Credit rating agency Fitch Ratings has projected a surge in non-performing loans among Nigerian banks, citing the pressures of elevated inflation and high interest rates as primary factors.
This outlook was published in Fitch’s latest credit ratings report on Nigeria, which highlights the impact of these economic conditions on the country’s banking sector.
In its report, Fitch affirmed Nigeria’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘B-’ with a Positive Outlook. This rating reflects Fitch’s cautious optimism about the country’s economic stability, despite ongoing challenges in the financial sector.
According to the report, the loan books of Nigerian banks represented 35 per cent of total assets by the close of 2023, indicating relatively low lending activity in comparison to total assets. However, Fitch warned that rising interest rates and inflationary pressures are likely to erode borrowers’ repayment capacity, ultimately increasing the likelihood of defaults in the coming months.
Adding to the sector’s challenges, Fitch pointed to recent regulatory changes. The Central Bank of Nigeria (CBN) has mandated an increase in capital requirements for banks, a move set to be completed by the end of the first quarter of 2026.
This adjustment aims to strengthen the resilience of banks, requiring them to hold more capital in proportion to their assets. Additionally, an amendment to the 2020 Finance Act has imposed a substantial 70 per cent windfall levy on banks’ foreign exchange gains, applicable through 2023 and the first quarter of 2024.
This tax increase, Fitch noted, is unlikely to lead to breaches in capital adequacy ratios, but it could impact banks’ profitability and may lead to tighter liquidity conditions.
Furthermore, Fitch indicated that the Central Bank may increase the Monetary Policy Rate (MPR) once again in the fourth quarter of 2024. The anticipated rate hike is expected to align with other monetary tools, such as open market operations, aimed at improving the effectiveness of monetary policy transmission.
The strategy is an attempt to counter financial repression and to create a more favorable environment for economic stability by setting rates near the MPR.
These factors collectively signal a challenging environment ahead for Nigerian banks. With higher capital requirements and taxation on foreign exchange gains, the banks face constrained profitability.