Dollar supply seen rising on CBN’s new directive

The latest directive by the Central Bank of Nigeria (CBN) to lenders is expected to drive up dollar supply and give the naira a further boost, analysts have said.

The CBN had on Monday banned the use of foreign currency-denominated collaterals for naira loans, threatening to sanction banks that fail to wound down the loans secured with dollars after 90 days.

The only exceptions are Eurobonds issued by the Federal Government of Nigeria or guarantees of foreign banks, including standby letters of credit.

In a letter to all banks, signed by Adetona Adedeji, acting director of the banking supervision department, the apex bank said it had observed the widespread practice where bank customers utilised foreign currency as collaterals for naira loans.

It said failure to comply with the directive will result in such exposures being risk-weighted at 150 percent for capital adequacy ratio computation, in addition to other regulatory sanctions.

Ayodele Akinwunmi, relationship manager corporate banking at FSDH Merchant Bank, said the CBN wants banks to encourage clients to deploy the dollars in their positions instead of keeping them as collateral and using naira.

“This situation will lead to an increase in the supply of dollars in the country and lead to the Naira appreciation,” he said.

Ayokunle Olubunmi, head of financial institutions ratings at Agusto Consulting, a pan-African credit rating agency, said the CBN action is aimed at stabilising the naira and reducing exchange rate volatility.

Olubunmi highlighted the CBN’s efforts at tackling speculation against the naira, particularly targeting individuals who purchased large quantities of dollars in anticipation of further naira depreciation and utilised them as collateral when seeking loans from banks.

He said some banks perceived the acceptance of foreign currency as collateral as an incentive, leading to the accumulation of dollars even by those who did not necessarily require them.

He said with the new directive, banks could engaged with customers to renegotiate collateral arrangements, potentially substituting foreign currency with alternative assets.

Olubunmi also pointed out scenarios involving companies, particularly subsidiaries of global corporations, and fintech firms that raised funds internationally, opting to retain dollars due to FX volatility and seeking naira-denominated loans instead.

“For such individuals and entities, the need to sell FX arises, especially if they lack sufficient naira reserves,” he said.

He added that customers may be compelled to explore alternative collateral options or dispose of existing foreign currency assets to comply with revised lending terms.

“The CBN warned last year about USD collateralised loans. It’s suspected that most banks were not complying, leading to a new circular. Massive sales are expected in the coming weeks,” Alli-Balogun Lekan, an analyst, said on social media platform X.

He pointed out that customers that used dollar-denominated collaterals for naira loans were “simply betting and hedging against the naira”.

“Some collect the naira loans, enter the market, purchase another round of USD, deposit it, and ask for additional loan enhancement based on the new USD rates,” he said.

Also commenting on X, Seun Osewa said: “They aren’t actually being forced to liquidate the loans. The ‘punishment’ for not liquidating them is that the loans will be considered to be 50 percent riskier. The practice is unethical, and a CBN memo for 2015 warned, but they persisted.”

“No bank will take that risk-weight of 150 percent on Capital Adequacy Ratio. They will either get a liquidation or force sell the collateral,” Nobleman Oke wrote.