Legality of foreign currency-denominated loans by Nigerian banks

Introduction
Facts
CBN Act and CBN Circular
Plaintiff's arguments
Bank's arguments
Decision
Analysis of CBN Act, CBN Circular and decision
Comment

Introduction

It is common practice for Nigerian banks to grant loan facilities to customers in need of funds for the purpose of executing a project, to serve as working capital or for the acquisition of assets and for some loan facilities to be denominated in foreign currency.

However, a recent Federal High Court decision has raised doubt as to the legality of foreign currency-denominated facilities.(1)

Facts

In 2007 the plaintiff (a Nigerian company) obtained a credit facility denominated in dollars from the defendant (a Nigerian commercial bank) to finance the completion of an office complex in Lagos. Unable to repay the loan, the plaintiff instituted a suit seeking declarations that:

• the facility contravened Sections 15 and 20 of the Central Bank of Nigeria (CBN) Act(2) and the CBN Circular(3) and that the facility and the bank's demand of the outstanding debt in dollars were thus null, void and unenforceable; and
• any security created by the plaintiff in favour of the bank pursuant to the facility was null, void and unenforceable.

CBN Act and CBN Circular

The CBN Act provides that the naira(4) and the kobo are Nigeria's unit of currency and that currency notes issued by the CBN are legal tender in Nigeria at their face value for the payment of any amount.(5) The CBN Act goes further to criminalise a person's refusal to accept the naira as a payment method.(6)

As such, in 2015 the CBN issued a circular(7) to Nigerian banks reiterating the relevant provisions of the CBN Act and warning the general public that it is illegal to price or denominate the cost of any product or service in foreign currency. The circular also stated that no agreement between Nigerian persons should be consummated in any currency other than the naira.

Plaintiff's arguments

The plaintiff purported to rely on the CBN Act and the circular and argued that the transaction between the plaintiff and the bank had contravened the CBN Act, as the transaction was between two Nigerian entities for the construction of a building complex in Lagos and, as such, had no cross-border implications. Further, the plaintiff earned its revenues in naira.

Bank's arguments

The bank argued that the CBN Act does not prohibit the grant of dollar-denominated loans. Rather, the CBN Act prohibits the refusal of the naira as a medium of exchange or payment method for goods and services in domestic transactions in Nigeria.(8)

The bank distinguished between the grant of a foreign currency loan in Nigeria and the use of foreign currency as the legal tender or a medium of exchange for the payment of goods and services. This distinction is fundamental, as the former is permissible under Nigerian law while the latter is prohibited.

The bank urged the court to:

• adopt the purposive rule of construction in interpreting the provisions of the CBN Act; and
• hold that the CBN Act intends to:
  • preserve the naira as Nigeria's legal tender and the payment method for goods and services in Nigeria; and
  • prevent a situation where the naira is abandoned and replaced with a foreign currency.

Decision

The court held that:

• the grant of the facility to the plaintiff violated the CBN Act and was therefore null, void, illegal and irrecoverable, and the court will not enforce a contract which is illegal or contrary to public policy;
• enforcing the terms of a facility granted in foreign currency is contrary to public policy on the 'non-dollarisation' of the Nigerian economy and the sole use of the naira as legal tender in Nigeria;
• the CBN Act not only prohibits the use of any other currency for transactions in Nigeria, but also renders it illegal for parties in Nigeria to enter into non-naira transactions or refuse to accept the naira as a payment method; and
• the bank's banking licence restricted its operations to Nigeria and did not permit it to provide foreign currency loans, as this would amount to offshore banking.

Analysis of CBN Act, CBN Circular and decision

Legality of foreign currency transactions
The CBN Act makes it clear that the naira is the currency of payment for the domestic supply of goods and services in Nigeria. However, the designation of the naira as legal tender in Nigeria does not in itself prohibit the use of any other currency as a medium of exchange within Nigeria. The designation of a currency as legal tender only makes such currency the default and predominant medium of exchange. As such, the CBN Act renders it illegal to refuse the naira as a payment method for goods and services in Nigeria but does not prohibit parties from mutually agreeing to denominate the currency of payment for their contract in foreign currency.

In addition, the court failed to consider the provisions of other statutes which permit the conduct of transactions in foreign currency in Nigeria – for example, the Foreign Exchange (Monitoring and Miscellaneous Provisions) (FEMM) Act, which is the primary legislation that regulates foreign currency transactions in Nigeria. The FEMM Act establishes an autonomous foreign exchange market for the buying and selling of foreign currency in Nigeria, consisting of authorised dealers (including commercial banks) authorised buyers and the public. The FEMM Act also provides that any transaction adequately supported by appropriate documentation is eligible for the purchase of foreign exchange in the market.(9)

The FEMM Act provides that any person may open, maintain and operate a domiciliary account designated in foreign currency with an authorised dealer.(10) In addition, the CBN is empowered by the FEMM Act to authorise a bank to transact banking business, including the provision of financing,(11) in any foreign currency deposited with the bank.(12) Thus, it could be argued that the court erred by failing to consider the FEMM Act in its decision.

