Banks get three-month deadline to stop forex-backed loans

With a new circular directing Deposit Money Banks to cease using foreign currencies as collateral for naira loans within 90 days, the Central Bank of Nigeria intensified its efforts on Monday to increase foreign exchange liquidity in the economy.



On Monday, the naira appreciated against the US dollar on both the official and black markets.

By implementing several strategies to support the naira versus the US dollar, the CBN has continued to intensify its fight to liberate dollar liquidity that has built up in the financial sector.

Concerns regarding the usage of foreign currency as collateral for naira loans were voiced in a new circular released by the CBN, which is led by Olayemi Cardoso, on Monday.



The reference for the circular, "The use of foreign-currency-denominated collaterals for naira loans," was BSD/DIR/PUB/LAB/017/004, which was made public on its website.



The bank stated that it had seen consumers using foreign currency as collateral for naira loans, even though this is not the first time it has forbade the usage of FCY. Therefore, it was decided to forbid its use.



The Central Bank of Nigeria (CBN) stated in the leaked letter dated August 17, 2023, written by Mr Haruna B. Mustafa, Director of Banking Supervision, that the development was in line with the conclusions of a recent supervisory review.



The banks' provision of naira overdraft facilities guaranteed by foreign currency deposits was discovered. It appears from the new directive that banks have carried out these practices in spite of this warning.



The apex bank reported that it has seen foreign money being used as collateral by bank customers for naira loans in a recent circular that was signed by Adetona Adedeji, acting director of the Banking Supervision Department.



Because of this, the regulator gave banks instructions to reduce all outstanding loans with foreign currency collateral to 90 days or face a computation of the capital adequacy ratio equal to 150 percent of the bank's risk.



According to the new guideline, a borrower seeking a naira loan cannot use dollar deposits held in their domiciliary bank accounts as security.



Stakeholders claim that the practice is partially motivated by the desire to protect against foreign exchange surges, which can be more expensive than interest rates.

The Nigerian Central Bank has noted that bank customers are currently using foreign cash as security for Naira loans.



As a result, it is now forbidden to use foreign money as collateral for Naira loans, unless the foreign currency is Eurobonds that the Federal Government of Nigeria issues or foreign bank guarantees, such as standby letters of credit.



In this context, the circular stated that all loans that are currently secured by dollar-denominated collaterals other than those listed above should be paid off within 90 days. If they are not, the exposures will be risk-weighted 150% when calculating the capital adequacy ratio and will be subject to additional regulatory penalties.



The CBN opposes these activities because it believes that there could be a currency mismatch, which could put banks at serious financial danger.



Some borrowers may prefer to borrow in naira rather than convert their dollars since the interest rate on borrowing in naira may be lower than the cost of buying the dollars back.



However, because of its speculative nature, this may cause the exchange rate to fluctuate.



Even as the value of the naira increases, the CBN insisted that its goal was to guarantee that there was enough foreign exchange available in the market.

The Hong Kong and Shanghai Banking Corporation defines eurobonds as bonds that are issued offshore by companies or governments and are not denominated in the issuer's home currency.

Usually denominated in US dollars, eurobonds are long-term debt securities.



According to the International Trade Administration, letters of credit are legally binding promises made by the bank of the foreign buyer to make payments as soon as the exporter ships the products and provides the necessary paperwork to the exporter's bank as authentication.



Letters of Credit are an instrument used in trade financing that is intended to safeguard importers and exporters.



The earlier circular from the apex bank to all banks, which was signed by Ibrahim Mu'azu, the bank's former director of the corporate communications department, stated that the bank had been made aware of the rising number of people and businesses in the domestic economy using foreign currencies as a form of payment for goods and services.



Additionally, it was noted that several establishments charge foreign exchange rates for their goods and services and prefer to receive payments in foreign currencies rather than Nigeria's official tender, the naira.



For the sake of clarity, the public is hereby alerted to the requirements of the CBN Act of 2007, which provide, among other things, that "the currency notes issued by the Bank shall be legaltender in Nigeria…for the payment of any amount."

Additionally, the Act states that anyone found guilty of violating this clause faces a mandatory fine or up to six months in jail upon conviction for their violation.



At the close of trading on Monday, the naira was strengthening to N1,230/$ on the official market and N1,220/$ on the black market, indicating that it has continued to appreciate against the US dollar.



The rate that the CBN offers to the Bureau Change Operator has been adjusted downward, and this new rate exhibits a 3.33% appreciation over the N1,240/dollar it traded on Friday at the parallel market.



In preparation for selling $15.88 million to 1,588 qualifying BDCs, the CBN adjusted the exchange rate for Bureau De Charge Operators on Monday, bringing it down from N1,251/$1 to N1,101 per dollar.



The order from CBN



The CBN announced the sale of $10,000 to the BDC operators at an exchange rate of N1,101 per US dollar in a letter to the president of the Association of Bureau De Change Operators of Nigeria.



The purpose of this proposal is to make it easier for eligible retail market operations to obtain foreign exchange.



The letter describes the direction for BDCs to sell the acquired forex to qualified end-users at a spread not to exceed 1.5 percent above market value and is signed by W.J. KANYA, the director of the trade and exchange department.

In response to the new policy's impact on trade, Ibrahim Suleiman, a Bureau De Change operator at the well-known Wuse Zone 4 market, stated that merchants were suffering significant losses and that the dollar will continue to weaken.



Malam Yahu Ibrahim, one of the impacted traders, stated that the dollar was purchased for between N1,150 and N1,170 and sold for N1,220, yielding a N50 profit margin.



He stated, "The way the dollar is falling and the CBN's new rate has really upset the system, we are facing serious problems right now." We are selling for N1,220 and purchasing between N1,150 and N1,170. We continue to anticipate that the dollar will continue to plummet. The items are falling apart 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.

The naira finished at N1,230/$ on the official market, down from N1,251.05/$ on Friday. This represents a slight increase of N21, or 1.67 percent, against the dollar.



The Nigerian Autonomous Foreign Exchange Market's increased dollar supply helped with this.



On the other hand, the dollar supply fell by 49% on Monday to $125.55 from $248.27 million on Friday.



The intraday high rose to N1, 261 better than the N1,281 per dollar reported on Friday, according to the FX auction summary. From last week's N1,220 per dollar intraday low, it rose to N1,200 per dollar today.



As of right now, the illicit market is selling more than the legitimate market thanks to the new pricing.



The Association of Bureau De Change Operators of Nigeria, the governing body for BDC operators, filed an appeal, which led the CBN to decide to reconsider the BDC rate. Aminu Gwadabe, the national president of ABCON, sent a letter to the CBN.



Experts respond



Experts have applauded the CBN for its most recent action, stating that it will support the dollar's value.



Director of Research and Strategy at Chapel Hill Denham, Tajudeen Ibrahim, analysed the action taken by the apex bank and said it was a positive measure that would increase the availability of dollars in the currency market and support the naira.



He declared, "The CBN is approaching the foreign exchange situation strategically, and this is one of the ways they are trying to address the issue. This suggests that it would be inappropriate to use dollar collateral for a loan denominated in naira in the first place. Following a customer's N5 billion loan, the bank now holds the assets as collateral in case it needs to take possession