Nigeria’s Banks and the Conflict between Liquidity and Lending – OpEd
By Sola Oni
Nigeria’s banking sector has emerged from its latest recapitalisation exercise with stronger balance sheets and renewed confidence, but capital alone does not guarantee stability or growth. The real test lies in how that capital is deployed. The tension between liquidity management and productive lending remains unresolved, particularly in an environment of elevated interest rates and structural inflation pressures.
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As banks weigh the appeal of short-term returns against the imperative to support the real economy, the risk of repeating past cycles of excess cannot be ignored. In this OpEd, Sola Oni situates recapitalisation not as an endpoint but as a governance and allocation challenge, in which policy coordination, supervisory vigilance, and institutional discipline will determine whether the current momentum translates into sustainable economic outcomes or another missed opportunity.
It is encouraging that Nigeria’s latest bank recapitalisation has been declared a success by the Central Bank of Nigeria (CBN). Capital levels have increased, balance sheets are stronger, and confidence appears to have been restored. However, if history is any guide, this is only half the story. The previous recapitalisation also seemed impressive until reckless investments, insider abuses, and weak risk controls exposed its flaws. This time must be different. Our banks must recognise that recapitalisation is not a victory; it is a responsibility.
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The central question is clear: if banks channel fresh capital into speculation or related-party lending, the cycle of boom and bust will persist. However, if they deploy it into the real economy, it could mark a turning point. Nigeria’s private sector, particularly SMEs, continues to face a shortage of affordable credit. Manufacturing, agriculture, and technology require financing, not promises. Yet lending cannot grow meaningfully under current borrowing costs. Interest rates remain elevated as the CBN prioritises inflation control. While this objective is necessary, it also imposes a constraint. Tight monetary policy discourages the very lending needed to drive growth, and this tension cannot be ignored.
The solution lies in policy coordination. Inflation in Nigeria is largely driven by structural factors, including energy costs, foreign exchange instability, and supply constraints. Monetary tightening alone cannot address these issues. Fiscal authorities must tackle the root causes. Without such alignment, high interest rates will continue to crowd out private sector access to credit. Banks, however, must also adjust their priorities. Stronger capital should translate into better discipline, not higher risk-taking. Governance failures were at the heart of past excesses, and they must not be repeated. The CBN has a critical role here, moving beyond routine compliance checks to proactive, risk-based supervision. Early intervention and strict enforcement will be key to maintaining stability.
Digital banking is another area that demands urgent attention. Financial inclusion remains uneven, with millions still outside the formal system. Investment in digital platforms, agent networks, and fintech partnerships can expand access, reduce costs, and improve efficiency. New capital should be directed toward systems that deepen the financial system, rather than merely inflate balance sheets. Export financing also remains underdeveloped, despite its potential to boost foreign exchange earnings and reduce reliance on imports. The commodities ecosystem requires government support through infrastructure development and appropriate policies. Commodities exchanges can further support exports by providing price transparency, improving market access, and enabling producers to hedge against price volatility, thereby enhancing confidence in export markets.
Equally important is the need to protect and finance local innovators and entrepreneurs. Many promising Nigerian inventors and startups struggle to access credit due to a lack of collateral or perceived risk. Banks should develop tailored products that recognise intellectual property, ideas, and early-stage innovation as viable assets. Supporting innovation is not just about funding new businesses; it is about building future industries, creating jobs, and reducing dependence on imports. A forward-looking banking sector must see inventors not as high-risk clients, but as drivers of long-term economic value.
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It can be tempting for banks to channel excess liquidity into the capital market. With larger capital bases, they may find equity investments more attractive than lending to the real sector. While this approach may deliver short-term gains, it carries significant risks if not properly managed. Heavy bank participation in the stock market can overheat valuations and push share prices beyond their underlying fundamentals. The consequences, such as market corrections, weakened investor confidence, and financial instability, can make this a costly gamble.
Banks must avoid becoming speculative players. However, a new policy on margin lending to qualified securities dealers under strict supervision by the Securities and Exchange Commission (SEC) and the Nigerian Exchange Limited (NGX) could be a win-win for both banks and the capital market. Oversight should extend beyond capital adequacy to the deployment of funds. Prudential limits, stress testing, and close monitoring of investment portfolios will help prevent excessive risk-taking. The focus should remain on stability, not short-term market performance.
Nigeria can also learn from countries where recapitalisation delivered lasting benefits without widespread abuse. In Canada and Malaysia, regulators combined higher capital requirements with strict supervision and strong corporate governance. They closely tracked how banks used their capital and acted quickly when risks emerged. The success of this exercise will be measured not by stronger balance sheets, but by real economic outcomes. Without these, recapitalisation risks becoming another missed opportunity rather than a foundation for sustainable growth.
