Nigeria: CBN Issues Warning Against Using Forex as Collateral for Naira Loans

The Central Bank of Nigeria (CBN) has issued a stern warning to bank customers, urging them to refrain from using foreign currency as collateral for Naira-denominated loans.

Adetona Adedeji, Acting Director of the Banking Supervision Department at the CBN, emphasized this cautionary message in a statement released in Abuja on Monday.

Adedeji clarified that the only permissible scenario for using foreign currency-denominated collateral for Naira loans would be in cases involving Eurobonds issued by the Federal Government. Additionally, guarantees from foreign banks, including standby letters of credit, would be accepted.

He further outlined that any existing loans secured with dollar-denominated collaterals, apart from those mentioned above, must be gradually phased out within a 90-day period. Failure to comply with this directive would result in such exposures being subjected to a 150% risk weighting for Capital Adequacy Ratio computation, along with other regulatory penalties.

The CBN’s directive comes amidst concerns over the potential risks associated with leveraging foreign currency assets to secure local currency loans. As Nigeria grapples with economic challenges and currency fluctuations, the CBN aims to mitigate risks and ensure financial stability within the banking sector.

Bank customers are urged to heed the CBN’s warning and adhere to the prescribed guidelines to avoid facing regulatory sanctions and potential financial repercussions.