Nigeria’s financial system entered 2023 under severe strain, caught in the crosscurrents of a weakening currency, surging inflation and eroding investor confidence that threatened to spill into a broader banking crisis. The country, once Africa’s largest economy, had slipped to fourth place behind South Africa, Egypt and Algeria, while inflation climbed from 15.4 percent in November 2021 to 22.4 percent and continued rising. Foreign exchange liquidity had dried up, a backlog of about $7 billion in unmet obligations weighed on confidence, and a fragmented exchange-rate system left a gap of more than 60 percent between official and parallel markets.
The macroeconomic deterioration posed a direct risk to the banking sector. With inconsistent policy signals, extensive subsidies and heavy Central Bank financing of government spending, monetary policy had become unsustainable. Banks faced rising exposure to currency volatility, deteriorating asset quality and weakening borrower capacity in an economy many feared was edging toward a systemic crisis.
When President Bola Ahmed Tinubu assumed office in May 2023, the scale of the challenge was stark. The economy was widely described as being on the brink of hyperinflation, with the naira in free fall and inflation accelerating month after month. Early policy decisions, including the removal of fuel subsidies and liberalisation of the foreign exchange market were aimed at resetting the system but triggered immediate shocks.
Prices surged, the currency weakened further, and uncertainty intensified amid leadership changes at the Central Bank of Nigeria (CBN). For banks, the environment became increasingly complex, with heightened risks across balance sheets, liquidity pressures and declining investor confidence.
By October 2023, a new leadership team led by Olayemi Cardoso, governor of the CBN, inherited what insiders described as “a mess” and faced the urgent task of stabilising both the macroeconomy and the financial system.
A central pillar of the reset has been the overhaul of Nigeria’s foreign exchange market, long considered a major source of distortion and instability. The CBN dismantled the multiple exchange-rate regime and transitioned to a willing-buyer, willing-seller framework, replacing opacity with a more transparent, market-driven system.
The introduction of the electronic foreign exchange matching system, powered by Bloomberg BMatch, marked a significant shift. With mandatory order submission and real-time regulatory visibility, the platform improved price discovery and curtailed opportunities for manipulation.
Crucially, the Central Bank also moved to clear the backlog of FX obligations owed to sectors such as aviation and manufacturing. This step eased pressure on corporate balance sheets and reduced systemic risks within the banking sector, where unmet FX demand had been building.
By late 2025, the gap between official and parallel market rates had narrowed to under 2 percent, down sharply from over 60 percent. The naira began trading within a more stable range, while improved liquidity, stronger non-oil exports and renewed capital inflows helped rebuild external reserves to about $46.7 billion by November 2025, and currently at over $49 billion.
For banks, the impact has been significant. Greater FX transparency has reduced uncertainty, improved risk management and restored confidence among investors and counterparties.
Alongside FX reform, the CBN embarked on an aggressive monetary tightening cycle to combat inflation, which peaked at 34.80 percent in December 2024. Interest rates were raised from 18.75 percent in 2023 to 27.5 percent by late 2024, marking one of the most forceful tightening phases in Nigeria’s recent history.
While the higher rates increased borrowing costs and constrained credit growth, they were essential to restoring price stability and anchoring inflation expectations, key conditions for financial system resilience.
The effects have begun to materialise. Inflation declined to 16.05 percent by October 2025 and further to 15.10 percent by January 2026. This allowed the Central Bank to cautiously ease rates, cutting the policy rate to 27 percent in September 2025 and again to 26.5 percent in February 2026.
For the banking sector, the tightening cycle has presented a delicate balancing act. While macroeconomic stability has improved, elevated interest rates have pressured loan demand and heightened credit risks, requiring banks to navigate a more disciplined operating environment.
To strengthen the system further, the CBN launched a comprehensive bank recapitalisation programme in 2024, requiring lenders to meet higher capital thresholds based on their licence categories. The emphasis on paid-up share capital and share premiums, rather than retained earnings, marks a shift toward more robust, loss-absorbing buffers.
More than 33 banks have raised fresh capital through public offers and rights issues, with at least 31 meeting the new thresholds ahead of the March 2026 deadline. Institutions that fail to comply face the prospect of licence downgrades, regulatory intervention or liquidation.
The recapitalisation drive is aimed at breaking the boom-and-bust cycle that has historically characterised Nigeria’s banking sector. By strengthening capital adequacy and aligning with Basel III standards, regulators are seeking to build a system capable of withstanding shocks while supporting sustainable growth.
Beyond capital, the CBN has intensified efforts to enhance regulatory oversight and risk management. The transition to Basel III, coupled with stronger stress testing and risk-based supervision, is designed to improve liquidity monitoring and address vulnerabilities such as credit concentration and operational risk.
At the same time, the Central Bank has expanded oversight to cover fast-growing segments such as fintech and digital assets, recognising the evolving nature of financial risks. Cybersecurity, in particular, has emerged as a critical focus area as digital financial services continue to expand.
Despite tighter regulation, the CBN has maintained support for credit expansion in key segments. Lending to the microfinance sector has grown by over 14 percent, while digital credit platforms have extended financing to more than 1.2 million small businesses, highlighting efforts to balance stability with financial inclusion.
Reforms have also extended to the broader financial ecosystem. The CBN has worked with the Securities and Exchange Commission and the National Pension Commission to develop a more transparent and liquid fixed-income market.
The transition of the over-the-counter secondary market to a more robust regulatory framework is expected to enhance price discovery, improve investor confidence and support long-term domestic savings mobilisation. A deeper fixed-income market is also critical for effective monetary policy transmission, ensuring that policy signals are reflected more efficiently across the economy.
Modernising Nigeria’s payments infrastructure has been another key component of the financial system reset. The CBN’s payments system vision has driven the expansion of digital finance, with over 12 million contactless cards now in circulation and a regulatory sandbox supporting innovation across fintech, open banking and digital assets.
At the same time, the Central Bank has undertaken a comprehensive review of the cash lifecycle, introducing new guidelines on ATM deployment, strengthening oversight of payment agents and enforcing sanctions on banks that fail to meet cash availability standards.
The recalibration of the e-naira, now moving toward a second version with greater involvement from commercial banks, reflects efforts to integrate digital currency into the broader financial system while improving adoption and usability.
Institutional reform within the Central Bank has underpinned these broader changes. The Cardoso-led team has prioritised governance, transparency and accountability, establishing a dedicated compliance function and deploying advanced analytics tools to strengthen policy formulation.
A significant restructuring of staff and operations has aimed to eliminate inefficiencies and align the institution with its core mandate. These efforts have been complemented by improved communication and stakeholder engagement, helping to rebuild trust in the Central Bank’s actions.
International recognition has followed. Nigeria’s removal from the Financial Action Task Force grey list in 2025 marked a major milestone, reflecting stronger financial crime supervision and improved regulatory standards. Credit rating agencies have also acknowledged the progress, citing improved reserves, policy discipline and greater FX transparency.
Despite these gains, Nigeria’s financial system remains a work in progress. Inflation, while declining, is still above target levels, and the full benefits of macroeconomic stabilisation have yet to translate into broad-based economic relief.
Banks continue to face structural challenges, including credit concentration risks, operational vulnerabilities and the need to adapt to a rapidly evolving digital landscape. Completing the recapitalisation process, deepening financial markets and strengthening institutional capacity will be critical in sustaining momentum.