The Central Bank of Nigeria (CBN) has issued a circular instructing all banks in Nigeria to cease accepting foreign currencies as collateral for naira loans. The circular, titled “The use of foreign-currency-denominated collaterals for naira loans,” was signed by Adetona Adedeji, the acting director of the Banking Supervision Department. The directive aims to address the observed practice of customers using foreign currency as collateral for naira loans.
According to the CBN, except for specific cases involving Eurobonds issued by the Federal Government of Nigeria or guarantees from foreign banks, including standby letters of credit, the use of foreign currency collateral for naira loans is now prohibited. Banks are required to wind down all existing loans secured with dollar-denominated collateral, unless they fall within the approved exceptions, within 90 days. Failure to comply will result in a risk-weighting of 150% for the capital adequacy ratio computation, in addition to other regulatory sanctions.
The CBN emphasizes its commitment to ensuring sufficient foreign exchange liquidity in the market while strengthening the value of the naira. Eurobonds, which are debt instruments issued offshore, and letters of credit, which provide payment protection in international trade, are the only permitted forms of foreign currency collateral for naira loans.
The CBN’s decision is aimed at promoting the use of the domestic currency, the naira, as the legal tender for transactions within Nigeria. The CBN Act of 2007 emphasizes the naira’s status as the sole legal tender, making the use of foreign currencies for payment in the domestic economy a contravention of the law. The Act stipulates that offenders may be punished with fines or even imprisonment.
The CBN’s circular serves as a reminder to individuals and corporations that the naira should be the primary currency for transactions within Nigeria, fostering the stability and integrity of the country’s financial system.
