CBN’s BAN ON FOREIGN CURRENCY COLLATERAL FOR NAIRA LOANS RECEIVES ANALYST APPLAUSE!

Financial analysts are applauding the Central Bank of Nigeria’s (CBN) decision to ban foreign currency as collateral for naira loans. They believe this will improve the Nigerian economy by making more dollars available in the foreign exchange market and addressing issues with currency liquidity.

The CBN issued a circular to all Nigerian banks, outlining the new policy with some exceptions. Foreign currency collateral is still allowed in the form of Nigerian government Eurobonds and guarantees from foreign banks.

Analysts support this policy because it encourages using more appropriate collateral like government bonds and foreign bank guarantees. This reduces pressure on Nigeria’s foreign exchange reserves. Previously, some borrowers used foreign currency (like US dollars) as collateral, which analysts say isn’t ideal.

Financial experts like Olatunde Amolegbe argue that using foreign currency as collateral weakens the Nigerian Naira (the country’s currency). He suggests using tools like forwards or Eurobonds to manage currency risk instead. This way, the dollars are still circulating in the economy.

Others, like Victor Chiazor, believe the new policy is a good move because it encourages using government Eurobonds and foreign bank guarantees as collateral. This is seen as a better option than using US dollars from savings accounts. Chiazor predicts this will free up foreign exchange reserves and potentially encourage investment in government bonds.

Tajudeen Olayinka sees the policy as part of a larger effort to stabilize the Nigerian economy. He believes it will improve dollar availability in the short term, which is a goal of the CBN.

However, not everyone agrees. David Adonri questions the reasoning behind the ban. He feels foreign currency can be less risky as collateral because foreign courts might be more efficient in handling defaults. But he acknowledges the CBN might be concerned about the quality of some foreign currency as collateral, hence the exceptions outlined in the policy.

According to him, he finds the directive perplexing because holding foreign currency-denominated collateral may seem less risky, given the stability of foreign currencies.

• “To realize such collateral securities in the event of default may be less cumbersome because of prompt responsiveness of foreign courts in dispensing justice. 
• However, I think that CBN is worried about the quality of some foreign securities as collaterals hence its prescription of the kinds of foreign currency assets that are permissible,” he said.