The Central Bank of Nigeria (CBN) intensified its efforts to enhance foreign exchange liquidity in the economy with a new directive on Monday. The circular mandated Deposit Money Banks to cease using foreign currencies as collateral for naira loans within 90 days. This move coincided with a positive trend in the naira’s value against the dollar in both official and parallel markets on the same day.
The CBN has been actively implementing measures to bolster dollar liquidity in the financial system, aiming to strengthen the naira against the US dollar. In its latest circular, signed by the acting Director of Banking Supervision Department, Adetona Adedeji, the CBN expressed concern over the use of foreign currencies as collateral for naira loans, noting the potential financial risks associated with currency mismatch.
The directive prohibits customers from using foreign currency as collateral for naira loans, except for Eurobonds issued by the Federal Government of Nigeria or guarantees of foreign banks, including standby letters of credit. Loans currently secured with dollar-denominated collateral are to be wound down within 90 days, failing which such exposures will be risk-weighted 150% for Capital Adequacy Ratio computation, in addition to other regulatory sanctions.
The CBN’s decision is driven by concerns about currency mismatch, which could pose significant financial risks for banks. Some borrowers prefer borrowing in naira rather than converting their dollars to hedge against foreign currency spikes, which may be costlier than naira interest rates. However, this practice can impact the exchange rate due to its speculative nature.
The CBN reiterated its commitment to ensuring adequate foreign exchange liquidity in the market while maintaining the naira’s strength. Eurobonds and Letters of Credit were highlighted as acceptable forms of foreign currency collateral, emphasizing their role in supporting legitimate trade transactions.
Furthermore, the CBN reminded the public of the legal tender status of the Nigerian Naira, as stated in the CBN Act of 2007. Any contravention of this provision is deemed an offence, punishable by a prescribed fine or imprisonment.
In response to the directive, Bureau De Change Operators expressed concerns about potential losses and disruptions to trading activities. However, the CBN’s adjustment of the exchange rate for Bureau De Change Operators aims to facilitate access to foreign exchange for legitimate transactions within the retail market.
Analysts viewed the CBN’s directive as a strategic move to boost dollar supply in the currency market and strengthen the naira. By discouraging banks from holding foreign currency collateral for naira loans, the CBN aims to align the country’s monetary policies with its objectives of exchange rate stability and economic growth.
Banks have initiated discussions with customers to liquidate naira loans, thereby unfreezing foreign exchange assets held in domiciliary accounts. This development is expected to increase dollar supply in the market and contribute to the appreciation of the naira.
