In a significant policy shift, the Central Bank of Nigeria (CBN) has announced a ban on the use of foreign currency-denominated collaterals for naira loans.

The directive, conveyed through a circular dated April 8, 2024, and addressed to all banks by the CBN’s Acting Director of Banking Supervision Department, Adetona Adedeji, aims to address prevailing concerns regarding currency mismatches and associated risks in the banking sector.

The circular issued by the apex bank highlighted two exceptions to the prohibition, namely Eurobonds issued by the Federal Government and guarantees of foreign banks, including Standby Letters of Credit.

“The Central Bank of Nigeria has observed the prevailing situation where bank customers use Foreign Currency (FCY) as collaterals for Naira loans,” the circular partly read.

“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

“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 such exposures shall be risk-weighted 150% for Capital Adequacy Ration computation, in addition to other regulatory sanctions.”