Debt Deepens Growth Crisis

Banks’ soaring earnings from government securities have become the toast of the financial markets, but beneath the glossy profit sheets lies a grim irony: the real sector that powers jobs and production is gasping for credit, writes Festus Akanbi

In recent years, Nigeria’s banking sector has maintained impressive profitability despite a sluggish macroeconomic environment. However, analysts are increasingly concerned that the source of this profitability, banks’ growing preference for investing in government securities, is deepening the credit drought in the real economy.

While the sector appears resilient on paper, the structure of earnings suggests a growing disconnect between financial performance and the country’s productive potential.

Rising Domestic Borrowing by Government

Last week, President Bola Tinubu wrote to the Senate seeking approval for a fresh N1.150 trillion loan to support the 2025 national budget. The financing, according to the president’s communication, will be sourced from the domestic debt market. This borrowing pattern underscores the federal government’s growing reliance on local financial institutions for funding.

The mechanism is straightforward: the Debt Management Office (DMO), often in collaboration with the Central Bank of Nigeria (CBN), issues domestic debt instruments such as Treasury Bills, FGN Bonds, and Sukuk to raise capital. 

These instruments are then subscribed to by banks and institutional investors. The arrangement provides the government with an immediate funding pipeline and offers banks a secure, high-yield investment avenue.

However, this symbiotic relationship between banks and government debt has far-reaching implications for credit availability to businesses and households.

 Investment Shift and Profit Composition

Data from financial disclosures of the top-tier banks reveal that income from government securities rose sharply in 2025. Between January and September, Nigeria’s leading commercial banks collectively earned about N5.05 trillion from such investments, representing a 42 per cent increase over the same period in 2024.

Zenith Bank, Access Holdings, and UBA led the pack with earnings from government paper exceeding N900 billion each, while GTCO also reported substantial growth in similar income streams.

Across the banking system, the top ten listed banks invested over N20 trillion in government securities within two years, a level analysts describe as both lucrative and distortionary.

This shift reflects a clear trend: deposit money banks are channelling more resources into risk-free sovereign instruments rather than extending credit to the private sector. The attraction is obvious: government paper offers double-digit returns in an environment of high interest rates, minimal default risk, and low regulatory costs.

Impact on Lending and Credit Growth

The opportunity cost of this investment strategy is significant. By locking up a large portion of their assets in government securities, banks have constrained their ability and willingness to lend to businesses.

According to data from the CBN’s October 2025 Monetary Policy Report, the prime lending rate averaged 18.88 per cent, while the maximum lending rate hovered between 29 and 31 per cent. These high borrowing costs, coupled with tight credit conditions, have discouraged investment by small and medium-sized enterprises (SMEs), manufacturers, and agricultural producers.

In several cases, loan-to-deposit ratios (LDR) among major banks remain between 28 and 40 per cent, below the regulatory benchmark of 65 per cent set by the CBN. This signals that even as deposits grow, the proportion channelled to productive lending remains limited.

Structural Incentives Behind Banks’ Choices

Industry analysts point to a mix of regulatory, economic, and operational incentives driving banks’ investment behaviour.

 Lending to the real economy in Nigeria carries substantial risks: weak collateral enforcement, frequent borrower defaults, unpredictable judicial outcomes, and macroeconomic volatility.

A senior bank official who spoke with THISDAY explained that “the incentive structure is heavily skewed. Government securities offer predictable, high-yield returns without credit risk or litigation challenges. By comparison, lending to SMEs or manufacturers requires extensive monitoring, collateral management, and provisioning against potential defaults.” This calculus explains why many banks have identified “increased yields from investment securities and trading activities” as major contributors to their profit growth in their recent financial statements.

Crowding-Out Effect on Private Investment

Economists warn that this pattern of domestic financing is creating a “crowding-out effect,” where government borrowing absorbs a disproportionate share of available loanable funds, leaving limited credit for the private sector.

Dr Samuel Ayo, an investment economist, noted that “banks’ preference for government paper is a rational response to the environment, but the macroeconomic impact is distortionary. As government borrowing expands, it competes with private borrowers for domestic capital. The result is that private enterprises face higher interest rates and tighter liquidity.”

