Nigeria’s Central Bank (CBN) announced a new policy on April 8th, 2024, restricting the use of foreign currency-denominated collateral for naira loans. This move is intended to safeguard the banking system from potential risks associated with a strengthening naira.
The CBN previously observed some lenders accepting foreign currency, such as US dollars, as collateral for loans issued in naira. The new regulation explicitly prohibits this practice. However, there are exceptions. Eurobonds issued by the Nigerian government and letters of credit from reputable foreign banks remain acceptable forms of foreign currency collateral.
The CBN instructed banks to wind down existing loans secured by dollar-denominated collateral within the next 90 days. Failure to comply could result in sanctions from the regulatory body.
Naira Gains Momentum
The naira has seen a significant appreciation against the US dollar recently, on both the official and black markets. This positive trend follows a period of devaluation earlier in 2024.
The CBN’s recent interest rate hikes in February and March are credited with boosting the naira’s value. Additionally, the bank lifted restrictions on foreign participation in its fixed-income auctions.
This new policy allows foreign investors to pre-fund their accounts in naira at the prevailing exchange rate before participating in bill auctions. Previously, lenders faced challenges fulfilling foreign investor bids due to potential extra costs incurred when borrowing from the CBN to cover these transactions.
Transparency and Stability for Foreign Investors
Analysts suggest the new policy offers greater transparency and stability for foreign investors participating in Nigeria’s financial markets. By eliminating the risk of currency fluctuations associated with foreign currency collateral, the CBN aims to make naira-denominated loans more attractive to foreign investors. This could lead to increased foreign investment, which can benefit the Nigerian economy by stimulating growth and development.
However, some experts caution that the policy change might have unintended consequences. Restricting foreign currency collateral options could limit lending options for Nigerian businesses with international operations. Additionally, the short-term impact on loan availability for domestic borrowers remains to be seen.
A Balancing Act
The CBN’s new regulation reflects its efforts to strike a balance between promoting foreign investment and safeguarding the Nigerian banking system. The recent appreciation of the naira presents a positive outlook for the Nigerian economy. While the short-term impact of this policy remains to be seen, it highlights the CBN’s proactive approach to ensuring financial stability and fostering a more transparent and predictable investment environment.
Source: ReutersÂ
