Standby letters of credit (L/Cs) are excepted from a new notice issued by the Central Bank of Nigeria (CBN) that bans the country's commercial banks from accepting foreign currency as collateral for naira loans.

The new regulation aims to protect Nigeria's banking system against a strengthening of the local currency.

Comply or face sanctions

"The current practice of using foreign currency-denominated collaterals for naira loans is hereby prohibited, except, where the foreign currency collateral is: Eurobonds issued by the federal government of Nigeria; or guarantees of foreign banks, including standby L/Cs'" the notice issued by the CBN says.

It goes on to say that banks failing to comply with the notice within 90 days "shall be risk-weighted 150 per cent for capital adequacy ratio computation, in addition to other regulatory sanctions."

Currency gains

Following its second devaluation in less than a year in January, the naira experienced a significant surge against the US dollar in both the official and parallel markets.

This strengthening came about as a result of the central bank's decision to increase interest rates in February and March, along with the lifting of restrictions on foreign participation in its fixed-income auctions.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.