As Nigerian banks brace for another challenging half financial year, a growing debate is emerging over the long-term impact of the Central Bank of Nigeria’s (CBN) forbearance policies. Introduced to cushion the financial system during periods of economic stress, especially in the aftermath of COVID-19 and amid ongoing macroeconomic instability, these regulatory leniencies are now coming under scrutiny for their potential side effects—most notably, declining profitability, weakened capital buffers, and a possible surge in non-performing loans (NPLs). The CBN’s forbearance regime—comprising relaxed loan classification rules, deferred provisioning, and restructuring allowances—initially provided much-needed breathing space for banks and borrowers alike. However, with the Nigerian economy navigating persistent inflation, naira volatility, and rising interest rates, analysts warn that the continued reliance on regulatory leniency could be masking systemic risks and impairing the financial health of the banking sector. The origin and purpose of CBN’s forbearance In response to the economic disruptions triggered by the COVID-19 pandemic in 2020, the CBN introduced a series of forbearance measures to safeguard financial stability. These included allowing banks to restructure loans without requiring immediate reclassification, suspending the application of prudential ratios in certain instances, and granting temporary waivers on provisioning requirements. While these interventions helped prevent a credit crunch and stabilized the financial system at the time, they have become a double-edged sword. In the years since, the CBN has maintained a soft stance on asset classification and provisioning, particularly for sectors deemed critical to economic recovery such as oil and gas, agriculture, and manufacturing. “Regulatory forbearance gave banks room to maneuver during the pandemic. But as the economy adjusts to new shocks—currency devaluation, rising inflation, and now recapitalisation pressures— the cost of this leniency is becoming evident,” said Ifeanyi Eze, a Lagos-based financial analyst. Squeezed profit margins One of the most direct consequences of the CBN’s forbearance policy is its effect on bank profitability. By delaying the recognition of bad loans and suspending stricter capital charges, the policy allowed banks to present healthier financials in the short term. However, as these deferred risks begin to crystalize, banks are likely to face increasing impairments that will erode their earnings. The post-devaluation economic environment has already made loan servicing more difficult for many corporate borrowers, particularly those with foreign-currency exposure. Under forbearance, many of these loans remain classified as performing, even though they carry a significant probability of default. As a result, banks are accumulating a hidden layer of risk that could eventually manifest as sharp spikes in NPL ratios. “Banks are sitting on a time bomb of restructured or high-risk loans that haven’t been fully provisioned for. When these loans start to go bad, the hit to profits could be severe,” said Bamidele Ogunbanjo, a banking sector consultant at Financial Derivatives Company. Already, several tier-2 banks are showing signs of stress. While profit after tax figures for 2024 remained respectable for most major lenders, analysts expect a downturn in the second half of 2025 due to rising credit impairments and the gradual phasing out of forbearance measures. Fitch Ratings recently warned that the eventual removal of these policies could significantly raise NPL ratios across the sector. Eroding capital buffers Another area of concern is the erosion of capital buffers. The CBN’s forbearance effectively allows banks to delay provisioning, which supports short-term capital adequacy. But in reality, it weakens the sector’s resilience to shocks. With Nigeria’s economy exposed to volatile oil revenues, exchange rate fluctuations, and political uncertainty, capital adequacy becomes even more crucial. Furthermore, the CBN’s new bank recapitalisation directive—requiring commercial banks to increase their minimum capital base significantly over the next two years—adds another layer of pressure. Banks must now raise fresh capital while also dealing with potentially deteriorating asset quality and suppressed profitability. “The recapitalisation drive is necessary, but it comes at a time when banks may struggle to attract new equity due to their deteriorating fundamentals. Investors are cautious, especially with the currency risks and declining returns,” said Ayo Shonubi, a portfolio manager at a Lagos-based investment firm. He adds that banks may be forced to prioritize capital conservation over lending, which could constrain credit growth and limit economic recovery efforts, especially in critical sectors. Surge in non-performing loans looms Perhaps the most significant risk associated with prolonged forbearance is the potential for a sudden increase in non-performing loans. As of the end of 2024, the industry-wide NPL ratio remained just within the regulatory threshold of 5%, according to data from the CBN. However, this figure may not reflect the true state of asset quality. Analysts argue that many restructured loans— particularly those in the oil and gas, power, and real estate sectors—have only been kept afloat by lenient classification rules. Once these measures are withdrawn or revised, the NPL ratio could rise sharply. “Banks are essentially postponing the inevitable,” said Eze. “If we have another economic shock or if the CBN enforces stricter asset classification, we could see a wave of defaults that will overwhelm current provisions.” The possibility of increased credit risk also threatens to undermine investor confidence. International investors are already cautious about Nigerian bank exposures, particularly given the ongoing foreign exchange market volatility and the lack of clarity around regulatory timelines for ending forbearance. Regulatory dilemma and path forward The CBN finds itself in a difficult position. On one hand, maintaining forbearance helps preserve financial stability and gives banks room to support economic growth. On the other hand, it delays the recognition of systemic risks and distorts key financial indicators. Some stakeholders have called for a gradual phasing out of the policy, coupled with increased transparency and more proactive risk management across the sector. The CBN has hinted at a review of the current framework but has not provided a definitive timeline. “There needs to be a structured exit from forbearance,” said Shonubi. “This should include enhanced supervisory oversight, stress testing, and support for banks to build capital buffers in a sustainable way.” Another suggestion is to adopt a sector-specific approach, where only industries genuinely recovering from structural disruptions receive tailored support, while others face stricter rules. In the meantime, banks will need to brace for a period of margin compression, increased provisioning, and tighter regulatory scrutiny. Some may need to explore mergers or acquisitions to shore up capital, while others could pivot to more fee-based services to offset shrinking interest income. Conclusion The CBN’s forbearance policy has served its purpose as a counter-cyclical tool during economic crisis. However, its prolonged use poses significant risks to the financial health of Nigerian banks. With profitability under threat, capital buffers shrinking, and a potential NPL surge on the horizon, the industry faces a critical juncture. A clear, phased exit strategy—anchored by transparency, adequate provisioning, and stronger supervision—will be essential to restoring investor confidence and ensuring the long-term stability of Nigeria’s banking system. Until then, the sector remains vulnerable to both domestic and external shocks, with the specter of hidden vulnerabilities threatening to derail its fragile recovery.