The Central Bank of Nigeria (CBN) has implemented a stringent forbearance policy requiring banks under regulatory supervision to halt dividend payments, defer executive bonuses, and suspend foreign investments.
This move aims to strengthen financial institutions by reinforcing capital buffers and improving balance sheet resilience.
Financial analyst and CEO of Nairametrics, Ugodre Obi-Chukwu, has provided insights into the rationale behind the policy.
Speaking on MoneyLine with Nancy, he explained that forbearance is a relief mechanism used by central banks during periods of economic crisis, allowing financial institutions temporary leniency in meeting certain regulatory requirements.
Why the CBN Introduced This Measure
The latest directive affects banks benefiting from forbearance due to breaches in credit exposure limits and Single Obligor Limits (SOL), which is the maximum loan amount a bank can issue to a single borrower relative to its net worth.
- Obi-Chukwu noted that the policy is meant to mitigate risks associated with excessive lending to individual clients, preventing financial instability in the banking sector.
- According to Obi-Chukwu, forbearance has historically been applied during economic disruptions, such as the 2008 financial crisis in the United States and the COVID-19 pandemic in 2020.
Although the immediate effects of COVID-19 eased in 2023, Nigeria’s economy continued to struggle due to exchange rate reforms and the removal of fuel subsidies, prompting the CBN to extend relief measures until June 2025.
“Forbearance had been, of course, COVID happened five years ago. But let’s remember that the remnants of COVID lingered until 2023. And then we now had these exchange rate reforms, a revolve of full subsidy. That again impacted the Nigerian economy severely,” he said.
Capital Adequacy and Banking Sector Reforms
Beyond limiting dividends and bonuses, the CBN policy aims to encourage banks to strengthen their capital reserves.
Obi-Chukwu pointed out that while some institutions reported substantial profits last year, the regulatory body had already restricted dividend payouts to ensure capital retention.
“The CBN has been proactive in managing regulatory forbearance, signaling banks to accelerate their capital-raising efforts. With ongoing financial restructuring, institutions may need to increase capital beyond the N500 billion minimum requirement or reinvest a significant portion of their earnings to stabilize their balance sheets,” Obi-Chukwu stated.
The expert further warned that some loans may pose recovery challenges in the near term, making it crucial for banks to fully make provision for potential defaults.
The CBN directive essentially mandates financial institutions to account for loan risks now rather than postpone them, ensuring Nigeria’s banking sector enters 2026 with a clean slate following its recapitalization exercise.
The Future of Nigerian Banking Post-Forbearance
Obi-Chukwu emphasized that the policy shift represents a return to stricter financial regulations, aligning with best practices in risk management.
“So we’re now going back to how banking is meant to be. And it’s better that we have banks that are stronger, even if it means that we need to break the bullet now. And that’s basically what we’re doing.”
Stronger banks, he noted, ultimately benefit the economy by enabling more responsible lending, fostering financial stability, and improving investor confidence.
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