As Nigeria tries to manage exchange rate risks and stop pressures mounted on the naira from excess demand, the Central Bank of Nigeria, CBN, has slashed the limit on the borrowings to 75 per cent, amending a 2001 rule, which placed foreign currency borrowings, including Eurobonds, at 200 per cent of shareholders’ funds. The regulation also requires that banks have adequate liquid foreign assets including cash and government securities to cover maturing foreign obligations and a contingency arrangement with other financial institutions, which would cover loan repayment.

The document sent to all lenders stated that the lower interest rate on foreign debt has created an incentive for banks to borrow abroad. “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,” the statement read in part.

The local currency has declined by almost 4 per cent this year to 165.35 against the dollar and has been battered since June as the price of crude oil, Nigeria’s major foreign currency earner, dropped more than 25 per cent.

Nigerian banks have been identified as 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. Nigerian banks have raised over $1.1 billion this year from issuing Eurobonds and other types of debt instruments as global lenders take advantage of loose monetary policies by global central banks to strengthen their capital bases.