The Central Bank of Nigeria (CBN) has issued a circular to all banks in Nigeria, directing them to cease the use of foreign currencies as collateral for naira loans. The CBN disclosed its decision in a circular titled “The use of foreign-currency-denominated collaterals for naira loans” with reference number BSD/DIR/PUB/LAB/017/004. The circular, signed by the apex bank's acting Director of Banking Supervision Department, Adetona Adedeji, was uploaded to the CBN's website on Monday.
The CBN noted the use of foreign currency (FCY) by bank customers as collateral for naira loans, and as such, prohibits it with immediate effect. The apex bank has directed banks to reduce all existing loans with foreign currency collaterals to 90 days or attract a 150% capital adequacy ratio computation as part of the bank's risk.
According to the circular, the current practice of using foreign currency-denominated collaterals for naira loans is 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.
The CBN maintained that it is on a mission to ensure there is adequate foreign exchange in the market, even as the naira is being strengthened. Eurobonds are bonds issued offshore by governments or corporates denominated in a currency other than that of the issuer’s country. Eurobonds are typically long-term debt instruments and are usually denominated in US dollars.
As a trade finance tool, letters of credit are contractual commitments by the foreign buyer’s bank to pay once the exporter ships the goods and presents the required documentation to the exporter’s bank as proof. Letters of credit are designed to protect both exporters and importers.
It is pertinent to note that the CBN has previously drawn attention to the increasing use of foreign currencies in the domestic economy as a medium of payment for goods and services by individuals and corporates, and has observed that some institutions price their goods and services in foreign currencies and demand payments in foreign currencies rather than the domestic currency (the Naira), which is the legal tender in Nigeria.
The CBN Act of 2007 stipulates that any person who contravenes the provision that “the currency notes issued by the Bank shall be legal tender in Nigeria…for the payment of any amount” is guilty of an offense and shall be liable on conviction to a prescribed fine or six months imprisonment.
Post a Comment