An internal document from the Central Bank of Nigeria (CBN) to a commercial Bank Plc has surfaced, disclosing a strict guideline issued by the apex bank regarding Naira overdrafts supported by foreign currency deposits.
This guideline signifies that individuals cannot leverage dollars held in their bank accounts as security for obtaining loans 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, the 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 arises from concerns of currency mismatch, which could introduce substantial financial risks for banks.
Instead of exchanging their dollars for naira, certain borrowers prefer borrowing in naira. This choice is driven by the potential for higher costs when buying back dollars, compared to the interest rate they would pay for naira borrowing. Nevertheless, this decision could impact the exchange rate, given its speculative nature.
