CBN bans foreign currency collateral: Will foreign investors be wary of the Nigerian market?

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Nigeria's CBN policy bars foreign currency as loan collateral, raising questions about the impact on foreign investment and banking stability.

In a move to safeguard its banking system, Nigeria’s Central Bank has barred commercial banks from accepting foreign currency, typically US Dollars, as collateral for Naira loans. The new directive signed by Banking Supervision Director Adetona Adedeji prohibits foreign currency-denominated collateral except for two specific cases: Eurobonds issued by the Nigerian government and guarantees from foreign banks .

All lenders are expected to wind down all loans currently secured with dollar-denominated collateral within 90 days or face sanctions. The CBN approved Eurobonds issued by the government or letters of credit issued by an offshore bank as eligible foreign currency collateral.. When a borrower defaults on a Naira loan backed by foreign currency collateral, the bank can sell those dollars to recoup its losses.

Currently, Nigeria ranks 131st out of 190 countries in terms of ease of accessing credit for businesses, according to the World Bank’s “Doing Business 2024”. This ranking places it among the bottom third of countries globally, signifying significant challenges for companies, both domestic and foreign, in obtaining loans.

With foreign currency collateral no longer an option, it might be difficult for foreign-owned businesses to secure loans from Nigerian banks. Nigeria alreadyaccess to credit as a major obstacle for over 70% of foreign companies operating in the country. Local lenders may be more hesitant to provide loans without the additional security offered by foreign currency collateral.to never-before levels.

 

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