Banks Surplus on Capital, Economy Lacks Credit Availability

Banks have fresh capital, but businesses still lack credit. Can that change? Festus Akanbi asks

Nigeria’s banking sector has emerged from one of the most ambitious recapitalisation exercises in its history, raising about N4.65 trillion in fresh capital and strengthening balance sheets across the industry. Yet, despite stronger banks and improved profitability, the African Development Bank (AfDB) has raised concerns about the sector’s limited contribution to economic growth, noting that credit to Nigeria’s private sector accounts for only 9.4 per cent of Gross Domestic Product (GDP).

The figure places Nigeria among the weakest performers in Africa. It highlights a critical challenge facing the economy: the inability of businesses, particularly small and medium‑sized enterprises (SMEs), to access affordable financing needed for expansion, innovation and job creation.

AfDB’s Concern

In its African Economic Outlook 2026, the AfDB described Nigeria’s financial system as shallow and insufficiently developed to support long‑term economic transformation.

According to the report, Nigeria’s private‑sector credit‑to‑GDP ratio of 9.4 per cent trails Kenya’s 31.6 per cent, Egypt’s 28.3 percent, and Cô­té d’Ivoire’s 21.4 per cent. It is also far below those of emerging economies such as Vietnam (121.6 percent), Malaysia (121.5 percent), and Chile (111.8 percent).

The bank noted that financial institutions across Africa generally favour short‑term, low‑risk assets over long‑term investments capable of generating significant developmental impact. As a result, the continent’s domestic credit to the private sector averaged just 34.6 per cent of GDP between 2020 and 2024, the lowest globally.

For Nigeria, the implication is significant. Limited access to finance constrains business growth, weakens industrial expansion, and reduces the economy’s capacity to create jobs.

Why Lending Remains Weak

The weak flow of credit reflects several structural and policy challenges.

Experts pointed out that one major factor is banks’ growing preference for government securities. Treasury bills and federal government bonds offer attractive returns with little risk, making them more appealing than lending to businesses operating in a volatile economic environment.

Data from the Central Bank of Nigeria (CBN) showed that while private‑sector credit stood at N75.62 trillion in February 2026, lending to the government rose to N35.77 trillion, representing a year‑on‑year increase of 24.2 per cent.

Economists have repeatedly warned that rising government borrowing is crowding out private investment. Chief Executive Officer of the Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf, has argued that banks naturally gravitate towards risk‑free government instruments rather than businesses facing uncertain operating conditions.

High lending rates also discourage borrowing. Despite recent moderation in monetary tightening, businesses continue to face borrowing costs ranging from 26 per cent to over 40 per cent. At such levels, many investment projects become economically unviable.

The high Cash Reserve Ratio (CRR) imposed by the CBN has also been cited as a constraint. Banks argue that a significant portion of deposits remains locked with the apex bank, limiting funds available for lending.

SMEs Remain the Biggest Casualties

The impact is particularly severe on SMEs, widely regarded as the backbone of the Nigerian economy.

Although SMEs contribute substantially to employment and economic activity, they receive only a tiny fraction of formal credit. According to Yusuf, SMEs account for roughly one per cent of total bank lending, compared to an estimated sub‑Saharan African average of about five per cent.

Industry estimates put the financing gap facing Nigerian SMEs at about N48 trillion, leaving many businesses unable to expand production, invest in technology, or create additional jobs.

Consequently, many firms rely on personal savings, informal financing arrangements, commercial papers, and intervention funds from institutions such as the Bank of Industry.

Can Recapitalisation Change the Narrative?

Supporters of the banking recapitalisation programme believe the sector now has the capacity to support economic growth more effectively.

Speaking at an investors’ conference in Lagos, the Managing Director of FSDH Merchant Bank, Bukola Smith, said stronger capital bases would enable banks to finance infrastructure and productive sectors more aggressively.

According to her, Nigeria faces enormous investment gaps that public resources alone cannot address. Well‑capitalised banks, she argued, can provide the long‑term funding required to stimulate industrialisation and economic expansion.

There is evidence supporting this optimism. Stronger balance sheets increase banks’ ability to fund larger projects and absorb risks. However, analysts caution that capital adequacy alone will not automatically lead to increased lending.

The real challenge lies in creating an environment in which productive‑sector lending is attractive and sustainable.

The Liquidity Paradox

Ironically, some analysts now fear that banks may have more capital than they can profitably deploy.

Vice‑President of Highcap Securities, David Adonri, argues that recapitalisation may have created excess liquidity in a market where lending opportunities remain limited by weak infrastructure, insecurity and policy uncertainty.

As yields on government securities begin to moderate, banks may increasingly face pressure to lend. Yet the risks associated with the real sector remain high.

This creates a paradox: banks are stronger than ever, but many businesses remain too risky to finance at scale.

Structural Barriers Persist

The AfDB insists that deeper reforms are necessary to unlock credit growth.

The report highlights weak savings mobilisation, poor collateral enforcement mechanisms, lengthy judicial processes, and regulatory inefficiencies as major obstacles to lending. Africa’s gross domestic savings averaged only 16.6 per cent of GDP between 2021 and 2024, well below the global average of 27.3 per cent.

In Nigeria, insecurity, particularly in agricultural regions, further increases lending risks. Manufacturers also continue to struggle with unreliable electricity, poor transport infrastructure, and high operating costs.

These conditions increase the probability of loan defaults and encourage banks to remain cautious.

The Way Forward

Experts say addressing Nigeria’s credit deficit requires a combination of financial and structural reforms.

Government borrowing from the domestic market must be moderated to reduce the crowding‑out effect. Regulatory reforms that strengthen collateral enforcement and accelerate dispute resolution could improve lenders’ confidence.

Many stakeholders also support a review of the CRR framework to release more liquidity into the banking system.

In addition, development finance institutions can expand credit guarantee schemes to encourage lending to SMEs, agriculture, and manufacturing.

Most importantly, improvements in infrastructure, security, and policy consistency would reduce business risks and make productive lending more attractive.

Beyond Stronger Banks

The AfDB’s warning highlights a critical reality: strong banks do not automatically translate into a strong economy.

Nigeria has successfully recapitalised its banking sector. The next challenge is ensuring that the industry’s expanded capital base reaches factories, farms, technology firms, and small businesses that create jobs and drive economic growth.

As regulators conduct post‑recapitalisation stress tests and banks navigate a changing economic landscape, the true measure of success will not be how much capital they raised, but how effectively that capital supports the productive sectors of the economy.