Nigeria’s tilting dependence on domestic borrowing is creating an increasing contest for bank credit, raising anxieties that government’s capacity to offer attractive yields on its securities could inhibit the flow of affordable credit to businesses and households even as banks surface from a major recapitalisation exercise.
This is becoming serious as the Federal Government continues to finance large fiscal deficits through the domestic market, while Nigerian banks remain key buyers of government securities.
The International Monetary Fund (IMF), cited in its 2026 Article IV assessment of Nigeria, some limitations on private-sector credit extension, including banks’ holdings of government securities and tight monetary conditions.
The IMF said Nigerian banks’ holdings of government securities were valued at about 22% of total bank assets.
The trend raises a serious question for the banking industry: will the extra capital garnered by banks convert into considerably more lending to businesses, or will a substantial portion of available balance-sheet capacity continue to be invested into relatively attractive government securities?
Nevertheless, data show that private-sector credit has expanded overtime, albeit marginal. Credit to Nigeria’s private sector appreciated to about ₦83.43 trillion in July 2026 from ₦81.04 trillion in May, representing an appreciation of ₦2.39 trillion in two months. The July figure, however, remained below the record high of ₦94.61 trillion recorded in February 2026.
The IMF also forecasts continued growth in private-sector credit, with its 2026 prognosis pointing in the direction of private-sector credit rise at 14.2% in its recent projection framework.
The concern, therefore, is not whether financial service institutions are lending more, but whether government borrowing is attracting a lopsided share of the financial resources that could otherwise support private investment, especially long-term lending to manufacturers, SMEs and infrastructure businesses.
He noted that some dead companies are being revived, and that such firms will depend on and be financed by local banks that have recently recapitalized.
The IMF has previously found a relationship between higher bank holdings of sovereign debt and weaker growth in private-sector credit, pointing to the possibility of a crowding-out effect when banks allocate more of their balance sheets to government securities.
Nigeria’s domestic debt market has become increasingly attractive to investors because of elevated yields, with short term federal government debt offering yields around 20%, attracting international investors as well as domestic banks, pension funds and insurers.
There are implications. A manufacturer unable to garner affordable long-term financing may reschedule investment, function below capacity or rely more heavily on internally generated funds. An SME may abandon expansion plans, while a property or infrastructure project may become commercially unviable when financing costs rise.
Government at all levels has significant expenditure obligations and continues to rely on borrowing to finance budget deficits.
At the same time, debt-service obligations consume a large share of government revenue, increasing the inducement to access domestic capital markets when foreign financing is expensive or constrained.
But larger domestic borrowing can have a second-order effect: it can motivate banks and other institutional investors to allocate more funds to government securities, potentially leaving private borrowers competing for the remaining pool of funds.
