Banks’ bad loans climb as forbearance ends

…Worsening NPLs could weaken lenders’ balance sheets, says CBN

Nigeria’s banking sector has recorded a rise in non-performing loans (NPLs) to an estimated seven percent, breaching the prudential limit of five percent, following the withdrawal of regulatory forbearance measures introduced during the COVID-19 pandemic, the Central Bank of Nigeria (CBN) has said.

The COVID-19 forebearance saw bad loans rise across the banking sector, with non-performing loans (NPLs) in seven big banks surpassing N1.57 trillion in 2024. The total value of NPLs reported by the banks increased by 30 percent, from N1.21 trillion in 2023. Loans to customers by these banks surged by 39 percent, expanding from N28.9 trillion to N40.1 trillion.

In its 2026 Macroeconomic Outlook for Nigeria published on its website on Tuesday, the CBN noted that the increase in NPLs reflects the impact of tighter regulatory conditions as banks adjust to the post-forbearance environment.

The CBN warned that rising NPLs pose a direct threat to banks’ profitability, credit availability, and overall risk-bearing capacity, underscoring the need to sustain measures that prevent further deterioration in asset quality.

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It said a worsening NPL profile could weaken banks’ balance sheets, impair asset quality, and potentially trigger systemic contagion across the financial system. Although recent improvements in capital adequacy and liquidity ratios provide some buffers, the bank cautioned that these indicators remain vulnerable to unforeseen macroeconomic shocks.

According to the apex bank, an increase in credit losses or foreign exchange illiquidity could erode capital buffers, lead to breaches of prudential thresholds, and place pressure on banks’ liquidity coverage positions. Such developments, it said, could disrupt financial intermediation, reduce market confidence, and amplify vulnerabilities across the banking sector.

The CBN noted that a sharp depreciation of the naira, although considered unlikely, could negatively affect banks’ balance sheet and liquidity positions. This, it said, could result in an expansion of monetary aggregates and heightened inflationary pressures. The bank also cautioned that despite the ongoing bullish momentum in the capital market, higher concentration risk could emerge from the banking sector, as the current recapitalisation exercise may lead to investor fatigue and crowd out funding for other issuers.

In addition, the high level of interconnectedness within the financial system was flagged as a source of systemic risk. The apex bank warned that cyberattacks on financial institutions could propagate data breaches, compromise sensitive information, and erode public confidence in the financial system.

Despite these risks, the CBN said Nigeria’s banking sector remained broadly stable in 2025, with key Financial Soundness Indicators largely aligned with regulatory benchmarks. The liquidity ratio stood at 65 percent, well above the 30 percent regulatory minimum and higher than the 48.94 percent recorded in December 2024, reflecting the sector’s strong capacity to meet maturing obligations.

Similarly, the capital adequacy ratio stood at 11.60 percent, exceeding the 10 percent regulatory minimum, and indicating the banking sector’s ability to absorb credit and market shocks.

To strengthen resilience and ensure a robust capital base capable of absorbing unexpected losses, supporting a trillion-dollar economy, and boosting public confidence, the CBN said it raised minimum capital requirements for banks as part of efforts to enhance overall financial system stability.

Read also: CBN sees FX reserves rising to $51bn in 2026 on market reforms

The banking and financial institutions regulator said it would prioritise four strategic pillars aimed at achieving monetary and price stability, strengthening financial sector resilience, and reinforcing the external sector. These priorities are also designed to sustain a market-determined exchange rate, bolster external reserves, and support stable and predictable economic growth over the 2026–2027 period. The bank added that it would continue to work closely with fiscal authorities to ensure fiscal sustainability and drive structural transformation of the Nigerian economy.

Between 2026 and 2027, the CBN expects that a more coordinated fiscal and monetary policy environment will help to reduce speculative pressures on the naira, while improving the predictability of foreign exchange (FX) market reactions to policy announcements as communication strengthens.

The apex bank also projected improved financial system supervision and enhanced early-warning capabilities, driven by real-time monitoring of Financial Soundness Indicators across sectors, geographies, and institutions. It said this would enable faster and more effective regulatory interventions, reduce systemic vulnerabilities, and lower the probability of bank distress through proactive, data-driven policy calibration.

Furthermore, stronger cross-border and regional financial integration are expected to deepen participation by Nigerian banks and corporates in regional capital markets, diversify funding sources for businesses, and boost investor confidence through more harmonised regulatory frameworks. The CBN added that greater stability in domestic credit markets would be supported by effective supervision, robust financial infrastructure, and improved liquidity management by banks, helping to ensure stable credit flows to productive sectors and reinforce stakeholder confidence in the safety, resilience, and sound regulation of the financial system.