CBN Directive: Leaked Letter Prohibits Naira Overdrafts Secured by Foreign Currency Deposits

A confidential communication from the Central Bank of Nigeria (CBN) to a prominent commercial Bank Plc has surfaced, shedding light on a decisive directive issued by the apex bank concerning Naira overdrafts supported by foreign currency deposits.

This directive marks a significant shift in lending practices, disallowing borrowers from employing foreign currency deposits, notably in dollars as collateral to access loans denominated in Naira.

The rationale behind this prohibition stems from the strategic considerations of borrowers aiming to safeguard themselves against potential spikes in foreign currency value.

The leaked document, dated August 17, 2023, and bearing the signature of Mr. Haruna B. Mustafa, the Director of Banking Supervision at the CBN, presents a comprehensive overview of the central bank’s latest supervisory appraisal.

The investigation uncovered that the concerned bank had been extending Naira overdraft facilities underpinned by foreign currency deposits, a practice now explicitly disallowed by the CBN.

Highlighting the rationale behind this decision, the CBN’s communication emphasizes that such arrangements introduce the risk of currency misalignment, potentially constricting foreign exchange (FX) liquidity within the market. Consequently, this phenomenon could precipitate scarcity, consequently exerting undue pressure on the nation’s exchange rate.

This strategic stance by the CBN emerges from its genuine apprehensions over currency misalignment, which, if unchecked, could introduce significant financial vulnerabilities to banks.

Interestingly, instead of opting to convert their foreign currency holdings into Naira, certain borrowers have historically favored borrowing in Naira. Their reasoning revolves around the potential disparity between the cost of repurchasing the foreign currency later and the prevailing Naira interest rates. This intriguing practice, however, bears the inherent risk of contributing to speculative activities that can reverberate throughout the exchange rate landscape.

As the ramifications of the leaked CBN letter continue to reverberate, market analysts and financial experts anticipate a dynamic shift in how lending institutions and borrowers navigate the complex interplay between foreign currency assets and Naira-denominated loans. This development could have far-reaching implications for Nigeria’s financial landscape, shaping the trajectory of lending practices and exchange rate stability in the foreseeable future.