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CBN Moves To Boost FX Liquidity Gives Banks Three-Month Deadline On Forex-Backed Loans

For the Central Bank of Nigeria (CBN) its desire to enhance FX liquidity knows no bounds as it has once again stepped up the fight with a new circular mandating Deposit Money Banks to stop the use of foreign currencies as collateral for naira loans within 90 days.

This amid naira’s good showing against the greenback at both the official and parallel markets on Monday.

Met metrobusinessnews.com (MBN) gathered that CBN’s action is a direct response to alleged foreign exchange stockpiled in the financial system, particularly by some banks at various locations within the premises.

Besides, CBN is said to be worried by high liquidity of cash, both local and foreign within and outside the banking system that is still exerting pressures on the economy as well as stoking inflationary pressures.

Consequently, on Monday, the apex bank issued a new circular, expressing concerns over the use of foreign currencies as collateral for naira loans.

The circular made available on its website and titled “The use of foreign-currency-denominated collaterals for naira loans”, was referenced BSD/DIR/PUB/LAB/017/004.

Although this is not the first time the bank has prohibited the use of FCY, it said it had observed the use of foreign currency by bank customers as collateral for naira loans. Hence, the decision to prohibit its use.

In 2023, in a confidential letter to commercial lenders, CBN issued a stern directive against naira overdrafts backed by foreign currency deposits.

In the leaked letter dated August 17, 2023, and signed by the Director of Banking Supervision, Haruna B. Mustafa, the CBN said the development followed its findings from a recent supervisory review.

It was uncovered that the banks had been offering naira overdraft facilities secured with foreign currency deposits.

Despite this warning, the new directive indicates that banks have continued to engage in such practices.

In the latest circular signed by the acting Director, Banking Supervision Department, Adetona Adedeji, the apex bank said it observed the use of foreign currency by bank customers as collateral for naira loans.

As such, the regulator directed banks to trim all existing loans with foreign currency collaterals to 90 days or attract a 150 per cent capital adequacy ratio computation as part of the bank’s risk.

The new directive means a borrower may no longer use dollar deposits in their domiciliary bank accounts as collateral to obtain naira loans.

It was further gathered that the practice is partly due to the need to hedge against foreign currency spikes which can be costlier than interest rates.

“The Central Bank of Nigeria has observed the prevailing situation where bank customers use foreign currency as collaterals for Naira loans.

“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 exposures shall be risk-weighted 150% for Capital Adequacy Ratio computation, in addition to other regulatory sanctions,” the circular read.

The CBN’s stance against such practices arises from concerns of currency mismatch, which could introduce substantial financial risks for banks.

Rather than convert their dollars to naira, some borrowers will rather borrow in naira as the cost of buying the dollars back might be higher than the interest rate they pay for borrowing in naira.

However, this can have a ripple effect on the exchange rate due to its speculative tendencies.

The CBN maintained that it was on a mission to ensure adequate foreign exchange in the market even as the naira gains strength.

MetroBusinessNews\A strategic cross=reporting initiative,

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