In a decisive move aimed at reshaping Nigeria’s financial landscape, the Central Bank of Nigeria (CBN) recently instructed banks to phase out naira loans backed by foreign currency collaterals within three months.
This directive, articulated in a letter from Dr. Adetona Adedeji, the acting Director of Banking Supervision at the CBN, signifies a significant shift in banking practices within the country.
This decision comes as part of the CBN’s efforts to curb certain practices that have been impacting the financial sector. The move has received support from various quarters, including the Association of Bureaux De Change Operators of Nigeria (ABCON).
The CBN’s letter highlighted the observation that some bank customers were leveraging foreign currencies as collateral for naira-based loans, a practice the apex bank now deems as prohibited. However, exceptions were made for certain types of collaterals, notably Eurobonds issued by the Federal Government of Nigeria and guarantees from foreign banks, including Standby Letters of Credit.
Failure to comply with this directive within the stipulated 90-day period will result in increased risk weighting of 150 per cent for Capital Adequacy Ratio computation, in addition to other regulatory penalties.
This move is expected to address concerns about the misuse of foreign currency assets and their impact on the stability of the financial sector.
The Association of Bureaux De Change Operators of Nigeria (ABCON) has expressed support for the CBN’s directive, emphasising its potential to enhance dollar liquidity, bolster reserves accumulation, and fortify the overall resilience of the financial services sector.
ABCON’s president, Aminu Gwadabe, lauded the CBN’s decision, saying it would curb the excessive reliance on foreign currency collaterals by major businesses and manufacturers, which has contributed to undue pressure on the forex market. He highlighted the need for a review of foreign currency holding guidelines and advocated for stricter measures to prevent large entities from monopolizing forex resources.
ABCON’s backing of the CBN’s directive underscores the significance of this policy change within the financial landscape of Nigeria. Gwadabe further suggested that the CBN review foreign currency holding guidelines for non-oil export domiciliary accounts, proposing a maximum holding period of 48 hours for individuals and companies with specified minimum balances. This, he believes, would contribute to market stability and enhance forex reserves.
Gwadabe also urged the CBN to maintain its proactive stance in implementing policies that foster market stability and confidence among investors. He called for continued engagement with stakeholders to ensure transparency, efficiency, and healthy market dynamics.
In addition to supporting the CBN’s policies, ABCON called for reforms in the operational structures of financial markets, including the separation of ownership and operational aspects within exchanges like the FMDQ Exchange.
This, according to Gwadabe, would promote transparency and improve price control mechanisms.
The stance taken by ABCON reflects a broader sentiment among stakeholders in Nigeria’s financial sector, advocating for measures that enhance market efficiency, transparency, and stability. The reinstatement of BDCs as a significant player in the forex market has been welcomed, with Gwadabe noting positive outcomes in addressing volatility and speculation.
Looking ahead, ABCON reaffirmed its commitment to collaborating with the CBN and other stakeholders to achieve market objectives effectively. The organisation emphasised the importance of ongoing engagement to deepen and democratise the retail forex market, ensuring a healthy balance of payments and sustainable market dynamics.
The CBN’s directive, supported by key industry players like ABCON, underscores a concerted effort to streamline financial practices, promote responsible lending, and strengthen Nigeria’s economic fundamentals in the face of evolving global challenges.