In 2015 the CBN issued a circular(13) prohibiting Nigerian banks from granting foreign currency loans to customers that solely generate revenues that are denominated in the naira. Pursuant to this circular, Nigerian companies that have both naira and foreign currency receivables, or solely foreign currency receivables, may obtain foreign currency facilities from Nigerian banks. Therefore, it is obvious that the CBN circular did not place a blanket ban on Nigerian banks from granting foreign currency-denominated facilities to Nigerian companies.

Further, the CBN has since issued several guidelines which have endorsed the denomination of domestic transactions in foreign currency.(14) The CBN is statutorily charged with:

• ensuring monetary and price stability;
• issuing legal tender currency in Nigeria; and
• regulating the activities of licensed banks and financial institutions.

To the extent that the CBN has continued to regulate the provision of foreign currency loans by Nigerian banks, it arguably recognises the validity and enforceability of such loans.

Non-dollarisation policy
On the court's decision that enforcing the terms of the facility would be contrary to public policy on the non-dollarisation of the Nigerian economy, any public policy must follow the dictates of the law to be enforceable.(15) As such, to the extent that Nigerian law permits the grant of foreign currency facilities, any contrary public policy ought not to be enforced by the courts.

Licence to lend in foreign currency
The court also erroneously interpreted offshore banking activities to include the provision of foreign currency loans within Nigeria and held that the bank's banking licence did not permit it to do either. Offshore banking involves the conduct of banking business outside Nigeria and it is believed that extending foreign currency facilities to a Nigerian borrower will not amount to conducting business outside Nigeria.

As such, it can be argued that the court was wrong to hold that the provision of a foreign currency-denominated facility by the bank was illegal and unenforceable. Rather, the court ought to have granted Sections 15, 20(1) and 20(5) of the CBN Act their ordinary literal meaning and upheld its duty to enforce a contract duly entered into by the parties. As set out above, because the facility was not illegal or contrary to public policy, the court ought to have held that a facility denominated in foreign currency would be enforceable in the currency in which the obligation was expressed.

Comment

This decision – pending its being overturned either on appeal or by another court of appropriate jurisdiction – has unnecessarily created confusion and concern among Nigerian banks and could affect the disposition of banks to provide financing in foreign currency in order to assist customers' businesses and projects. It is hoped that the Nigerian judiciary will, when faced with a similar matter in future, carefully interpret the circular, the CBN Act and the FEMM Act so as to reveal the true intention of the drafters, which may not have been to prohibit the grant of foreign currency-denominated credit facilities by Nigerian banks.

For further information on this topic please contact Funmilayo Otsemobor, Mutiat Adeyemo or Oluwatamilore Oluwalaiye at Aluko & Oyebode by telephone (+234 1 462 8360 71) or email (funmilayo.otsemobor@aluko-oyebode.com, mutiat.adeyemo@aluko-oyebode.com or oluwatamilore.oluwalaiye@aluko-oyebode.com). The Aluko & Oyebode website can be accessed at www.aluko-oyebode.com.

Endnotes

(1) RB Properties Limited v Guaranty Trust Bank PLC (FHC/L/CS/1374/2016), 28 February 2018.

(2) CBN Act, CAP C4, Laws of the Federation of Nigeria 2004.

(3) CBN Circular BSD/DIR/GEN/LAB/08/013, 17 April 2015, "Currency Substitution and Dollarisation of the Nigerian Economy".

(4) Section 15 of the CBN Act.

(5) Section 20(1) of the CBN Act.

(6) Section 20(5) of the CBN Act.

(7) CBN Circular, Ibid.

(8) Section 20(5) of the CBN Act.

(9) Section 10 of the FEMM Act.

(10) Section 17(1) of the FEMM Act.

(11) Section 66 of the Banks and Other Financial Institutions Act, CAP B3, Laws of the Federation of Nigeria 2004.

(12) Section 18(2) of the FEMM Act.

(13) Foreign Exchange Manual 2018; Circular BSD/DIR/GEN/LAB/08/037, 4 August 2015, "Granting of Foreign Currency Loans to Non-Dollar Generating Businesses".

(14) CBN Circular BSD/DIR/GEN/LAB09/037, 27 July 2016, "Provisioning for Foreign Currency Loan".

(15) Edet v Chagoon (2008) 2 NWLR (Pt 1070) 85 at P 108, Paragraphs F-G.