Nigeria’s banking industry has emerged from one of the most ambitious recapitalisation exercises in its history, raising about N4.65 trillion in fresh capital and significantly strengthening balance sheets across the sector. However, despite improved capital positions and rising profitability, the African Development Bank (AfDB) has expressed concern over the industry’s limited contribution to economic growth, citing weak credit flows to the private sector.

In its African Economic Outlook 2026 report, the AfDB revealed that private-sector credit in Nigeria accounts for only 9.4 per cent of Gross Domestic Product (GDP), one of the lowest ratios on the continent. The figure underscores a major challenge facing the economy: the inability of businesses, especially small and medium-sized enterprises (SMEs), to access affordable financing needed for expansion, innovation, and job creation.

According to the report, Nigeria lags behind several African peers, with Kenya recording a private-sector credit-to-GDP ratio of 31.6 per cent, Egypt 28.3 per cent, and Côte d’Ivoire 21.4 per cent. The gap is even wider when compared to emerging economies such as Vietnam, Malaysia, and Chile, where private-sector credit exceeds 100 per cent of GDP.

The AfDB noted that financial institutions across Africa continue to favour short-term, low-risk investments over long-term financing capable of driving economic transformation. As a result, domestic credit to the private sector across the continent averaged only 34.6 per cent of GDP between 2020 and 2024, the lowest globally.

Analysts attribute Nigeria’s weak lending culture to several structural and policy challenges. Chief among them is the attractiveness of government securities, which offer relatively high returns with minimal risk. Data from the Central Bank of Nigeria (CBN) showed that while private-sector credit stood at N75.62 trillion in February 2026, lending to the government rose to N35.77 trillion, reflecting a 24.2 per cent year-on-year increase.

Economists have repeatedly warned that rising government borrowing is crowding out private investment. Chief Executive Officer of the Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf, noted that banks naturally prefer risk-free government instruments to lending to businesses operating in an uncertain economic environment.

High interest rates have further compounded the challenge. Although monetary tightening has eased somewhat, businesses still face borrowing costs ranging from 26 to over 40 per cent, making many investment projects financially unviable.

The burden falls most heavily on SMEs, which remain the backbone of the Nigerian economy but receive only a small fraction of formal bank credit. Industry estimates suggest that SMEs account for roughly one per cent of total bank lending, compared to about five per cent across sub-Saharan Africa. Their financing gap is estimated at N48 trillion, forcing many businesses to rely on personal savings, informal funding channels, and intervention schemes.

Despite these concerns, proponents of the banking recapitalisation programme argue that stronger banks are now better positioned to support economic growth. Managing Director of FSDH Merchant Bank, Bukola Smith, recently stated that enhanced capital bases would enable financial institutions to fund infrastructure projects and productive sectors more aggressively.

While stronger balance sheets undoubtedly improve banks’ lending capacity, experts caution that recapitalisation alone cannot guarantee increased credit to businesses. They argue that the broader business environment must become more attractive and less risky before banks significantly expand lending.

Some analysts also warn that the recapitalisation exercise may have created excess liquidity in a market with limited viable lending opportunities. According to Vice-President of Highcap Securities, David Adonri, banks could struggle to profitably deploy their enlarged capital amid weak infrastructure, insecurity, and policy uncertainty.

The AfDB insists that deeper reforms are needed to unlock sustainable credit growth. These include improving savings mobilisation, strengthening collateral enforcement, accelerating judicial processes, and reducing regulatory bottlenecks.

Stakeholders have also called for a review of the CBN’s Cash Reserve Ratio (CRR) framework, which many believe restricts banks’ ability to lend by locking up substantial portions of deposits. In addition, development finance institutions are being urged to expand credit guarantee programmes for SMEs, agriculture, and manufacturing.

Ultimately, experts agree that addressing insecurity, improving infrastructure, and ensuring policy consistency are essential to reducing lending risks and encouraging banks to channel more funds into productive sectors.

The AfDB’s warning serves as a reminder that stronger banks do not automatically translate into a stronger economy. While Nigeria has successfully recapitalised its banking sector, the true test of success will be whether the industry’s expanded capital base reaches the factories, farms, technology firms, and small businesses that drive growth, create jobs, and transform the economy.