IMF has warned Nigeria over rising bad loans despite stronger banks from recapitalisation drive.
NewsOnline Nigeria reports that the International Monetary Fund (IMF) has cautioned Nigerian financial regulators to remain vigilant over rising non-performing loans (NPLs), despite acknowledging that the country’s banking sector has become more resilient following ongoing recapitalisation efforts.
In its latest Article IV Consultation report on Nigeria, the IMF stated that the financial system remains stable and better positioned to withstand economic shocks. However, it warned that increasing credit risks and banks’ growing exposure to government debt could threaten the gains achieved through recent reforms.
According to the Fund, Nigeria’s banking sector has benefited significantly from the Central Bank of Nigeria’s (CBN) recapitalisation programme and a series of regulatory stress tests designed to strengthen lenders’ balance sheets and improve their shock-absorption capacity.
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While commending the reforms, the IMF noted that regulators must closely monitor the rising volume of bad loans and the deepening financial links between banks and the government, commonly referred to as the sovereign-bank nexus.
“Directors welcomed that the financial system remains resilient, helped by the recent recapitalisation of banks, while encouraging continued vigilance of rising NPLs and the sovereign-bank nexus,” the IMF stated.
The Fund also highlighted concerns over the way Nigerian banks transmit interest rate changes to customers. According to its findings, lenders tend to increase borrowing costs rapidly when monetary policy is tightened but are much slower to reduce lending rates or improve returns to depositors when policy conditions ease.
The IMF described this trend as a “rockets-and-feathers” pattern, where interest rates rise quickly but fall gradually, placing a heavier burden on borrowers during periods of high interest rates.
The observation comes after the CBN aggressively raised benchmark interest rates over the past two years in a bid to tackle inflation and stabilise the foreign exchange market. The tightening cycle led to significantly higher borrowing costs for businesses and households across the country.
The Fund further warned that banks’ substantial holdings of government securities could amplify risks during periods of fiscal stress. Such exposure, it said, could create vulnerabilities if government finances come under pressure.
The IMF’s concerns mirror recent observations by financial analyst and Managing Director of Financial Derivatives Company (FDC), Bismarck Rewane, who said the CBN’s stress-testing exercise has exposed growing differences within the banking industry.
Speaking at a Lagos Business School Breakfast Session, Rewane noted that the regulatory exercise had effectively separated banks with strong capital positions from those facing heavier provisioning requirements and greater pressure to strengthen their balance sheets.
According to him, some lenders possess sufficient capital buffers and earnings capacity to continue rewarding shareholders through dividend payments, while others remain constrained by regulatory requirements and the need to make additional provisions for potential losses.
Despite these concerns, the IMF expressed confidence in the overall health of Nigeria’s banking sector, describing recent reforms as important steps toward strengthening financial stability amid broader macroeconomic adjustments.
The Fund also urged Nigerian authorities to accelerate the implementation of Basel III banking standards, including the countercyclical capital buffer and liquidity coverage ratio, to further enhance the resilience of financial institutions.
In addition, the IMF called for stronger supervisory oversight of emerging financial technologies, recommending that stablecoin and other crypto-asset activities be brought within the country’s regulatory framework.
The Washington-based institution also welcomed Nigeria’s removal from the Financial Action Task Force (FATF) grey list and encouraged authorities to sustain anti-money laundering and counter-terrorism financing reforms to preserve recent gains in financial integrity.
According to the IMF, maintaining a sound, well-capitalised and effectively supervised banking system will be critical to supporting economic growth, safeguarding financial stability and sustaining investor confidence as Nigeria continues its economic reform agenda.
While recognising the progress made through recapitalisation and other reforms, the Fund stressed that continued regulatory vigilance remains essential to prevent rising bad loans and other vulnerabilities from undermining the stability achieved in the sector.
