In a bid to strengthen the financial sector and ensure regulatory compliance, Nigeria’s Central Bank recently implemented a new policy on collateral for Naira loans.
The directive, issued on Monday, prohibits the use of foreign currency as collateral for Naira loans, with exceptions for specific types of foreign currency collateral.
The letter addressed to all banks outlined the new guidelines, signed by Adetona Adedeji, the director of the banking supervision department.
The move aims to curb the prevailing practice where bank customers use foreign currency as collaterals for Naira loans, which can pose risks to the financial stability of the economy.
Under the new policy, the use of foreign currency-denominated collaterals for Naira loans is now prohibited, except for cases where the collateral is in the form of Eurobonds issued by the Federal Government of Nigeria or guarantees provided by foreign banks, including Standby Letters of Credit.
In a recent directive issued by the apex bank, it has been stated that all loans currently secured with dollar-denominated collaterals must be wound down within a 90-day period, except as allowed by the new regulations.
Failure to comply with these new requirements will result in lenders facing a 150 per cent risk-weighting for Capital Adequacy Ratio calculations, along with other regulatory penalties.
This development is part of the CBN’s efforts to bolster the banking sector and bring stability to the Nigerian economy.
The central bank had previously raised the minimum capital requirements for banks, stating that commercial banks with international licenses must maintain a capital base of N500 billion.
National and regional banks were also mandated to have capital bases of N200 billion and N50 billion, respectively.
These measures are aimed at ensuring that financial institutions in Nigeria are well-capitalized and able to withstand economic shocks.
This restriction aims to ensure that banks maintain adequate levels of Naira liquidity and reduce the exposure to foreign exchange risks.
According to the Central Bank of Nigeria, the decision to implement this new policy is in line with its efforts to enhance the resilience of the banking system and promote financial stability in the country.
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