Rising non-performing loans put pressure on banks

By Philippine Duru

philippineobetoduru@gmail.com

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Nigeria’s banking sector is witnessing a paradoxical trend in 2026 as lenders continue to report robust growth in assets, deposits and earnings, while credit expansion to businesses and households slows significantly amid mounting concerns over asset quality and rising non-performing loans (NPLs).

The development comes as banks adjust to tighter monetary conditions and prepare for the full implementation of regulatory measures following the gradual withdrawal of loan forbearance arrangements that had helped cushion borrowers through periods of economic stress.

Industry analysts say the banking sector remains fundamentally strong, supported by record profits, foreign exchange revaluation gains, increased digital banking revenues and aggressive capital-raising efforts. However, the quality of loan portfolios is increasingly coming under scrutiny as more borrowers struggle with high interest rates, inflationary pressures and elevated operating costs.

Despite a significant increase in customer deposits and total assets across the industry, banks have become more cautious in extending new credit, particularly to riskier sectors of the economy.

The cautious stance reflects concerns over the ability of borrowers to service debt in an environment characterized by high borrowing costs. The Central Bank of Nigeria’s monetary tightening cycle has pushed lending rates to multi-year highs, increasing repayment burdens for businesses and consumers alike.

Many lenders are prioritizing liquidity preservation and risk management over aggressive loan growth, leading to a slowdown in credit creation at a time when businesses are seeking financing to expand operations and manage rising costs.

Economic experts warn that prolonged weakness in credit expansion could affect private-sector investment, job creation and overall economic growth, especially for small and medium-sized enterprises that depend heavily on bank financing.

A major factor driving concern within the banking industry is the gradual expiration of regulatory forbearance measures introduced to help borrowers affected by economic disruptions.

During the forbearance period, banks were allowed certain regulatory flexibility in restructuring loans and providing repayment relief to struggling customers. While the policy helped prevent a sharp deterioration in asset quality, analysts note that it also delayed the recognition of some underlying credit weaknesses.

As these relief measures wind down, banks are being required to reassess affected facilities under stricter prudential standards. Loans that were previously classified as performing due to restructuring arrangements are increasingly being reviewed, with some migrating into non-performing categories.

The result has been a noticeable increase in impaired loans across segments such as manufacturing, oil and gas, trade, real estate and small business lending.

Industry observers report that non-performing loan ratios have begun trending upward after several years of relative stability.

Although most major lenders remain within regulatory thresholds, the rising trajectory is attracting attention from regulators and investors who fear that continued economic pressures could trigger further deterioration.

Banks are responding by increasing loan-loss provisions, strengthening recovery efforts and tightening underwriting standards for new borrowers.

Some institutions have also intensified loan restructuring programs aimed at helping viable businesses navigate temporary cash-flow challenges without slipping into outright default.

Financial analysts note that higher provisions could place pressure on future profitability, even though most banks currently retain substantial earnings buffers.

Despite emerging asset-quality concerns, the sector continues to benefit from strong capitalization.

Several leading banks have successfully raised fresh capital through rights issues, private placements and public offers as part of ongoing efforts to meet new regulatory capital requirements.

The recapitalization exercise is expected to strengthen the industry’s resilience against potential loan losses while providing additional capacity to support future lending activities.

Market analysts believe stronger capital buffers will help banks absorb shocks associated with deteriorating credit quality and maintain confidence among depositors and investors.

Investors are increasingly shifting attention from headline profit figures to the sustainability of earnings and the health of loan books.

While many banks continue to report impressive bottom-line growth, analysts caution that profits driven largely by foreign exchange gains and treasury operations may not be sufficient to offset persistent deterioration in loan performance.

Institutional investors are paying close attention to NPL ratios, provisioning levels, cost of risk indicators and management guidance regarding exposure to vulnerable sectors.

The trend is expected to play a significant role in determining market valuations for banking stocks in the second half of 2026.

The broader economic environment remains challenging for borrowers.

Businesses continue to grapple with elevated energy costs, exchange-rate volatility, inflation and weak consumer purchasing power. These factors have reduced operating margins and increased the likelihood of repayment difficulties across several sectors.

For households, rising living costs and higher lending rates have weakened debt-servicing capacity, particularly among consumers with variable-rate loans.

Economists argue that a moderation in inflation and borrowing costs could improve credit conditions and reduce pressure on bank asset quality over time.

Despite concerns over rising bad loans, banking industry experts remain optimistic about the sector’s long-term outlook.

They argue that stronger capital positions, improved risk-management frameworks and enhanced regulatory oversight should help lenders navigate the post-forbearance environment successfully.

However, they caution that banks will need to strike a delicate balance between maintaining profitability, supporting economic growth through lending and managing rising credit risks.

As the effects of forbearance withdrawal become more visible in coming quarters, the health of loan portfolios is likely to emerge as one of the most important indicators of the banking sector’s stability and performance in 2026.