Nigeria’s banking sector has crossed a critical regulatory threshold, with non-performing loans climbing to 7% in 2025, breaching the Central Bank of Nigeria’s prudential limit of 5% for the first time in years, according to the apex bank’s latest macroeconomic outlook report.
The surge in bad loans comes as the CBN officially ended the regulatory forbearance originally granted during the COVID-19 pandemic, forcing banks to reclassify restructured loans that had previously been shielded from non-performing status.
“The level of NPLs reflected the withdrawal of the regulatory forbearance granted to banks during the COVID-19 pandemic,” the CBN stated in its report, noting that the increase resulted from the “crystallisation of previously restructured loans that could no longer qualify for special consideration once the relief window expired.”
The forbearance measures, introduced at the height of the pandemic, had allowed Nigerian banks to restructure distressed facilities without immediately classifying them as non-performing — a move designed to prevent widespread financial sector instability during the economic crisis triggered by lockdowns and global disruptions.
System Remains Stable Despite Rising Defaults
Despite the breach, the CBN maintained that Nigeria’s financial system remained fundamentally sound throughout 2025, pointing to robust liquidity and capital buffers that exceeded regulatory requirements by comfortable margins.
Banking sector liquidity averaged 65% during the year, more than double the 30% minimum requirement, while capital adequacy ratios stood at 11.6%, above the 10% regulatory floor. According to the central bank, these cushions ensure lenders can absorb shocks and maintain normal operations without systemic stress.
The regulator expressed confidence that ongoing recapitalisation efforts across the industry would further strengthen bank balance sheets and enhance their capacity to support economic growth through expanded lending activities.
Credit Risk Concerns Mount
However, the CBN issued stern warnings about the implications of elevated non-performing loans, particularly as Nigerian borrowers grapple with higher interest rates and broader economic pressures that have characterized the post-pandemic period.
“Rising NPLs pose a direct threat to banks’ profitability, credit availability, and overall risk-bearing capacity,” the report cautioned, emphasizing the need for sustained measures to prevent deteriorating loan quality from weakening balance sheets and triggering contagion across the financial system.
The regulator noted that while current capital adequacy and liquidity ratios provide a buffer, “these indicators remain susceptible to unforeseen macroeconomic shocks,” underscoring the fragility of the positive outlook amid persistent economic headwinds.
Banks could see profitability squeezed and lending capacity constrained if credit discipline weakens further, the CBN warned, potentially creating a feedback loop that limits the sector’s ability to finance the real economy.
Recovery Measures and Policy Response
To address mounting credit risks, the CBN called for broader implementation of the Global Standing Instruction framework across the banking industry, a mechanism designed to improve loan recovery rates and strengthen repayment discipline among borrowers.
Enhanced recoveries, the regulator argued, would help banks reduce operational losses and bolster capital buffers, particularly in micro, small and medium enterprise lending and retail credit segments, which are typically more vulnerable to default.
Monetary policy remained restrictive for most of 2025 as the central bank prioritized price stability and exchange rate management, though the Monetary Policy Rate saw a modest reduction in September. The CBN emphasized that financial system stability would continue to anchor policy decisions going forward.
Cautiously Optimistic Outlook
Looking ahead to 2026, the CBN projected a broadly stable outlook for the banking sector but stressed that lenders must remain vigilant, strengthening risk management frameworks, diversifying loan portfolios and maintaining strong capital positions to withstand potential future shocks.
The ongoing recapitalisation drive, combined with reforms in foreign exchange management and the tax system, is expected to support investor confidence in the Nigerian banking sector as it navigates the transition away from pandemic-era support measures.
Industry analysts will be watching closely to see whether the spike in non-performing loans represents a temporary adjustment as restructured facilities work through the system, or signals deeper credit quality challenges that could persist as the economy adjusts to tighter monetary conditions and structural reforms.
WHAT YOU SHOULD KNOW
Nigeria’s banking sector has breached the 5% bad loan safety threshold, hitting 7% in 2025 after the Central Bank ended pandemic-era relief measures that had allowed banks to mask distressed loans. While the financial system remains stable with strong liquidity and capital buffers well above regulatory minimums, the rising non-performing loans expose banks to heightened credit risk at a time when borrowers face economic pressures and high interest rates.
The CBN warns this could squeeze bank profitability and lending capacity if credit discipline weakens, though ongoing recapitalisation efforts and improved loan recovery mechanisms are expected to strengthen the sector’s resilience heading into 2026.
Nigerian banks are emerging from pandemic protections into a reality check on loan quality, but the system has adequate cushions to weather the transition if lenders maintain strict risk management.
