As borrowers continue to grapple with high interest rates and rising inflation, credit losses in Nigeria’s banking sector are expected to remain elevated in 2025 at about 2.5% to 3.0% compared to 3.0% to 3.5% in 2024.
This is according to projections from an S&P Global report titled Nigerian Banking Sector Outlook 2025, which explained that currency depreciation has been the main driver of credit losses in the sector, as foreign currency loans account for 50% of total loans issued by banks in the country. This situation is further complicated by the persistent rise in inflation and high interest rates which put pressure on borrowers’ ability to repay loans.
“The elevated credit losses reflect the currency depreciation, as foreign currency loans account for 50% of banks’ loan books on average. The banking system's dollarisation has increased following the depreciation of the naira in 2023 and 2024,” the credit rating agency stated.
"In addition, high interest rates and inflation have exerted pressure on borrowers’ creditworthiness, particularly for corporates in nonessential consumer goods sectors and import-dependent corporates that cannot fully pass through the high cost of inflation to consumers.”
Thus, the agency expects nonperforming loans (NPL) to increase by 14% in 2025. However, the percentage of bad loans compared to all loans issued (NPL ratio) will likely decrease slightly from 4.3% in 2024 to 3.8% in 2025 owing to an increase in gross loans.
Additionally, challenges in Nigeria’s macroeconomic environment are expected to persist as inflation remains elevated at 25% from an average of 34% in 2024. As has been the trend, the projected high rate of inflation may force the Central Bank of Nigeria to hike interest rates, placing more pressure on borrowers.
On the other hand, higher interest rates are anticipated to help banks remain profitable in 2025, as customer deposits reflect adjusted rates.
“We expect banks to maintain adequate Return on Equity (ROE) of 20%-25% in 2025 following exceptional ROE of 30% in 2023 and 2024, supported by unrealised gains stemming from banks’ positive net open positions,” the report read.
However, the agency doesn’t see banks earning “significant unrealised gains in 2025, as the regulator introduced stringent limits on net long positions.”
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In January 2024, Nigeria's central bank (CBN) imposed strict limits on the amount of foreign currency that banks can hold. The Bank, in a circular, noted that the Net Open Position (NOP) of banks—the difference between their foreign currency assets and liabilities—must not exceed 20% of their shareholders' funds for short positions and must be zero for long positions. Banks exceeding these limits were required to adjust their positions by February 1, 2024.
This move aimed to mitigate risks associated with excessive foreign currency exposure and to promote a more stable banking sector. The CBN also emphasised the importance of banks maintaining adequate high-quality liquid foreign assets to cover maturing foreign currency obligations and having contingency funding arrangements in place.
On a positive note, S&P forecasts that Nigeria’s economy will grow by 3.5% in 2025, driven mainly by the non-oil sector and a slight increase in hydrocarbon production. The naira is also expected to remain stable and trade between ₦1,625/$ and ₦1,650/$ over 2025 and 2026, while foreign reserves move up to $32.6 billion in 2025 riding on higher exports.