Despite the fact that Nigerian banks have become better capitalised, the additional capital has not yet led to a significant increase in lending to businesses and households, the World Bank has said.
The World Bank, in its October 2026 Nigeria Development Update, reported that federal government and Central Bank of Nigeria (CBN) securities accounted for about 22 per cent of banks’ total assets in the first quarter of 2026.
This was an increase from roughly 18 per cent a year earlier.
It said the share of loans in banks’ assets remained broadly unchanged at 32.6 per cent over the same period.
The Bank said the development showed that the recent recapitalisation of the banking sector had strengthened banks’ balance sheets, but had not yet translated into higher private-sector credit.
The report noted that by March 2026, 33 banks had met the new minimum capital requirements after raising about N4.65 trillion in fresh capital.
However, the report indicated that banks had more capital, more liquidity and higher bad loans, while holding a larger share of assets in government securities.
The World Bank said the banking system entered the second quarter of 2026 with stronger capital buffers. It added that the systemwide capital adequacy ratio rose from 12.35 per cent at the end of 2025 to 13.2 per cent in the first quarter of 2026.
The CBN also reported that the five domestic systemically important banks remained compliant with prudential requirements.
Despite the stronger capital position, the World Bank said private-sector financial intermediation “still has room to deepen.”
It explained that the continued movement of bank assets into public-sector securities was limiting the extent to which stronger capitalisation could result in additional credit to firms and households.
“Private-sector financial intermediation still has room to deepen,” the Bank said.
It added that the continued shift towards public-sector securities “limits the extent to which stronger capitalisation turns into additional private-sector credit.”
The report showed that banks were holding a growing share of their assets in securities issued by the federal government and the CBN.
This means that, although banks had more capital and liquidity, they were not expanding their loan books at the same pace.
The World Bank said high yields on risk-free government securities were one reason banks preferred to invest in them rather than lend to the private sector.
It also identified the high cash reserve ratio (CRR) as another factor affecting credit allocation.
The CRR remained at 45 per cent for deposit money banks, 16 per cent for merchant banks and 75 per cent for public-sector deposits held outside the Treasury Single Account.
The Bank said the elevated CRR had helped to absorb excess liquidity in the system, but it also distorted credit allocation and widened the gap between lending and deposit rates.
Liquidity remains high
The World Bank said liquidity in the banking system remained ample.
It reported that the regulatory liquidity ratio stood at 67.3 per cent in the first quarter of 2026, well above the 30 per cent minimum requirement.
Banks also made heavy use of the CBN’s standing deposit facility, which the Bank said had effectively become the operational anchor for short-term interest rates.
According to the report, this arrangement left the effective policy rate about 300 basis points below the announced rate.
The World Bank said overnight borrowing from the CBN was near its lowest level in years, indicating that banks had little need for short-term central bank funding.
Policy measures to improve lending
The Monetary Policy Committee reduced the Monetary Policy Rate by 350 basis points to 23 per cent in September 2026.
It also narrowed the corridor for the standing lending and deposit facilities to +50 and -300 basis points around the policy rate.
The CBN has also introduced measures aimed at discouraging banks from keeping funds with the central bank for long periods.
The World Bank said the apex bank had shifted Open Market Operations towards shorter-tenor bills, reducing the incentive for banks to lock up funds in CBN bills instead of lending to firms, households and the government.
Other measures include opening the primary and secondary markets for CBN securities to individuals, corporates and non-bank financial institutions through banks.
The CBN also introduced a new overnight benchmark rate in April and restored repurchase agreements of up to 94 days.
The World Bank said these steps could help banks manage liquidity better and improve transparency in the financial market.
However, it did not say whether the measures had already changed banks’ lending behaviour.
Rising bad loans
Asset quality also remained a concern for the banking sector.
The World Bank reported that the systemwide non-performing loan ratio increased from 7.5 per cent in December 2025 to 9.9 per cent in the first quarter of 2026.
This was above the five per cent prudential threshold.
The Bank attributed the rise to the withdrawal of COVID-19-era regulatory forbearance and waivers on single-obligor limits.
It said exposures that had earlier been restructured under those rules were reclassified under the normal prudential framework.
According to the World Bank, the reclassification improved the recognition of asset-quality pressures, but required continued monitoring of provisioning, loan recoveries and their impact on capital adequacy.
Higher bad loans could also make banks more cautious about extending new credit, although the report did not directly establish that link.
Businesses still lack credit
The World Bank said limited access to credit continued to constrain industrial activity in Nigeria.
It identified poor infrastructure and the high cost of imported inputs and equipment as other major obstacles facing businesses.
Despite the challenges in credit delivery, the financial sector continued to grow.
The Bank said financial and insurance services expanded by 8.9 per cent in the first half of 2026.
It attributed the growth to recent bank and insurance recapitalisation, high interest rate spreads and a surge in digital financial transactions.
Government borrowing remains a factor
The World Bank linked the shift in banks’ balance sheets to continued public-sector borrowing.
It said fiscal prudence and price stability were important for reducing the crowding out of private credit by the public sector.
The Bank projected that the federal fiscal deficit would widen to about 3.5 per cent of gross domestic product in 2026, as spending pressures offset higher Federation Account allocations.
It also said inflation had remained around 15.5 per cent since February.
What could change
The World Bank said better transmission of bank recapitalisation into private-sector credit could support investment, productivity and job creation.
It said such an improvement could also push economic growth above current projections.
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