CBN Bans Use of Foreign Currency-denominated Collaterals for Naira Loans

•Orders termination of existing facilities within 90 days 

•Approves fresh allocation of FX to BDCs at N1,101/$1, sale to customers not to exceed 1.5% above purchase price

James Emejo in Abuja

The Central Bank of Nigeria (CBN), yesterday, prohibited the use of foreign currency (FCY) denominated collaterals for naira loans by bank customers going forward.

CBN ordered that all loans currently secured with dollar-denominated collateral be wound down within 90 days, adding that banks risk both financial and regulatory sanctions for noncompliance.

The central bank disclosed the new directives in a circular addressed to all banks, dated April 8, 2024, which was signed by Dr. Wiliams Kanya, on behalf of the CBN Director, Trade and Exchange Department.

The fresh advices came as the apex bank further announced the sale of another tranche of Foreign Exchange (FX) to Bureau De Change (BDC) operators at N1,101/$1, below current market price – the third consecutive intervention since the apex bank resumed its support to the segment under its current management.

CBN, however, pointed out that FCY-denominated collaterals could only be considered for naira loans where the foreign currency collateral was either Eurobonds issued by the Federal Government of Nigeria (FGN), or guarantees of foreign banks, including Standby letters of credit.

The bank further warned that exposures shall be risk-weighted 150 per cent for Capital Adequacy Ratio computation, in addition to other regulatory sanctions, should banks fail to comply with the new policy direction.

The latest FX intervention to BDCs was conveyed in a circular dated April 8, 2024, which was addressed to President, Association of Bureau De Change Operators of Nigeria (ABCON), and signed by Kanya, on behalf of the CBN Director, Trade and Exchange Department.

The bank explained that the FX allocation was aimed at helping the BDCs meet retail market demand for eligible invisible transactions, adding that the sum of $10,000 would be sold to each BDC at below the market rate.

The apex bank also mandated the BDCs to sell the dollars to eligible end users at a spread not exceeding 1.5 per cent above the purchase price.

The support could effectively help the local currency to strengthen further to about N1,117/$1, should BDCs adhere to the CBN directive.

The naira traded at N1,251.05/$1 on the Nigerian Autonomous Foreign Exchange Market (NAFEM) over the past weekend.

CBN advised BDCs to continue to abide by the rules and conditions as stipulated in the terms guiding earlier interventions.

On February 27, CBN announced that it had approved the sale of FX to eligible BDCs to meet their demand for invisible transactions, adding that the sum of $20,000 would be sold to each BDC at the rate of N1,301/$, which represents the lower band rate of executed spot transactions at the Nigeria Autonomous Foreign Exchange Market (NAFEM) for the previous trading day, as of February 27, 2024.

CBN explained that the intervention became necessary following the continued price distortions at the retail end of the market, which was feeding into the parallel market and further widening the exchange rate premium.

The move also complemented ongoing reforms in the foreign exchange market, aimed at achieving an appropriate market-determined exchange rate for the naira.

CBN, however, emphasised that the BDCs were allowed to sell to end-users at a margin not more than one per cent above the purchase rate from the central bank.

Also, on March 25, the central bank approved a second tranche of sale of FX to BDCs, slashing the volume to $10,000 for each BDC at the rate of N1,251/S, which was a N50 reduction compared to N1,301/S allocation in the initial tranche.