Due to the Central Bank of Nigeria’s (CBN) hawkish monetary policy and growing funding costs, Nigeria’s banking sector has continued to operate cautiously, with deposit money banks (DMBs) reducing credit expansion.
According to experts, this has resulted in a delayed economic recovery because there is less credit available, borrowing prices are higher, and investment and consumption have significantly decreased.
They noted that consumers have less purchasing power, which has slowed economic activity, and that businesses are having difficulty operating, which has resulted in job losses and increased unemployment.
They claim that even though Nigeria’s economy is growing, with projections for 2025–2026 ranging from 3.9% to 4.4% due to services, the average citizen still perceives it as having slow activity because of high inflation and the fact that growth isn’t reaching the majority of the population.
Total credit to the economy decreased slightly by 0.2 percent quarter-over-quarter (q/q) to N59.1 trillion in the first quarter of 2025, the first quarterly contraction in recent periods, according to the apex bank’s most recent Quarterly Statistical Bulletin.
The CBN’s persistent tightening strategy, which has driven interest rates to multi-year highs in an effort to control inflation and stabilize the naira, is reflected in the figures. Banks have adopted a cautious strategy, putting asset quality ahead of ambitious loan expansion, as lending margins shrink and risk costs increase.
An investment banker in Lagos stated, “This decline in credit growth is a natural reaction to tighter liquidity and higher yields on risk-free instruments.” “Banks are earning more from placing funds with the apex bank than from taking lending risks in a weak economy because the CBN is mopping up liquidity through its open market operations and standing deposit facilities.”
The oil and gas industry continued to be the primary receiver of bank loans notwithstanding the overall contraction. The industry made up 31.4 percent of all lending, or N18.6 trillion, which is an increase of 8.2 percent every quarter.
This sustained expansion is attributed by analysts to the capital-intensive character of the energy sector and the continuous restructuring of legacy risks due to the relatively steady global oil prices.
According to a credit analyst in Lagos, “the energy sector continues to attract financing because of its perceived strategic importance and relatively secured cash flows.”
“In line with Nigeria’s energy transition goals, banks are also supporting downstream players and new entrants in gas processing and distribution.”
As disbursements increased by 8% on a quarterly basis, the banking and insurance sector became the second-largest recipient, taking in 14.2% of the total credit. Banks’ increasing interest in non-real sector exposures, especially investments in financial institutions and capital market-related instruments, is reflected in the expansion.
Analysts claim that this pattern highlights banks’ preference for short-term, safer, and higher-yielding assets, particularly in a setting where real sector credit defaults are on the rise.
In essence, banks are reallocating risk. Another analyst stated, “Lending to finance and insurance-related entities offers better returns without the complications of managing manufacturing or trade-related credit risks.”
With a 13.1 percent share of overall lending, the manufacturing sector—which has historically been a major driver of credit growth—ranked third, but credit to the industry decreased by 9 percent on a quarterly basis. The drop reflects the challenging operating environment that manufacturers face, which includes reduced consumer demand, rising energy prices, and fluctuating foreign exchange.
Banks are reevaluating exposures since manufacturers are finding it difficult to fulfill their payback obligations due to increased transportation costs and inflation from imports.
Many have reduced their concentration on heavy industries and import-dependent areas in favor of more resilient subsectors like food processing and packaging.
A senior risk manager at a Tier-1 bank stated, “Manufacturing is no longer a haven for lenders.” “We are now pickier, favoring customers with steady cash flows or export potential.”
Additionally, the CBN Bulletin revealed significant drops in trade/general commerce (-18.8%) and credit to general services (-18%). Analysts attribute the declines to increasing borrowing costs, tougher lending standards, and weak working capital demand, all of which have reduced the profitability of small and medium-sized businesses (SMEs).
These two industries, which together account for a sizeable share of Nigeria’s workforce, are among those most negatively impacted by high interest rates. Even while alternative financing options like supplier credit and fintech lending platforms frequently have higher effective costs, many SMEs have turned to them.
Economist Stephen Iloba stated, “The commercial sector is feeling the pinch of liquidity constraints,” in his contribution. Trade credit growth is being negatively impacted by weak consumer spending and decreased inventory finance.
On the other hand, targeted lending under government-backed initiatives and revived interest in agro-processing enterprises drove an 11 percent quarterly increase in credit to the agriculture sector to N3.2 trillion. Despite providing 26.2% of GDP in Q2 2025, the sector’s share of total credit remained low at 5.4%.
Analysts claim that structural flaws, such as insufficient collateral frameworks and weather and price risks that discourage banks, are to blame for the discrepancy between agriculture’s economic significance and its access to foreign funding.
“Agriculture is still underbanked,” a development finance specialist said. “Banks will continue to allocate a disproportionately low share of credit to the sector in the absence of risk-sharing mechanisms and improved insurance coverage.”
The survey also revealed that credit to the government increased by 5.7 percent on a quarterly basis to N3.1 trillion (a 5.2% share), underscoring the public sector’s persistent need for short-term liquidity to close budget deficits. In a similar vein, loans to the ICT industry increased by 9% to N2.1 trillion, reflecting growing investments in fintech, broadband development, and digital infrastructure.
According to a digital economy analyst, “the ICT space remains a bright spot.” “Data center projects, network upgrades, and fintech innovations that support payment digitization—all of which have long-term growth potential—are being funded by banks.”
At N2.4 trillion (+0.1% q/q), credit to the construction sector was essentially flat, in line with the sluggish pace of capital projects and private real estate developments amid high material costs and muted consumer demand. The picture of widespread caution in lending activity was completed when the “Others” category of loans dropped 2.2 percent to N5.4 trillion.
Overall, the data confirms that Nigeria’s high interest rate environment and limited liquidity are limiting the growth of loans. The benchmark Monetary Policy Rate (MPR) set by the CBN, which was kept high for the majority of 2025, has greatly increased borrowing rates, deterring both banks and borrowers.
According to a treasury dealer at one of the top five lenders, “the risk-adjusted return on government securities now rivals what banks can earn from loans.”
The dealer continued, “In this situation, holding cash or investing in CBN instruments becomes more attractive than lending to riskier clients.”
