Bank customers who speculatively used dollar-denominated currency as collateral to obtain naira loans are expected to begin massive sales or look for alternatives, from the coming weeks, following the new rule by the Central Bank of Nigeria (CBN). This is expected to boost the naira further.
The CBN on Monday banned the use of foreign currency-denominated collaterals for Naira loans, threatening to sanction erring banks after 90 days given to wound down the loans secured with dollars.
In his view, Ayodele Akinwunmi, relationship manager of corporate banking at FSDH Merchant Bank said the CBN wants banks to encourage clients to deploy the Dollar in their positions instead of keeping the dollar 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.
In response to the development, Ayokunle Olubunmi, head of financial institutions ratings at Agusto Consulting, a prominent pan-African credit rating agency, emphasized the significance of the CBN actions aimed at stabilizing the Naira and reducing exchange rate volatility.
Olubunmi highlighted the CBN’s efforts to address speculation against the Naira, particularly targeting individuals who purchased large quantities of dollars in anticipation of further Naira depreciation and utilized these dollars as collateral when seeking loans from banks.
“The CBN does not want to promote speculation,” remarked Olubunmi, underscoring the Central Bank’s intention to curtail activities that undermine the stability of the Naira. He explained that 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. This practice allowed borrowers to potentially access Naira-denominated loans using foreign currency as security, contributing to currency speculation.
Regarding the impact on banks selling foreign exchange (FX), Olubunmi clarified that the decision lies with the customers who provided the foreign currency as collateral. He outlined the course of action for banks, which involves engaging 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,” Olubunmi explained, emphasizing that banks themselves are not directly involved in selling foreign currency. Instead, customers may be compelled to explore alternative collateral options or dispose of existing foreign currency assets to comply with revised lending terms.
Responding on X, formerly Twitter, Alli-Balogun Lekan, analyst, said “the CBN warned last year about USD collateralized loans. It’s suspected that most banks were not complying, leading to a new circular. Massive sales are expected in the coming weeks,”
One investment banker who spoke anonymously noted that there is still time as banks were given 90 days to liquidate all loans currently secured with dollar-denominated collaterals.
“It might not take place next week because they have been given 90 days,” one analyst said.
Explaining how this is practiced, the banker said, that when customers have foreign currency or dollars and they need loans because of fear of devaluation of the currency, they don’t want to allow the loan to go down, so they go to the bank to say take this as collateral and give me a Naira loan. They will use that dollar as collateral and banks will give them loans.”
“The way it’s practiced here. They are 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,” Lekan said.
“Na where Wahala go dey is when the forced sale value has no cover for the Naira loan,” he added.
Reacting in X, Seun Osewa, said “They aren’t 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, said on X.
In a letter to all banks, and signed by Adetona Adedeji, acting director of the banking supervision department, the CBN mandates that all loans currently secured with dollar-denominated collaterals, other than those mentioned in the letter, must be wound down within 90 days.
Failure to comply with this directive will result in such exposures being risk-weighted at 150 percent for Capital Adequacy Ratio computation, in addition to other regulatory sanctions.
The directive highlights the observation by the CBN of the widespread practice where bank customers utilize Foreign Currency (FCY) as collaterals for Naira loans. Effective immediately, the CBN has prohibited the use of foreign currency-denominated collaterals for Naira loans, except under specific circumstances.
The only exceptions permitted for the use of foreign currency collaterals are Eurobonds issued by the Federal Government of Nigeria or guarantees of foreign banks, including Standby Letters of Credit.
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