CBN Raises Forex Borrowing Limit

CBN Raises Forex Borrowing Limit

The Central Bank of Nigeria (CBN) has increased the limit on banks’ foreign currency borrowings to 125 percent of shareholders’ funds.

The decision came after some lenders breached the CBN’s regulatory limit due to the recent fall in the naira, a recent circular sighted by Reuters has shown.

The new regulation replaces a 2014 rule capping foreign borrowings, including Eurobonds, at 75 percent of shareholders’ funds as Nigeria struggles with extensive capital shortfalls due to a currency crisis and bad loans.

“A major consequence of this development was the inadvertent breach of the regulatory limit for foreign currency borrowings by some banks.

To address this development, the aggregate foreign currency borrowing of a bank borrowing should not exceed 125 percent of shareholders’ funds,” the CBN said in a circular.

The new rules also prescribe that all foreign borrowing should be hedged through the financial markets and debt should have a minimum of five-year maturity except for trade lines.

It directed lenders to report on their utilisation of foreign currency borrowings monthly.

A plunge in global oil prices had seen Nigeria face a shortage of dollars, triggering a currency crisis that left lenders and firms struggling to purchase hard currency, a situation that eroded investor confidence.

The naira lost around a third of its official value last year after the apex bank lifted its dollar peg to float the currency on the interbank market.

It later re-imposed a quasi-peg to avoid further currency loss, thereby creating multiple exchange rates.

With the sharp falls in the currency, banks have seen their dollar loan books swell in naira terms, the central bank said.

This implies that they have to hold more capital in order to keep within a regulatory threshold of the loan to capital ratio.

Banks in the country raised over $1.5 billion from Eurobonds and other debt instruments in 2013 as lenders rush to lend to the once lucrative oil industry at the peak of crude prices before the 2014 price crash.

The central bank has been trying to curb pressures on the naira from excess demand for dollars. It also wants to help avoid widespread capital raises for the banking industry given the weak equity markets and expensive debt market yields.

The International Monetary Fund (IMF) last month urged Nigeria to quickly increase the capital of under-capitalized banks and putting a time limit on regulatory forbearance but welcomed efforts to strengthen the banking sector.

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