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Deadline Set: Banks Given Three Months to Cease Offering Forex-Backed Loans

Nigeria’s Central Bank Intensifies Efforts to Boost Foreign Exchange Liquidity, Mandates Banks to Halt Forex-Backed Loans within 90 Days

In an ongoing bid to bolster foreign exchange liquidity within the economy, the Central Bank of Nigeria (CBN) issued a new directive on Monday instructing Deposit Money Banks to cease accepting foreign currencies as collateral for naira-denominated loans within a 90-day period.

This move coincided with a strengthening of the naira against the US dollar in both official and parallel markets on Monday.

The CBN has persistently pursued strategies to alleviate the scarcity of dollars within the financial system, deploying various measures to reinforce the naira against the greenback.

Under the leadership of Olayemi Cardoso, the CBN released a new circular expressing apprehension over the use of foreign currencies as collateral for naira loans. The circular, titled “The Use of Foreign-Currency-Denominated Collaterals for Naira Loans” and referenced BSD/DIR/PUB/LAB/017/004, was made accessible on the bank’s website.

While this prohibition is not a novel decree, the CBN noticed the continued practice of employing foreign currency by bank customers as collateral for naira loans, prompting the decision.

In a confidential letter to commercial lenders in 2023, the apex bank sternly instructed against naira overdrafts secured by foreign currency deposits. However, despite this warning, the recent directive indicates that such practices persist.

In the latest circular signed by Adetona Adedeji, the acting Director of the Banking Supervision Department, the CBN observed the ongoing utilization of foreign currency by bank clients as collateral for naira loans.

Consequently, the regulator directed banks to resolve all existing loans secured with foreign currency collaterals within 90 days or face a 150% risk weighting for Capital Adequacy Ratio computation, along with other regulatory penalties.

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This directive essentially prohibits borrowers from leveraging dollar deposits in their domiciliary bank accounts as collateral to secure naira loans.

The rationale behind this move lies in the concern over currency mismatch, which could pose significant financial risks for banks. Instead of converting their dollars to naira, some borrowers prefer naira loans due to the potentially higher costs associated with repurchasing dollars, which could have speculative implications on the exchange rate.

The CBN remains steadfast in its mission to ensure ample foreign exchange availability in the market, even as the naira strengthens.

Meanwhile, experts have commended the CBN’s initiative, affirming that it would enhance dollar supply in the currency market and fortify the naira.

Additionally, some banks have commenced negotiations with customers to liquidate loans, a development expected to unfreeze foreign exchange reserves in banks’ domiciliary accounts.