CBN Doubles Down on Naira Strength
…BDC Dollar Sales Continue, Foreign Currency Collateral for Loans Banned
By Patience Ikpeme
In a two-pronged approach aimed at strengthening the Naira and promoting domestic lending practices, the Central Bank of Nigeria (CBN) has announced a continuation of dollar sales to Bureau De Change (BDCs) operators alongside a new regulation restricting the use of foreign currency as loan collateral.
Marking the third consecutive month of intervention, the CBN will continue selling US dollars to BDCs to address potential foreign exchange (FX) shortages at the retail level.
Participating BDCs will receive $10,000 each at a pre-determined rate of N1101 per dollar. They can then sell these dollars to eligible end-users, such as individuals and small businesses, with a maximum profit margin of 1.5% above the purchase price.
A circular to this effect signed by Dr. W.J Kanya for Director Trade and Exchange and sent to the President of the Association of Bureau De’Change Operators of Nigeria (ABCON) reads: “We write to inform you of the sale of $10,000 by the Central Bank of Nigeria (CBN) to BDCs at the rate of N1101/$1. The BDCs are in turn to sell to eligible end users at a spread of NOT MORE THAN 1.5 percent above the purchase price.
All eligible 1,588 BDCs are therefore directed to commence payment of the Naira deposit to the underlisted CBN Naira Deposit Account Numbers from Today Monday April 08, 2024, and submit confirmation of payment with other necessary documentation for disbursement at the appropriate CBN Branches. All BDCs are strongly advised to continue to abide by the rules and conditions as stipulated in our earlier letters/circulars”.
This intervention aims to improve access to FX for low-value transactions, potentially reducing pressure on the black market and contributing to exchange rate stability.
With regards to the ban on foreign currency collateral for Naira loans, the CBN has introduced a new regulation prohibiting banks from accepting foreign currency deposits (USD, EUR, GBP etc.) as collateral for Naira loans.
This move aims to discourage reliance on foreign currencies within the banking system and to promote the use of the Naira.
The regulation includes two key exceptions. Nigerian government-issued Eurobonds and guarantees provided by reputable foreign banks remain acceptable forms of loan collateral.
According to a different circular signed by the Acting Director Banking Supervision Dr. Adetona Adedeji, the Central Bank of Nigeria said it “has observed the prevailing situation where bank Customers use Foreign Currency (FCY) as collaterais 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. anks have 90 days to address existing loans secured by non-compliant collateral (i.e., foreign currency deposits).
“They can either restructure these loans to utilize acceptable collateral as defined by the new regulation or take steps to recover outstanding loan balances.
Going by the tone of the circular, loans secured by non-compliant collateral will be subject to a 150% risk weighting for capital adequacy ratio calculations. This effectively reduces the profitability of such loans for banks, further discouraging the practice.
Businesses and borrowers who previously relied on foreign currency collateral may need to explore alternative options like Naira-denominated assets or guarantees from reputable institutions to secure loans.
The CBN’s dual approach is designed to address two key challenges: foreign exchange volatility and a potential over-reliance on foreign currencies within the banking system. While the continued dollar sales to BDCs aim to improve access to FX and stabilize exchange rates, the ban on foreign currency collateral for loans promotes the use of the Naira and encourages domestic lending practices.
