Regulatory Alerts2010-09-25 | FPRD/DIR/GDL/SGB/01/003Guidelines for Granting Liquid Asset Status to State Government Bonds
The Central Bank of Nigeria (CBN) has established guidelines for liquid asset status for State government bonds to encourage investments and promote the development of the domestic bond market. For a state government bond to qualify as a liquid asset, it must meet specific criteria outlined in these guidelines. The criteria include: - Maturity period not exceeding seven years. - Investment-grade rating by an SEC-accredited agency throughout its tenor. - Adequate disclosure of bond issuance details, including utilization of proceeds and repayment structure through sinking funds. - Evidence of an irrevocable letter of authority issued by the Accountant-General of the State to deduct at source in case of default or failure to meet payment obligations. Liquid assets are given a 20% risk weight for capital adequacy ratio purposes, enabling banks and discount houses to hold them as collateral in repurchase transactions with a reduced "haircut." The guidelines also set investment limits for banks regarding bond holdings of State governments and their agencies. State government bonds qualifying as liquid assets will not be included in the computation of the 10% ceiling on lending to all tiers of government. However, those that do not qualify carry a risk weight of 50%. The guidelines apply to both new issues and previously issued bonds, and the CBN reserves the right to review them periodically.