Leaked CBN Circular Bans Naira Overdrafts Secured by Foreign Currency Deposits

A confidential letter from the Central Bank of Nigeria (CBN) to a commercial Bank Plc has been leaked, revealing a stern directive from the apex bank concerning naira overdrafts backed by foreign currency deposits.

This means a borrower cannot use dollars deposited in their bank account as collateral to obtain a loan in naira.

The preference for these borrowers is likely due to the need to hedge against foreign currency spikes which can be costlier than interest rates.

In the leaked letter dated August 17, 2023, and signed by Mr. Haruna B. Mustafa, director of Banking Supervision, the CBN highlighted its findings from a recent supervisory review.

It was uncovered that the bank had been offering naira overdraft facilities that were secured with foreign currency deposits.

“This practice is not only fraught with the risk of currency mismatch, but is capable of limiting FX liquidity in the market, thereby creating scarcity and exerting pressure on the exchange rate.”

The CBN’s stance against such practices arose from concerns of currency mismatch, which could introduce substantial financial risks for banks.

Rather than convert their dollars to naira, some borrowers will rather borrow in naira as the cost of buying the dollars back might be higher than the interest rate they pay for borrowing in naira.

However, this can have a ripple effect on the exchange rate due to its speculative tendencies.

Source: Nairametrics.com