Excessive government lending, high CRR threaten stability of Nigerian banks–Fitch 

Global credit rating agency Fitch Ratings has raised alarm over the mounting risks facing Nigerian banks, citing excessive exposure to government debt, stringent Central Bank regulations, and profitability constraints that could threaten the sector’s long-term stability.

Speaking during a joint webinar with Renaissance Capital, Tim Slater, Director for African Banks at Fitch Ratings, outlined how sovereign-related assets — including treasury bills, bonds, and unremunerated reserves held at the Central Bank of Nigeria (CBN) — now account for a staggering 35 per cent of total banking sector assets and 350 per cent of total equity.

He described this as a “material concentration risk” that could severely undermine bank solvency in the event of a sovereign default.

“Banks cannot be rated above the sovereign,” Slater noted, emphasizing that their exposure to government debt inherently caps their Issuer Default Ratings (IDRs).

Fitch identified the Cash Reserve Ratio (CRR) — which mandates that banks deposit 50 per cent of their naira deposits with the CBN without interest — as one of the most damaging policies to the sector’s health.

As of December 2024, these reserves constituted 17 per cent of total banking sector assets and 46 per cent of naira deposits, up from 12 per cent and 27 per cent, respectively, in 2016.

“These unremunerated balances significantly constrain banks’ ability to lend and generate returns,” Slater stated.

He noted that while the official CRR has now been standardized under the current CBN leadership, previous administrations applied ad hoc debits on banks, often exceeding official requirements and destabilizing liquidity planning.

Fitch also expressed concerns over regulatory forbearance, particularly for banks with large dollar-denominated exposures in the oil and gas sector. Many of these loans, still undergoing restructuring, have led to breaches of the Single Obligor Limit (SOL).

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The CBN recently directed banks under forbearance to suspend dividend payments, triggering apprehension in the market.

However, leading institutions such as FirstHoldCo Plc have responded by pledging full compliance and assuring shareholders of continued dividend payments, subject to regulatory approval.

In a statement on June 19, 2025, FirstHoldCo disclosed that two major foreign currency loans under its subsidiary, FirstBank, had breached the SOL due to a 200% naira devaluation, but restructuring efforts with other consortium lenders are underway.

“The affected facilities are part of syndicated exposures, and re-tenoring is being worked out based on improved asset performance and cash flow,” the bank noted.

Slater reiterated that sovereign risk remains the most significant constraint on Nigerian bank ratings.

The 30 per cent liquidity ratio requirement imposed by the CBN further encourages banks to hold government securities, deepening their exposure.

“This high sovereign asset concentration, combined with Nigeria-centric operations, means many of the largest banks’ credit ratings are effectively capped,” Slater concluded.

While Fitch acknowledged recent improvements in policy clarity, the agency warned that unless regulatory flexibility, diversification, and sovereign risk mitigation improve, Nigeria’s banking sector could remain vulnerable to systemic shocks.