Nigerian Banks face rising climate-related credit risks, Fitch says

Nigeria’s banking sector faces mounting exposure to climate-related risks that could significantly weaken asset quality, increase credit losses and reshape lending practices over the coming decades, according to a new report by Fitch Ratings.

In its report, “African Banks Have Structural Exposure to Climate Risk; Credit Implications Evolving,” the global rating agency said that although climate-related threats remain manageable in the near term, both physical and transition risks are expected to intensify as countries pursue decarbonisation policies and extreme weather events become more frequent.

Fitch identified Nigeria as one of the African economies most vulnerable to climate-related financial risks because of its heavy dependence on the oil and gas industry and agriculture, two sectors that account for a significant share of banks’ loan portfolios.

According to the report, Nigerian lenders are particularly exposed to industries that could face declining profitability as governments tighten climate policies, technological innovations accelerate the shift to cleaner energy, and global investors increasingly favour low-carbon assets.

“Oil and gas, mining, and heavy industry remain central to economic activity in several countries, with Nigerian banks among the most exposed due to the country’s reliance on hydrocarbons and agriculture,” Fitch stated.

The rating agency warned that stricter international climate commitments could leave some carbon-intensive assets stranded, making it more difficult for affected borrowers to repay loans and increasing non-performing loans within the banking system.

It also highlighted growing risks in the agricultural sector, noting that floods, droughts and other extreme weather events are expected to become more frequent, potentially reducing farm output, weakening borrowers’ repayment capacity and eroding the value of collateral pledged against loans.

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The agency projected that Nigeria could record a combined climate-risk score of between 50 and 55 by 2050 under its Climate Vulnerability Signals (Climate.VS) framework, placing the country among Africa’s more climate-vulnerable economies alongside Ghana, Egypt, Kenya and South Africa.

Beyond physical risks, Fitch noted that Nigeria is developing carbon-pricing and carbon-market frameworks as part of its climate commitments under the Paris Agreement.

While these policies are expected to support environmental sustainability, they could increase operating costs for businesses in emissions-intensive sectors, potentially affecting their creditworthiness and loan repayment performance.

The report stressed that African banks generally face elevated transition risks because of their concentration in sectors vulnerable to emissions-reduction policies and technological disruption.

However, physical climate risks—including rising temperatures, flooding and prolonged droughts—are expected to become increasingly significant by 2050, particularly across West Africa.

The agency urged banks to expand green finance, sustainable lending and climate-focused investment products while integrating climate risks into credit assessments, governance frameworks and enterprise risk management systems.

The rating agency warned that institutions that fail to adapt could face reputational damage, declining investor confidence and tighter access to international capital as global investors increasingly prioritise sustainability.

Fitch concluded that while Nigeria’s transition towards a lower-carbon economy is expected to be gradual, banks must begin preparing now to remain resilient amid structural economic changes.

The Fitch report comes weeks after the rating agency cautioned that Nigeria’s proposed $5 billion Total Return Swap (TRS) with First Abu Dhabi Bank could reduce transparency around sovereign debt and complicate future debt restructuring, underscoring its growing focus on structural risks within the country’s financial system.