Nigeria’s banking sector is facing renewed pressure on asset quality as the withdrawal of regulatory forbearance pushed the industry’s non-performing loan (NPL) ratio close to 10 percent, exposing stress in loan portfolios despite strong capital and liquidity buffers.
Data from the Central Bank of Nigeria (CBN) monthly economic report showed that the NPL ratio rose by 1.82 percentage points to 9.85 percent I February 2026, nearly double the prudential threshold of 5.00 percent, following the reclassification of loans after the expiration of regulatory relief measures.
The increase underscores the challenges banks face as they adjust to tighter regulatory conditions after years of forbearance introduced to cushion the impact of economic disruptions. The latest reading also signals a deterioration in asset quality even as the broader banking sector remains resilient on other key financial soundness indicators.
The industry liquidity ratio rose to 69.27 percent, significantly above the regulatory minimum of 30.00 percent and higher than the 63.38 percent recorded in the preceding period. The improvement reflects banks’ strong capacity to meet short-term obligations and support financial intermediation.
Similarly, the capital adequacy ratio increased by 0.50 percentage point to 12.55 percent, remaining comfortably above the 10.00 percent regulatory benchmark. The development points to continued solvency and resilience against potential credit and market shocks.
However, the sharp increase in bad loans suggests that the withdrawal of forbearance is revealing underlying weaknesses in some loan books.
The development aligns with earlier warnings from the Central Bank, which disclosed in its 2026 Macroeconomic Outlook that the banking sector’s NPL ratio had risen to about 7.00 percent following the removal of pandemic-era regulatory relief measures.
According to the apex bank, rising non-performing loans pose risks to banks’ profitability, lending capacity and overall risk-bearing ability. The CBN warned that a continued deterioration in asset quality could weaken balance sheets, constrain credit growth and increase vulnerabilities within the financial system.
Although current capital and liquidity levels provide important buffers, the regulator cautioned that these safeguards could come under pressure from adverse macroeconomic developments, including higher credit losses and foreign exchange liquidity challenges.
The deterioration in asset quality comes as the International Monetary Fund (IMF) highlights broader pressures within Nigeria’s banking system arising from the prolonged period of tight monetary policy.
In a Selected Issues Paper accompanying its latest Article IV consultation on Nigeria, the IMF found that banks pass higher interest rates to borrowers much faster than they transmit lower rates when monetary policy is eased.
According to the Fund, a 100-basis-point increase in the Monetary Policy Rate (MPR) raises Treasury bill and lending rates by about 175 to 180 basis points on impact. In contrast, a similar reduction in the policy rate lowers those rates by only 25 to 30 basis points.
The IMF described the asymmetry as statistically significant, suggesting that banks amplify the effects of monetary tightening while responding more cautiously during easing cycles.
The findings come after the CBN embarked on aggressive monetary tightening following the foreign exchange reforms initiated in 2023. The benchmark interest rate was raised to as high as 27.5 percent in an effort to curb inflation and stabilise expectations under a more market-driven exchange rate regime.
While wholesale market rates and government securities yields have responded strongly to the policy stance, the IMF noted that borrowers have borne a disproportionate share of the adjustment. Businesses seeking working capital, manufacturers financing expansion projects and households accessing credit have faced significantly higher borrowing costs.
Although the CBN began easing monetary policy, cutting the MPR by 50 basis points to 27.0 percent in September 2025 and further to 26.50 percent in February 2026, the IMF’s findings suggest that the benefits of lower policy rates may take longer to reach borrowers.
Against this backdrop, the rise in non-performing loans highlights the strain that prolonged high borrowing costs may be placing on some borrowers, even as banks continue to maintain strong liquidity and capital positions.
The latest data suggest that while the Nigerian banking sector remains resilient and well-buffered against shocks, the end of regulatory forbearance is exposing pockets of vulnerability that regulators and lenders will need to monitor closely as monetary conditions gradually ease.