CBN Bans Foreign Currency Collateral For Naira Loans, Sets Three-Month Deadline

The Central Bank of Nigeria (CBN) has announced a ban on the use of foreign currency as collateral for naira loans. This directive comes as part of the CBN’s efforts to address concerns regarding the use of foreign-denominated collaterals in the country’s banking system.

The ban, which was communicated to all banks through a letter from Dr. Adetona Adedeji, the acting Director of the Banking Supervision department at the CBN, stipulates that banks have a three-month window to wind up naira loans backed by foreign currency collaterals.

The directive explicitly exempts Eurobonds issued by the Federal Government of Nigeria and guarantees from foreign banks, including Standby Letters of Credit, from the ban. However, all other forms of foreign currency collaterals for naira loans are now prohibited.

Explaining the rationale behind the decision, the CBN emphasized that the use of foreign currency collaterals for naira loans has become a common practice among bank customers in Nigeria. By implementing this ban, the CBN aims to mitigate potential risks associated with such practices and ensure the stability of the financial system.

Furthermore, the CBN outlined the consequences for non-compliance with the directive. Loans currently secured with dollar-denominated collaterals, other than those mentioned as exemptions, must be wound down within the stipulated 90-day period. Failure to do so will result in these exposures being risk-weighted at 150 percent for Capital Adequacy Ratio computation, in addition to other regulatory sanctions.