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.
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