Onome Amuge
Nigerian banks are facing a potential increase in impaired loans and fresh pressure on their capital buffers as regulators prepare to withdraw systemwide forbearance measures that have underpinned the sector since the country’s last major financial shock, according to Fitch Ratings.
The credit rating agency, in a commentary published this week, cautioned that the expiry of forbearance arrangements by the middle of 2025 will trigger the reclassification of large volumes of risky loans, raising impaired loan ratios and testing banks’ ability to maintain adequate capitalisation levels.
The warning comes as Nigerian lenders undergo a complex operating environment marked by high inflation, elevated interest rates, and shifting regulatory demands, even as recent reforms have strengthened earnings and liquidity.
Systemwide forbearance (Regulatory relief measures that allowed banks to avoid classifying certain stressed assets as non-performing), has provided temporary breathing space since the COVID-19 crisis and subsequent naira volatility. Fitch estimates that the vast majority of Nigerian banks will exit these arrangements by the end of 2025.
The agency said the transition will be disruptive, stating: “The expiry of forbearance will lead to some large Stage 2 loans being reclassified as impaired,” it noted. Stage 2 exposures are loans that show signs of significant credit deterioration but are not yet considered in default.
As these migrate into the impaired category, reported non-performing loan (NPL) ratios are expected to rise materially, with knock-on effects for provisioning and capital adequacy. Total capital adequacy ratios (CARs), already stretched for some mid-tier lenders, could come under notable pressure, Fitch said.
Banks that fail to meet prudential thresholds may continue under forbearance but will face penalties, including restrictions on dividend payments, a potential concern for investors in an industry long valued for its high payout ratios.
Despite the looming risks, Fitch emphasised that Nigerian lenders are not entirely unprepared. Many banks have undertaken proactive loan restructurings to improve repayment profiles, while a wave of capital-raising activity has been set in motion by the Central Bank of Nigeria’s (CBN) decision to sharply raise minimum paid-in capital requirements earlier this year.
Improved profitability has also given banks more cushion. Net interest margins have widened on the back of higher yields, enhancing loss-absorption capacity and providing a buffer against prospective impairment charges.
“This will help counteract increased loan impairment charges and prudential provisions resulting from the expiry of forbearance,” Fitch noted, pointing to stronger earnings as an important offset to asset quality pressures.
One bright spot has been the banking sector’s foreign-currency liquidity profile, which has benefited from the CBN’s exchange rate liberalisation and subsequent naira devaluations.
According to Fitch, the reforms have boosted turnover in the foreign-exchange market and improved banks’ access to hard currency. This will prove critical as lenders face external debt maturities in the coming years. This is even as Nigerian banks have Eurobonds worth $2.2 billion maturing or callable by 2026.
Fitch said most institutions hold sufficient liquidity to meet these obligations without resorting to refinancing. This is considered a marked contrast to previous periods when access to international capital markets was limited.
Nonetheless, structural challenges continue to weigh on the industry. Nigeria’s inflation rate, which has held above 20 per cent for much of the past two years, is eroding real returns and complicating monetary policy transmission. Interest rates are expected to remain high in the near term, further constraining credit expansion.
At the same time, regulatory burdens remain highly onerous, Fitch said, with banks facing compliance demands that add to operating costs and restrict flexibility.
Analysts also warn that sovereign risks including Nigeria’s rising debt stock and fiscal pressures, could spill over into the banking system, particularly given lenders’ large holdings of government securities.
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