Regulator moves to strengthen financial stability as lenders assess potential risks to loans, capital buffers, and asset quality under simulated economic shocks…..
The Central Bank of Nigeria (CBN) has instructed commercial banks across the country to begin a comprehensive stress testing exercise on their credit portfolios starting April 1, 2026, in a move aimed at safeguarding the stability of Nigeria’s banking sector.
According to a senior source at the apex bank, the directive was communicated through an official letter sent to the Chief Executive Officers of banks. The communication, the source said, was intended strictly for regulatory compliance and not for public distribution.
The exercise forms part of the CBN’s routine supervisory oversight designed to ensure that financial institutions remain resilient in the face of potential economic shocks and evolving market conditions.
The directive is backed by provisions in the Banks and Other Financial Institutions Act 2020, specifically Sections 13 and 63, which empower the central bank to require lenders to maintain capital levels considered adequate to cover the risks associated with their operations.
In the communication, the regulator clarified that the instruction does not override the existing framework outlined in its Guideline on Stress Testing for Nigerian Banks issued in March 2019, which continues to serve as the primary reference for such assessments.
Under the new directive, banks are required to evaluate the strength of their loan portfolios over a 12-month period, simulating various adverse scenarios that could affect borrowers’ ability to repay.
The stress scenarios include potential deterioration in asset quality, governance risks, and significant shifts in industry dynamics. These could involve events such as falling commodity prices, volatility in foreign exchange markets, supply chain disruptions, or declining demand in key sectors of the economy.
The central bank explained that the objective of the exercise is to determine how such adverse developments could affect critical banking indicators, including Non-Performing Loans (NPLs), loan loss provisions, and the Capital Adequacy Ratio (CAR) of each institution.
As part of the methodology, banks are required to apply the stress tests to all credit exposures, covering both on-balance sheet and off-balance sheet facilities. This includes loans linked to directors and other insider-related exposures.
The regulator also directed banks to assume a staged migration of credit facilities into higher-risk classifications in line with prudential guidelines issued in July 2020.
To ensure consistency, the CBN said banks must first establish a baseline position before conducting the stress analysis. However, where financial returns already indicate deterioration in specific credit exposures as of the testing date, such weakened positions must be adopted as the starting baseline.
Beyond the classification of loan portfolios into performing, watchlist, substandard, doubtful, and lost categories, the baseline assessment must also capture exposure at default, current provisioning levels, collateral valuations, and risk-weighted positions.
The apex bank further stated that the primary stress scenario should assume a gradual deterioration of credit quality over a one-year period.
For sectors already showing signs of weakening, banks are required to apply additional provisioning buffers. Specifically, exposures in vulnerable industries must be subjected to further stress assumptions, with at least an additional 10 percent provisioning applied.
The CBN also introduced stricter assumptions for insider-related lending. Under the directive, all loans connected to directors or other insiders must be treated under a severe stress scenario, with such exposures assumed to be in default and fully provided for during the exercise.
At the end of the stress test, banks must disclose the impact of the simulated shocks on their capital positions. The required disclosures include their pre-stress Capital Adequacy Ratio, post-stress CAR, and any resulting capital shortfall.
Where a shortfall is identified, the regulator said banks will be required to recapitalise accordingly.
Specifically, lenders must raise 100 percent of their reported stressed capital shortfall or 50 percent of the shortfall calculated by the CBN’s own stress analysis whichever is higher within an 18-month period.
The central bank noted that once the required capital level is communicated to a bank, it will become the institution’s risk-based capital requirement until the next stress-testing cycle is completed.
That next cycle, the regulator said, will take place six months after the bank concludes its capital raise aimed at addressing the stressed capital adequacy gap.
For banks that emerge from the exercise without any capital shortfall, the regulator indicated that a 12-month stress-testing cycle will apply going forward.
All banks have been directed to submit the results of their board-approved stress-testing reports to the central bank no later than April 30, 2026.
About the Author
