Less than a month after the banking sector emerged from an ambitious recapitalisation with near 100 percent success, subtle multi-level concerns about sustainability risks are gaining traction. Outside the banks, fresh skepticism is building around the medium to long-term value of the expansive capital injections. Concerns center on whether operators can leverage their ultra-high liquidity to stimulate output growth as envisaged by the recapitalisation concept note, and how fast the economy can de-risk to absorb the liquidity.
Within banking halls, there is silent concern about excess liquidity, its cost, risks, and ultimate value for stakeholders. Across boards, grumbles persist over share dilution, markdowns in dividend earnings, possible sluggish capital appreciation, and associated risks. With the economy entering a low-yield era and the credit market shrinking around the public sector and big corporations, fears grow that the sector could face a low profit-to-capital ratio, upsetting investors used to high returns.
Some radical views question the recapitalisation, arguing it was an excess quantity for the sector and that the need for additional capital was overrated. This fuels subdued worry in boardrooms about what to do with apparent excess liquidity. Although the largest quantum of freshly raised capital, if not the entire N4.65 trillion, is equity, bank managers know costs are attached. The recapitalisation lifted tier-one capital several-fold, but with most lenders raising capital, significant share dilution occurred. Billions of additional shares were issued, meaning many banks must double down on profitability to sustain high earnings per share and dividend payments.
Those knowledgeable about changing market dynamics warn that odds are against banks, suggesting that ultra-high dividend payouts may be over, at least temporarily. Growing worries exist over a possible repeat of liquidity-induced moral hazard, similar to the sector’s experience after the 2005 reconsolidation. With a history of regulatory liquidity support, doubts persist that bank chiefs have learned enough to conduct affairs with integrity. In 2025, highly liquid vaults and the perception that regulators would activate extended lifelines bred moral hazards threatening the entire sector.
The Asset Management Corporation of Nigeria (AMCON), created to buy back bad debt, remains undissolved, perpetuating expectations of future bailouts and encouraging socialization of individual mistakes. Although AMCON has not bought back new non-performing loans recently, its existence sends a wrong signal about commitment to discipline, where reckless owners and management bear consequences. The Central Bank of Nigeria (CBN) has consistently told operators that the new regulatory environment has no room for irresponsible banking, following up with policies to tighten integrity, corporate governance, and asset quality.
For instance, the CBN directed operators to stress test their internal systems effectively from April 1, with an overriding objective of safeguarding assets and protecting depositors’ funds. As part of the stress test directive, operators must treat all insider loans as bad and make 100 percent provisions accordingly, a policy expected to melt profitability in the near term. Stakeholders say the sector is entering a decisive post-recapitalisation phase, where stronger balance sheets may collide with tightening yield conditions, regulatory scrutiny, and structural inefficiencies.
On the surface, the recapitalisation marked a major regulatory success, but beneath the headline figures, a more complex reality unfolds—defined by excess liquidity, constrained lending opportunities, moral hazard concerns, and evolving macroeconomic headwinds. The capital build-up coincided with a high-yield environment in 2024 and early 2025, when elevated interest rates boosted banks’ earnings via investments in government securities. Treasury bills and bond yields climbed into double-digit territory, driving record profitability. As inflationary pressures ease and monetary conditions soften, fixed-income yields are moderating, though this trend may not be sustained if the Middle East crisis lingers.
A moderating fixed-income market narrows the high-margin window that underpinned bank profitability, exposing a structural contradiction: banks are better capitalised but face lower yields and a high-risk lending market. To compensate for falling yields, banks need to expand lending, but the real sector remains highly risky. The government aims to speed up real sector growth, but little has been done to de-risk it. Power efficiency remains an albatross, according to economist Dr. Muda Yusuf, along with poor road networks and limited transport options, making the real sector high risk for banks.
Executive Director of Halo Capital Management Limited, Paul Uzum, said the immediate post-recapitalisation risk lies in excess liquidity, noting that conservative asset allocation strategies could dilute returns on newly raised capital. He argued that a sharp rise in earnings per share in 2026 appears unlikely despite stronger capital positions, as the industry grapples with a lower-yield environment and cautious lending. Vice President of Highcap Securities, David Adonri, takes a more critical stance, questioning the policy rationale. He acknowledged success in injecting fresh capital but described the recapitalisation as a “misplaced priority,” arguing that banks were already over-capitalised following gains from naira floatation.