Data from the National Bureau of Statistics (NBS) support this concern. Credit to the private sector as a percentage of GDP remains below 25 per cent in Nigeria, significantly lower than the average of 50–60 per cent recorded in many peer emerging economies.

The outcome is a financial system that performs well on balance sheets but contributes less to economic expansion.

Implications for Growth and Employment

The consequences of weak credit transmission are visible in Nigeria’s growth composition. While the financial sector continues to post robust growth, sectors such as manufacturing, agriculture, and real estate show uneven performance.

Manufacturers cite credit scarcity as a key factor limiting capacity utilisation, which stood at about 56 per cent in mid-2025, according to the Manufacturers Association of Nigeria (MAN). Farmers and agribusiness operators face similar constraints in accessing structured financing for mechanisation, processing, and distribution. The creative and technology start-up sectors, though vibrant, often rely on informal or foreign funding sources due to limited access to domestic credit.

This imbalance has macroeconomic consequences. Limited productive investment restricts job creation, suppresses export competitiveness, and entrenches import dependence. In essence, while banks’ financial statements expand, the country’s productive base stagnates.

Policy Response and Regulatory Measures

Recognising the risk of excessive financialisation, regulators have taken steps to rebalance incentives. The Federal Inland Revenue Service (FIRS) recently introduced a 10 per cent withholding tax on interest income from short-term securities, aimed at discouraging speculative activity and encouraging longer-term, productive lending.

Similarly, the CBN has maintained its Loan-to-Deposit Ratio (LDR) policy as a tool to compel banks to increase credit to the private sector. The apex bank also continues to promote targeted intervention schemes in agriculture, manufacturing, and small business development.

However, experts argue that these policies will have limited impact unless they are complemented by broader structural reforms. These include improving credit guarantee schemes, strengthening collateral registries, fast-tracking judicial processes for loan recovery, and enhancing macroeconomic stability to reduce inflation and exchange-rate volatility.

Fiscal Discipline as a Missing Link

Fiscal policy remains a critical variable in addressing the imbalance. The federal government’s growing domestic borrowing requirement, driven by recurrent expenditure and limited non-oil revenue, has effectively transformed banks into major financiers of public deficits.

Analysts say that fiscal consolidation and improved tax efficiency could reduce the government’s borrowing appetite, thereby freeing up capital for the private sector. Without such adjustments, banks will continue to find government securities more attractive than private lending.

According to a report by Financial Derivatives Company (FDC), “the combination of high government borrowing and high interest rates creates a cycle where banks earn substantial profits from low-risk investments, while real-sector activities remain underfunded. Breaking this cycle requires both fiscal restraint and credit-enhancing reforms.”

Towards a Balanced Credit System

A more sustainable financial structure would require aligning bank incentives with national development priorities. This means strengthening the institutional frameworks that support lending, such as collateral laws, bankruptcy codes, and credit registries. It also means incentivising banks to fund sectors that generate employment, value addition, and export earnings.

Some analysts advocate a differentiated capital requirement model in which banks with greater exposure to real-sector lending receive regulatory advantages, such as lower reserve requirements.

Others propose expanding credit guarantee schemes and co-lending platforms between banks and development finance institutions (DFIs).

The Broader Economic Outlook

In the short term, banks’ profitability is likely to remain strong, supported by elevated interest rates and sustained government borrowing. However, the long-term implications for economic growth are less favourable.

If the current pattern persists, Nigeria risks entrenching a dual economy, one where financial assets expand rapidly while productive capacity and job creation lag. This dynamic, analysts warn, could undermine the effectiveness of monetary policy and limit the country’s ability to achieve inclusive growth.

Conclusion

The profitability of Nigeria’s banking sector reflects a system optimised for safety and returns, but not necessarily for development.  For sustainable growth, policymakers must balance fiscal borrowing with private-sector credit availability, enhance the legal environment for lending, and build stronger institutions that support risk-taking in productive investment.