The Central Bank of Nigeria (CBN) on Monday stepped up its fight to boost foreign exchange liquidity in the economy with a new circular mandating Deposit Money Banks (DMBs) to stop the use of foreign currencies as collateral for naira loans within 90 days.
The development happened as the naira rose against the greenback at both the official and parallel markets on Monday.
The CBN has continued to deepen its battle to free dollar liquidity stocked up in the financial system by deploying various measures aimed at shoring up the naira against the United States dollar.
On Monday, the Olayemi Cardoso-led CBN 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, the apex bank 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, Mr. 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.
According to stakeholders, 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.
Eurobonds, according to the Hong Kong and Shanghai Banking Corporation, are bonds issued offshore by governments or corporations denominated in a currency other than that of the issuer’s country.
Eurobonds are usually long-term debt instruments and are typically denominated in US dollars.
Letters of Credit, according to the International Trade Administration, are contractual commitments by the foreign buyer’s bank to pay once the exporter ships the goods and presents the required documentation to the exporter’s bank as proof.
As a trade finance tool, Letters of Credit are designed to protect both exporters and importers.
In the apex bank’s previous circular to all the banks signed by its former Director, Corporate Communications Department, Ibrahim Mu’azu, the bank said its attention was drawn to the increasing use of foreign currencies in the domestic economy as a medium of payment for goods and services by individuals and corporates.
It also observed that some institutions price their goods and services in foreign currencies and demand payments in foreign currencies rather than the domestic currency (the Naira), which is the legal tender in Nigeria.
The CBN stated, “For the avoidance of doubt, the attention of the general public is hereby drawn to the provisions of the CBN Act of 2007, which states inter-alia that “the currency notes issued by the Bank shall be legal tender in Nigeria…for the payment of any amount.”
Furthermore, the Act stipulates that any person who contravenes this provision is guilty of an offence and shall be liable on conviction to a prescribed fine or six months imprisonment.
Meanwhile, the naira has maintained its appreciation on the official and parallel markets against the United States dollar, strengthening to N1,230/$ at the official market and N1,220/$ on the black market at the close of trading activities on Monday.
This new rate which follows the decision by the CBN to adjust downward, the rate it sells to the Bureau du Change Operator, showed a 3.33 per cent appreciation over the N1,240/ dollar it exchanged on Friday at the parallel market.
The CBN on Monday reviewed the exchange rate for the Bureau De Charge Operators to N1,101 per dollar from N1,251/$1 as it plans to sell $15.88 million to 1,588 eligible BDCs.
In a letter addressed to the president of the Association of Bureau De Change Operators of Nigeria, the CBN announced the sale of $10,000 to the BDC operators at an exchange rate of N1,101 per US dollar.
This measure is intended to facilitate access to foreign exchange for legitimate transactions within the retail market.
The letter, signed by W.J. KANYA on behalf of the director of the trade and exchange department, outlines the directive for BDCs to sell the acquired forex to eligible end-users at a spread not exceeding 1.5 percent above the purchase price
Reacting to its effect on trade, a Bureau De Change operator selling at the popular Wuse Zone 4 market, Ibrahim Suleiman, said the new policy was causing heavy losses to traders, adding that the dollar would keep depreciating.
An affected trader, Malam Yahu Ibrahim, said the dollar was bought between N1,150 and N1,170 and sold at N1,220, leaving a profit margin of N50.
He said, “We are facing serious problem right now due to the way the dollar is crashing, the new rate by the CBN has disrupted a whole lot in the system. We are buying between range of N1,150 and N1,170 and selling at N1,220. And we still expect that the dollar will continue to crash. The thing is just coming down anyhow. If I tell how much people are losing every day, you won’t believe it. It is just sad but it’s meant to make our economy better.
At the official market, the naira closed at N1,230/$ against the greenback from the N1,251.05/$ recorded on Friday, indicating a marginal appreciation of N21 or 1.67 per cent against the dollar.
This was supported by improved dollar supply at the Nigerian Autonomous Foreign Exchange Market.
The dollar supply on Monday however decreased by 49 per cent to $125.55 from $248.27m recorded on Friday.
The summary of the FX auction showed that the intraday high strengthened to N1, 261 stronger than N1,281 per dollar quoted on Friday. The intraday low increased to N1, 200 per dollar from N1,220 per dollar recorded last week.
With the new rate, the black market is currently selling higher than the official market.
The CBN decision to review the BDC rate followed an appeal by the Association of Bureau De Change Operators of Nigeria (ABCON), the umbrella body for BDC operators.
ABCON National President, Aminu Gwadabe, had written a letter to the CBN. – Punch.
