Rising banks’ bad loans

After some years of reprieve from the Central Bank of Nigeria (CBN), which temporarily relaxed strict compliance for commercial banks to restructure their balance sheets to avoid default or failure, the Non-Performing Loans (NPLs) are on the rise again. According to a recent CBN Economic Report, bad loans in Nigeria’s banking sector rose to 8.03 per cent in January 2026.

This came seven months after the apex bank ended its regulatory forbearance granted to banks on credit exposure limits. While the temporary relief lasted, banks agreed with customers not to initiate foreclosures. This allowed borrowers time to recover financially, and the banks to delay classifying troubled exposure. However, with the end of the forbearance, the clean-up of the banks’ books is beginning to expose weaker loans of many banks performance index that had previously been cushioned by regulatory reliefs.

The new bad loan increase contained in the CBN’s 2026 January Economic Report, titled, “Consolidating Macroeconomic Stability and Global Uncertainty,” revealed that the banking industry non-performing loan ratio rose by 0.5 percentage point from 7.51 per cent in December 2025. The figure is above the CBN’s prudential threshold of five per cent, indicating a further deterioration in asset quality across the banking industry. This is despite the CBN insistence that the sector remains resilient.

The new development came after the apex bank in June 2025, directed commercial banks still benefiting from regulatory forbearance on credit exposures limit waivers to suspend dividend payment, defer bonuses to directors and senior management, and halt fresh investment in foreign subsidiaries or offshore ventures. The CBN says its decision to end the relief measures were aimed at strengthening capital buffers, improve balance sheets of the banks and make affected banks retain earnings while exiting temporary regulatory reliefs. With the withdrawal of the measure, a number of previously restructured facilities have been crystallised as bad loans, thereby pushing the industry ratio above the regulatory ceiling. Such an outcome could significantly impact banks’ balance sheets and liquidity position.

Without doubt, rising bad loans threaten stability of the banking sector. In January, the CBN warned that non-performing loans above the prudential limit of five per cent could weaken banks’ profitability, balance sheets and credit growth, and the overall risk-bearing capacity. The CBN’s warning was timely, as the January report showed that the industry’s NPLs ratio stood at an estimated seven per cent relative to the prudential limit. The level of bad loans in the sector reflects the decision of the apex bank to halt the forbearance granted to the banks during the 2020 COVID-19 era.

It is also not in doubt that elevated bad loans could undermine banks’ financial profiles; weaken their financial intermediation role in the economy, if not properly contained. The banks should look inwards on how to strengthen their buffers. It also underscores the need to sustain measures that will ensure that worsening bad loans do not impair their assets quality, and trigger systemic contagion. Although recent gains in capital adequacy and liquidity ratios as can be gleaned from the ongoing recapitalisation exercise, provide a measure of comfort. These indicators remain susceptible to unforeseen macroeconomic domestic and external shocks.

Despite claims of resilience of the banking sector by the CBN, impairment changes across Nigeria’s 10 bank rose to N3.2 trillion in their 2025 audited financial statements. It is so because the end of the regulatory forbearance triggered the sharp recognition of credit losses that had been deferred in earlier periods. The increase represents a 39 per cent jump from N2.3 trillion recorded in 2024, according to CBN data. All things considered, loans formerly tagged as “performing” under forbearance during the COVID-19 pandemic, have now started to migrate into stage three Credit impaired, driving a surge in provisioning under International Financial Reporting Standard (IFRS) rules. This indicates a reduction in the value of bank’s assets, which ordinarily should have been captured as provision made for loan losses.

We advise the banks to take their destinies in their hands by strategically designing portfolios that will make bad loans a minimum percentage of their total losses. The current uncertainty in the global financial system is a challenge to banks, and decides the banks with potential to succeed and those teetering on the brink of default or failure. In practical terms, if bad debts exceed the prudential limit of 5 per cent, the banks are most likely to face heightened regulatory scrutiny, special audits or even management overhauls. That is the more reason why banks should enforce stricter collateral requirements and higher interest rates to mitigate further risks.