CBN Bans Using Foreign Money As Security When Applying For Naira Loans

THE use of foreign cash as collateral for naira loans has been outlawed by the Central Bank of Nigeria, or CBN.

The CBN stated that this will only be allowed in certain circumstances.

Dr. Adetona S. Adedeji, the acting director of the CBN's Banking Supervision Department, sent out a circular announcing the ban to every bank in the nation.

The circular mentioned the CBN's findings that bank clients applying for naira loans frequently utilize foreign money as collateral. In order to stabilize the financial system and guarantee the economy's responsible use of foreign exchange, the CBN decided to outlaw this activity.

There are some significant exclusions to the directive, though. If foreign currency collateral takes the form of Eurobonds, which are issued by the Federal Government of Nigeria, or guarantees from international institutions, such as Standby Letters of Credit, then it will still be acceptable.

This action reflects the CBN's attempt to keep a balanced perspective while acknowledging the significance of particular international financial instruments and guarantees for the banking industry.

The circular reads: “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.”

According to the CBN's instructions, any loans that are currently in existence and secured by collateral denominated in dollars other than those listed must be repaid within ninety days.

“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 percent for Capital Adequacy Ratio computation, in addition to other regulatory sanctions,” the circular stated.