CBN bans use of forex denominated collateral for naira loans

By Abiodun OBA

The use of foreign denominated collaterals for naira loans has been banned.

The Central Bank of Nigeria, CBN, that placed the ban however, exempted Eurobonds issued by the Federal Government of Nigeria or Guarantees of foreign banks, including Standby Letters of Credit from the ban.

Announcing the ban in a circular titled, “The Use of Foreign-Currency Denominated Collaterals for Naira Loans”, Director, Banking Supervision Department, CBN, Dr. Adetona Adedeji, said: “The Central Bank of Nigeria has observed the prevailing situation where bank customers use Foreign Currency (FCY) as collaterals for Naira loans.

“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.”