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Monday, May 20, 2024

CBN moves to curb foreign currency collateral use

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In a bid to bolster foreign exchange liquidity and stabilize the economy, the Central Bank of Nigeria (CBN) issued a new directive on Monday, compelling Deposit Money Banks to cease accepting foreign currencies as collateral for naira loans within a 90-day window. This development coincides with a surge in the naira’s value against the US dollar across official and parallel markets.

Under the leadership of Olayemi Cardoso, the CBN has intensified efforts to address the challenge of dollar liquidity within the financial system, deploying a range of measures aimed at bolstering the naira’s performance against the greenback.

The latest circular, titled “The use of foreign-currency-denominated collaterals for naira loans,” expressed concerns over the prevalence of foreign currency collateralization among bank customers. While this is not the first time such prohibitions have been issued, the CBN’s renewed stance reflects ongoing challenges and a need for stricter enforcement.

The circular, referenced as BSD/DIR/PUB/LAB/017/004, underscores the regulator’s determination to curb practices that could undermine financial stability. Notably, the directive highlights the risks associated with currency mismatches, which could pose significant threats to banking institutions.

Furthermore, the CBN’s directive underscores the imperative of aligning lending practices with regulatory standards, emphasizing the importance of adherence to prescribed guidelines to mitigate systemic risks.

The decision to disallow foreign currency collateralization for naira loans underscores the CBN’s commitment to fostering a robust and resilient financial ecosystem, one that prioritizes prudential norms and safeguards against potential vulnerabilities.

As stakeholders navigate the implications of the new directive, attention remains focused on broader efforts to shore up foreign exchange reserves and sustain the naira’s newfound strength. Against a backdrop of evolving market dynamics, the CBN’s proactive measures signal a concerted effort to promote stability and resilience in Nigeria’s economic landscape.

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