CBN Prohibits Lenders From Utilizing Foreign Exchange-denominated Collateral For Naira Loans
On Monday, the Central Bank of Nigeria (CBN) announced that it has prohibited commercial banks from using foreign currency-denominated collateral to issue naira loans. This measure is aimed at safeguarding the banking system from potential risks associated with the appreciation of the local currency.
In a circular, the regulator stated that the practice of using foreign currency as collateral for naira loans, which it had observed, is now “prohibited.” Additionally, the central bank announced on Monday that it has sanctioned Eurobonds issued by the government and letters of credit issued by an offshore bank as acceptable forms of foreign currency collateral.
Lenders were instructed to conclude all loans currently backed by dollar-denominated collateral within 90 days or risk facing sanctions. Following its second devaluation in less than a year in January, the naira has experienced significant appreciation against the dollar in both the official and parallel markets. This strengthening occurred subsequent to the central bank’s decision to raise interest rates in February and March, as well as to remove restrictions on foreign participation in its fixed-income auctions.
The bank now allows foreign investors to pre-fund their accounts and get naira at the prevailing exchange rate for bill auctions, analysts said. In the past, lenders faced constraints in fulfilling foreign investors’ bids as they incurred extra costs on settlement day if they borrowed from the central bank’s discount window to pay for bills.
