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CBN Cracks Down on Foreign Currency Collateral for Loans

By William Emmanuel Ukpoju

In a decisive move to reinforce the stability of Nigeria’s financial system, the Central Bank of Nigeria (CBN) has issued a new directive that restricts the use of foreign currency as collateral for naira loans. This measure is part of a broader strategy to ensure the judicious use of foreign exchange within the economy.

Key Points of the New CBN Directive:

  • Prohibition: The use of foreign currency-denominated collateral for securing naira loans is now largely prohibited.
  • Exceptions: The only exceptions to this rule are Eurobonds issued by the Federal Government of Nigeria and guarantees from foreign banks, including Standby Letters of Credit.
  • Compliance Window: Banks have been given a 90-day period to align their current loans with the new directive.
  • Penalties for Non-Compliance: Loans that fail to comply after the deadline will incur a 150% risk weighting when calculating the bank’s Capital Adequacy Ratio, along with the possibility of further regulatory sanctions.

The CBN’s action aims to curb the risks associated with the extensive use of foreign currency collateral and to promote a more resilient banking sector. Banks are now tasked with the urgent need to review and adjust their lending practices to meet the requirements of this new regulation within the given timeframe.