How Government borrowing tests Nigeria’s Private-Sector Credit Market

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?

What they are saying

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.

• The founding director of the Institute of Capital Market Studies, Professor Joseph Uwaleke, noted that recapitalizing the banks, which was necessary to empower the banks to grow the economy, will empower them to invest their raised capital in the most economically viable assets. He said the banks should invest their financial assets in manufacturing and local production at lower interest rates.

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.

• “Government’s projects will also require funding. So, instead of going to the IMF to borrow, the government can do domestic borrowing, which is cheaper. Banks will also do their due diligence and make sure that they have returns that will compensate for the waiting period,” he said.
• Financial economist at the University of Nigeria, Dr. Godwin Imoibe, agreed that the government’s action of selling bonds and other securities to the private sector can have a crowding out effect on the private sector on the debt market hence starving entrepreneurs and other investors of much-needed investment funds.

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.

Why it matters

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.

• For banks, the lure is unambiguous. Government securities generally go with significantly lower credit risk compared to lending to businesses, while offering competitive takings without the costs related to originating, monitoring and recovering commercial loans.
• Banks are supposed to support economic growth via credit creation, but they must also protect depositors and shareholders by managing credit risk and guaranteeing adequate yields on their assets.
• Manufacturing and other industries need longer-term financing to procure machinery, increase production capacity, build warehouses and fund working capital.
• But when government securities present attractive risk-adjusted yields, banks may be less incentivized to shoulder the greater risks connected with lending to private businesses.

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.

What you should know

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.