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Tuesday, December 5, 2023

Are you seeking loans outside Nigerian banks?

This is for those who are seeking loans outside Nigeria's financial institutions.

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This is for those who are seeking loans outside Nigeria’s financial institutions. You must have noticed that these kinds of loans are given in dollars and you are expected to pay back both interest and principal in dollars.

So for instance, if you borrowed $20k at an interest rate of 10% flat per annum. You are expected to pay back $22k. Now, assuming you borrowed the money when a dollar was N365/$1 and suddenly the dollar hits N450, it then implies that you’ll be paying back a huge amount, way above your borrowing in other to pay down the loan.

This is what caused the rift between Etisalat and the consortium of Nigerian banks. Etisalat borrowed money in dollars N140/$1, converted it to naira but when it was time to pay back dollars was already N365. They couldn’t meet up hence they had to forfeit their Nigerian hold in Etisalat and it became 9mobile cos the consortium of banks took it over.

So back to my message, if you get an external loan, this is what you should do so as to avoid the consequences of the volatility of our currency.

Luckily, external loans interest rates are always one digit most of the time 8-9% per annum.

If you get the loan, the first thing you should do is to quickly fix the dollars in a dollar fixed deposit account, you’ll also earn one digit interest from your local bank. You then use that cash as collateral to borrow naira. This is called a currency swap.

After you get your naira, you can now start your business and pay your bank in naira. The bank will also pay you in dollars for fixing your dollars with them and of course as you get paid, you remit to your own foreign lenders in dollars. A win-win. Exchange rate differentials will not affect you. If the dollar likes let it rise to whatever, you will not be affected in any way.

Never, ever make the mistake of converting dollar loans to naira directly hoping to convert back to dollars to pay your loans, you’ll definitely get burned. Just do your currency swap and you are good to go.

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