The Central Bank of Nigeria (CBN) has implemented a new directive that prohibits the use of foreign currency-denominated assets as collateral for loans issued in Nigerian naira. This move, announced on Monday, aims to regulate lending practices and protect the local currency.
The policy was communicated to all commercial banks via a letter signed by the CBN’s Director of the Banking Supervision Department, Adetona Adedeji. The apex bank outlined specific exceptions to this restriction, including foreign currency-backed Eurobonds issued by the Nigerian government and certain guarantees from international banks, such as Standby Letters of Credit.
This decision follows closely after the announcement of new minimum capital requirements for Nigerian banks, marking an ongoing effort by the CBN to stabilize the financial system. Banks that currently have loans secured with foreign currency collateral will now have to adjust these arrangements within 90 days. If they fail to comply, the loans will be subject to a 150% risk weight for the purpose of calculating the banks’ capital adequacy ratio (CAR), a key indicator of a bank’s financial health.
The CBN circular emphasized the central bank’s growing concerns about the practice of using foreign currency as collateral for naira loans, which could contribute to currency instability. The regulator’s actions are part of broader efforts to ensure sufficient foreign exchange reserves in the country while strengthening the value of the naira.
For several months, CBN Governor Olayemi Cardoso has been spearheading various policy initiatives aimed at stabilizing the naira and securing the country’s economic future.
