Fitch Projects Increase in Nigerian Banks' Non-Performing Loans in 2024 Due to High Inflation and Interest Rates

Fitch Ratings has projected that non-performing loans (NPLs) in Nigeria’s banking sector will rise in 2024, driven by the country’s high inflation and interest rates. The global credit ratings agency made this prediction in its latest credit ratings report on Nigeria, where it affirmed the nation’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘B-’ with a Positive Outlook.

According to the report, the loan books of Nigerian banks, which made up 35% of banking sector assets by the end of 2023, are relatively small. However, Fitch expects the regulatory non-performing loans, which stood at 5.1% at the end of the first quarter of 2024, to increase further due to the ongoing economic pressures.

“Fitch expects the banking sector’s regulatory non-performing loans (end-1Q24: 5.1%) to increase in 2024 due to high inflation and interest rates. However, loan books are small (end-2023: 35% of banking sector assets),” the report stated.

Impact of Regulatory Changes on Banks

The report also touched on recent regulatory changes impacting Nigerian banks. Fitch referenced the Central Bank of Nigeria's (CBN) decision to raise the capital requirements for banks, which is expected to be fully implemented by the end of the first quarter of 2026. Additionally, the amendment of the 2020 finance act, which imposed a 70% windfall levy on banks’ foreign exchange gains in 2023 and Q1 2024, was also discussed. Despite these measures, Fitch does not foresee any breaches in capital adequacy ratios for Nigerian banks.

Fitch also projected a further increase in the Monetary Policy Rate (MPR) during the last quarter of 2024, in line with the CBN’s ongoing efforts to control inflation. The report noted that the use of monetary tools like open market operations, with rates set near the MPR, will continue to play a key role in improving monetary policy effectiveness after years of financial repression in the country.

Nigeria’s Inflation Challenges

Nigeria has been grappling with soaring inflation, which rose to 32.7% in September 2024, reversing a brief two-month decline since July. This surge was largely driven by rising petrol prices, which significantly increased transportation costs, contributing to higher overall living expenses. Food inflation also climbed to 37.77% year-on-year in September 2024, a sharp rise from 30.64% in September 2023.

On a monthly basis, food inflation grew to 2.64% in September 2024, up from 2.37% in August 2024, marking a 0.27% increase.

CBN’s Response to Inflation

Under the leadership of Yemi Cardoso, the Central Bank of Nigeria has taken aggressive steps to tackle inflation through a series of interest rate hikes. Since Cardoso's tenure began, the CBN has raised the Monetary Policy Rate (MPR) five times in a bid to curb inflation and stabilize the economy. The first adjustment increased the rate from 18.75% to 22.75%, followed by additional hikes to 24.75%, 26.25%, and finally 26.75%.

In September 2024, the CBN's Monetary Policy Committee (MPC) raised the MPR by 50 basis points, bringing the rate to 27.25%. These cumulative increases, totaling 850 basis points, reflect the central bank's commitment to addressing Nigeria’s persistent inflation challenges, especially core and food inflation.

Conclusion

As Nigerian banks brace for a potential rise in non-performing loans in 2024, high inflation and interest rates remain significant challenges for the economy. The Central Bank’s efforts to curb inflation through monetary tightening have been substantial, but the impact of these measures on inflation and banking stability will continue to be closely monitored. Despite these economic headwinds, Fitch maintains a positive outlook on Nigeria's long-term credit rating, emphasizing the need for continued regulatory reforms and prudent economic management to navigate the country's inflationary pressures and maintain financial stability.