CBN Disallows Foreign Currency as Collateral for Naira Loans

The Central Bank of Nigeria (CBN) has directed all banks to stop the use of foreign currency-denominated collaterals for naira loans.

Adetona Adedeji, acting director of the banking supervision department at CBN, disclosed this in a statement on Monday.

The regulator directed banks to trim all existing loans with foreign currency collaterals to 90 days or attract a 150 percent capital adequacy ratio computation as part of the bank’s risk.

Capital adequacy ratio is calculated by dividing a bank’s capital by its risk-weighted assets.

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“The Central Bank of Nigeria has observed the prevailing situation where bank customers use foreign currency (FCY) as collaterals for Naira loans,” the circular reads.

“Consequently, the current practice of using foreign currency-denominated collaterals for Naira loans is hereby prohibited except where the foreign currency collateral is Eurobonds issued by the federal government of Nigeria; or guarantees of foreign banks, including standby letters of credit

“In this regard, all loans currently secured with dollar-denominated collaterals other than as mentioned above should be wound down within 90 days, failing which such exposures shall be risk-weighted 150% for Capital Adequacy Ratio computation, in addition to other regulatory sanctions.”

The CBN said it is on the mission to ensure that the there is adequate foreign exchange in the market even as the naira is being strengthened.