According to Adonri, the sector now faces a surplus capital problem, with funds far beyond the absorptive capacity of the real sector. “This is a threat to price stability in certain asset classes like equities and real estate, as excessive credits may be directed to these sectors,” he said. He warned that surplus liquidity could fuel increased lending to the public sector, potentially pushing government borrowing beyond sustainable levels. While conservatively managed banks may benefit, the broader policy outcome risks starving the real productive sector of funding. From his perspective, recapitalisation may have inadvertently deepened structural imbalances—strengthening banks on paper while leaving the real economy constrained.
Even as profitability pressures mount, the sector witnesses a surge in investor interest. Strong dividend histories and relatively attractive valuations have triggered a rotation of capital into banking stocks, positioning the sector at the center of a broader equity market re-pricing. Managing Director of Crane Securities Limited, Mike Ezeh, said robust dividend payouts in 2025 provide a solid foundation for enhanced shareholder returns post-recapitalisation, even with moderating profits. He maintained that Nigerian banks’ stocks remain significantly undervalued relative to fundamentals, creating compelling entry points for domestic and offshore investors. According to him, growing influx of foreign and institutional capital into equities is reshaping market dynamics, with funds shifting out of money market instruments in search of higher returns in banking stocks.
While recapitalisation has been completed, analysts say the real test of the sector’s strength is only beginning. From April 1, the CBN commenced industry-wide stress tests, with results expected by month-end. The exercise aims to determine whether banks are genuinely resilient or have merely met regulatory thresholds. Executive Chairman of the Society for Analytical Economics, Nigeria, Prof. Godwin Owoh, described the stress tests as a “reconfirmation of the tenacity and texture of capital” to ensure newly-injected funds are real, stable, and not artificially structured. He warned against practices like temporary fund injections where capital is briefly parked to meet requirements and withdrawn shortly after, hoping tests would expose such manipulations.
The stress scenarios assess banks’ ability to withstand shocks, including liquidity pressures, credit losses, and market volatility, the CBN said. A key component is full provisioning of insider-related loans, a long-standing source of systemic risk. By forcing banks to account for loans to directors and related parties regardless of performance, regulators aim to reveal hidden vulnerabilities. Emeritus Professor of Economics and Public Policy, Akpan Ekpo, endorsed the exercise but cautioned that its credibility depends on execution. The advance notice, he warned, could allow banks to temporarily adjust books, masking weaknesses. He also raised concerns about the CBN’s institutional capacity to conduct rigorous and continuous assessments.
Beyond capital adequacy, the post-recapitalisation landscape revives concerns about moral hazard, particularly AMCON’s role. Established in 2010 to absorb non-performing loans, AMCON was intended as a temporary intervention but remains active, prompting criticism. Owoh argued that the agency has outlived its usefulness and undermines financial discipline by creating expectations of regulatory bailouts. He described AMCON as having evolved beyond a moral hazard issue into “an axis of corruption,” citing weak recovery performance and alleged collusion between debtors and officials. Ekpo shared similar concerns, warning that AMCON’s continued existence could encourage reckless lending and borrowing. Both called for stricter loan recovery mechanisms and greater accountability.
Despite stronger balance sheets, banks face structural barriers in lending to the real sector. High interest rates remain a major constraint. With the CBN’s monetary policy rate elevated, effective borrowing costs in Nigeria can approach 40 percent when bank margins are added, making long-term investment unviable. Ekpo noted that under such conditions, even well-capitalised banks are unlikely to finance productive ventures at scale. The small and medium-scale enterprise sector, widely regarded as the backbone of economic growth, remains largely excluded from formal credit. This disconnect highlights a central paradox: while banks are stronger, their ability to translate capital into productive activity is constrained by broader macroeconomic challenges, including fiscal headwinds, infrastructure crisis, and policy deficiencies.
Concerns about regulatory consistency also shape the outlook. Owoh pointed to unresolved issues surrounding certain banks, particularly the handling of Union Bank, which he described as procedurally faulty. He noted that the CBN’s intervention, which dissolved the board without a formal declaration of insolvency, violated provisions of the Banks and Other Financial Institutions Act (BOFIA). He said shareholders should have been allowed to recapitalise before regulatory intervention, warning that deviations from legal frameworks could undermine investor confidence. Still, uncertainty trails institutions that failed to meet recapitalisation thresholds. Analysts expect regulatory intervention through restructuring, mergers, or asset transfers, with the CBN and Nigeria Deposit Insurance Corporation prioritizing depositor protection and systemic stability.
