The Central Bank of Nigeria has cut the limit on banks’ foreign currency borrowings to 75 percent of shareholders’ funds from 200 percent.
The new measure, which is contained in a central bank circular, effectively replaces a 2001 rule capping foreign borrowings, including Eurobonds, at 200 percent of shareholders’ funds.
Reuters report indicates that this new policy is part of Nigeria’s attempts to manage exchange rate risks and curb pressures on the naira from excess demand for dollars.
The new rule also requires banks to have adequate liquid foreign assets including cash and government securities to cover maturing foreign obligations and a contingency arrangement with other financial institutions to cover loan repayment.
The central bank has moved towards strengthening rules and tightening capital requirements since the near collapse of eight banks in 2009 that forced it to implement a $4 billion bailout.
Nigerian banks have raised over $1.1 billion this year from issuing Eurobonds and other types of debt instruments as lenders rush to take advantage of loose monetary policies by global central banks to shore up their capital bases.
According to Reuters, the central bank is trying to ease pressure on the naira as banks borrow more dollars to cover interest payments offshore and as demand for imported goods stays high at 80 percent of all non-food consumption.
The local currency — down almost 4 percent this year to 165.35 against the dollar — has taken beating since June as the price of crude oil, Nigeria’s main foreign currency earner, has dropped more than 25 percent.
“The central bank of Nigeria has noted with concern the growth in foreign currency borrowings of banks through foreign lines of credit and issuance of foreign currency denominated bonds (Eurobonds). The lower interest rate on foreign debt has created an incentive for banks to borrow abroad,” the document dated Oct. 24 and sent to all lenders said.
“This has the advantage of providing fairly stable and long term funds to extend credit facilities in foreign currency and enhance their capital base. However, this also exposes banks to foreign exchange risks and other risks,” it said.
Banks in Africa’s biggest economy have been heavy borrowers of long-dated dollar securities over the past several years to fund industries such as oil and gas, power and telecoms whose need for manufactured good cannot be met locally.
In the first half, Zenith Bank sold $500 million in Eurobonds, Access Bank raised $400 million and Diamond Bank secured $200 million, according to Citi, which acted as lead arranger.
