The Central Bank of Nigeria (CBN) issued a strict rule about Naira overdrafts supported by foreign currency deposits, according to a confidential letter to a commercial Bank Plc that was leaked.
This implies that a borrower is unable to obtain a loan in naira with the use of dollars placed in their bank account as security.
The necessity to protect against foreign currency surges, which can be more expensive than interest rates, may be the reason for the preference for these borrowers.
The CBN underlined its conclusions from a recent supervisory assessment in the leaked letter dated August 17, 2023, and signed by Mr. Haruna B. Mustafa, the Director of Banking Supervision.
It was discovered that the Bank had been providing foreign currency-backed Naira overdraft facilities.
“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.