The Central Bank of Nigeria (CBN) has issued a circular prohibiting the use of foreign currency (FCY) as collateral for Naira loans, signaling a significant change in the bank's approach to loan collateralization. The directive, outlined by Dr. Acting Director of the Banking Supervision Department, Adetona S. Adedeji, restricts banks from accepting deposits denominated in foreign currencies such as USD, EUR, or GBP as security for loans issued in Naira, with few exceptions.
Under the new regulation, most foreign currency-based financial instruments are no longer acceptable as collateral for Naira loans, except for Nigerian government-issued Eurobonds and guarantees provided by reputable foreign banks, including Standby Letters of Credit. The CBN has set a timeframe for banks to address existing loans secured by non-compliant collateral, mandating that such loans be wound down within 90 days.
Failure to comply with this directive could result in potential consequences for banks, including a 150 percent risk weighting for Capital Adequacy Ratio computation, in addition to other regulatory sanctions. These additional requirements could reduce the profitability of loans secured with non-compliant collateral. However, the CBN did not specify the nature of these additional sanctions, leaving room for potential fines or other penalties for non-compliant banks.
