In a bid to enhance foreign exchange liquidity and stabilize the economy, the Central Bank of Nigeria (CBN) issued a circular mandating Deposit Money Banks (DMBs) to cease using foreign currencies as collateral for naira loans within 90 days.
The decision coincides with the naira’s appreciation against the US dollar in both official and parallel markets on Monday.
The CBN has been intensifying efforts to bolster dollar liquidity in the financial system, implementing various strategies to support the naira against the US dollar.
The latest circular, signed by the acting Director of the Banking Supervision Department, Adetona Adedeji, expresses concern over the use of foreign currencies as collateral for naira loans by bank customers.
While this isn’t the first time such a directive has been issued, the CBN observed that some banks continued to engage in this practice despite previous warnings.
The new directive requires banks to wind down existing loans secured with foreign currency collaterals within 90 days or face a 150 per cent capital adequacy ratio computation penalty.
This means borrowers can no longer use dollar deposits in their domiciliary accounts as collateral to obtain naira loans, except in cases of Eurobonds issued by the Federal Government of Nigeria or guarantees from foreign banks.
The CBN’s move aims to address concerns about currency mismatch, which could pose significant financial risks for banks. Instead of converting their dollars to naira, some borrowers opt to borrow in naira, anticipating higher costs associated with purchasing dollars later.
Experts have commended the CBN’s decision, stating that it will boost dollar supply in the market and strengthen the naira. However, it may lead to losses for some traders, as witnessed in the parallel market.
Some banks have begun negotiating with customers to liquidate loans, which would release frozen FX in domiciliary accounts.
Overall, the CBN’s directive reflects its ongoing efforts to maintain foreign exchange stability and promote economic growth.
