CBN: Rising NPLs’ Threat to Banks’ Profitability, Credit Availability

Nume Ekeghe

The Central Bank of Nigeria (CBN) has warned that rising non-performing loans (NPLs) in the banking industry pose a growing threat to banks’ profitability, credit creation and overall risk-bearing capacity.

The apex bank gave the warning in its 2026 macroeconomic outlook for Nigeria released recently, titled “Consolidating Macroeconomic Stability amid Global Uncertainty,” which assesses emerging risks to the financial system against the backdrop of domestic reforms and an uncertain global environment.

The report showed that the industry’s NPLs ratio stood at an estimated seven per cent relative to the prudential limit of five per cent. The level of NPLs reflected the withdrawal of the regulatory forbearance granted to banks during the COVID-19 pandemic.

According to the CBN, elevated NPL levels could undermine banks’ balance sheets and weaken financial intermediation if not properly contained.

It stated: “Rising NPLs pose a direct threat to banks’ profitability, credit availability, and overall risk-bearing capacity. This underscores the need to sustain measures to ensure that, worsening NPLs do not weaken banks’ balance sheets, impair asset quality, and trigger systemic contagion. Although recent gains in capital adequacy and liquidity ratios provide a buffer, these indicators remain susceptible to unforeseen macroeconomic shocks.”

The report noted that a spike in credit losses or renewed foreign exchange illiquidity could erode capital reserves, breach prudential thresholds and place pressure on liquidity coverage ratios.

“An increase in credit losses or foreign exchange illiquidity could erode capital reserves, breach prudential thresholds, and strain liquidity coverage. These conditions, could disrupt financial intermediation, diminish market confidence, and amplify vulnerabilities across the banking sector,” it added.

The CBN also flagged exchange rate risk as a potential pressure point, noting that although a sharp depreciation of the naira was considered unlikely under the baseline scenario, such an outcome could significantly impact banks’ balance sheets and liquidity positions. It stated that a sudden currency shock could fuel an expansion in monetary aggregates and stoke inflationary pressures.

It added: “A sharp depreciation in the value of the naira, though unlikely, could impact banks’ balance sheet and liquidity positions, leading to a significant expansion in monetary aggregates and heightened inflation.

“Despite the bullish momentum, the capital market could face higher concentration risk from the banking sector, as the ongoing recapitalisation could trigger investor fatigue and crowd-out other issuers.”

The apex bank further drew attention to systemic risks arising from the high degree of interconnectedness within the financial system. According to the CBN, this interconnectedness increases susceptibility to shocks, including cyber risks, where attacks on financial infrastructure could quickly propagate data breaches, compromise sensitive information and erode public confidence in the system.

“The high degree of interconnectedness among financial institutions creates a systemic susceptibility, where cyberattacks on systems, propagate data breaches that compromise confidential information and erode public confidence in the financial system,” it added.