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Naira Stability Measures: CBN Prohibits Use of Foreign Currencies as Collateral for Naira Loans

This directive, outlined in a circular uploaded to the CBN’s website, marks a decisive move to address concerns surrounding the use of foreign currency (FCY) as security for naira-denominated loans. The immediate ban aims to curb the practice observed among bank customers, effectively restricting the use of FCY as a form of collateral in the Nigerian banking sector.

Published

3 weeks ago

April 8, 2024

Stella Charles Akupue

Naira Stability Measures: CBN Prohibits Use of Foreign Currencies as Collateral for Naira Loans

The Central Bank of Nigeria (CBN) has taken significant measures to stabilize the country’s foreign exchange market and protect the value of the naira. In a recent move, the CBN has banned Nigerian banks from accepting foreign currencies as collateral for naira loans.

As communicated through a circular uploaded to its website, this decision aims to address the observed practice of customers using foreign currency as collateral for loans denominated in naira. Additionally, the CBN has announced the sale of $10,000 to Bureau De Change (BDC) operators at N1101/$, with a directive to sell at a spread not exceeding 1.5 per cent above the CBN rate.

This directive comes amid efforts by the CBN to regulate the foreign exchange market and maintain stability despite dwindling foreign reserves. The move is part of a broader strategy to curb speculative activities and ensure the efficient allocation of foreign exchange resources in the economy.

Furthermore, the CBN’s decision to sell dollars to BDCs at a predetermined rate aims to mitigate exchange rate volatility and prevent sharp fluctuations in the parallel market.

However, the recent decline in Nigeria’s foreign exchange reserves, totalling about $1.02 billion within 18 days as of April 4, underscores the challenges facing the country’s currency management efforts.

CBN Implements Stricter Regulations on Collateral Use in the Nigerian Banking Sector

The decline highlights the need for effective measures to boost foreign exchange inflows and address the economy’s underlying structural imbalances. Additionally, the Association of Bureau De Change Operators of Nigeria has appealed to the CBN to lower its applicable exchange rate below the current peg of N1,251/$, citing market dynamics and the prevailing parallel market rate of 1,235/$.

In summary, the CBN’s ban on using foreign currencies as collateral for naira loans and its interventions in the foreign exchange market reflect ongoing efforts to stabilize the naira and ensure macroeconomic stability. However, addressing the root causes of foreign exchange challenges remains crucial for sustaining Nigeria’s long-term economic growth and stability.

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