The Central Bank of Nigeria (CBN) has instructed commercial banks to begin a comprehensive stress test of their credit portfolios from April 1, 2026, as part of efforts to safeguard the stability of Nigeria’s banking sector.
According to a source within the apex bank, the directive was communicated through a confidential letter sent to the chief executive officers of banks. The source noted that the correspondence was intended strictly for internal regulatory purposes.
The move forms part of the CBN’s ongoing supervisory framework designed to strengthen the resilience of the country’s financial system.
The directive is backed by Sections 13 and 63 of the Banks and Other Financial Institutions Act 2020, which empower the CBN to ensure that banks maintain adequate capital to cover operational risks.
In the communication, the apex bank clarified that the exercise is consistent with the provisions of its CBN Guideline on Stress Testing for Nigerian Banks issued in March 2019.
Under the directive, banks are required to evaluate the strength of their loan portfolios over a 12-month period by simulating adverse economic and operational conditions. These include potential deterioration in asset quality, governance risks, fluctuations in foreign exchange rates, declining commodity prices, supply chain disruptions, and shrinking market demand.
The regulator explained that the stress tests are intended to determine how such shocks could affect banks’ Non-Performing Loans (NPLs), loan-loss provisions and Capital Adequacy Ratios (CAR).
Banks are expected to apply the stress testing to all credit exposures, including both on-balance sheet and off-balance sheet facilities as well as loans linked to directors and insiders. The process will also assume that some exposures could migrate to higher-risk classifications in line with prudential guidelines issued in July 2020.
The CBN further directed banks to establish a baseline position for the assessment. Where existing financial returns indicate deterioration in certain exposures as of the testing date, those conditions must be adopted as the baseline.
In addition, banks must classify their credit portfolios across categories such as performing, watchlist, substandard, doubtful and lost, while also factoring in exposure at default, current provisioning levels, collateral values and risk-weighted positions.
The apex bank added that the main stress scenario should assume a gradual weakening of credit portfolios over a 12-month period. Loans in sectors already showing signs of vulnerability must attract additional provisions.
Specifically, the CBN said exposures in weakening industries should be subjected to further stress, with at least an extra 10 percent provisioning applied.
For insider-related loans, the regulator adopted a stricter approach. Such exposures will be treated under a severe stress assumption and regarded as defaulted in the stress scenarios, requiring full provisioning.
After completing the exercise, banks must disclose the effect of the stress test on their capital positions, including their pre-stress and post-stress Capital Adequacy Ratios as well as any capital shortfall.
The CBN also stated that banks must raise 100 percent of any capital shortfall identified in their own stress tests or 50 percent of the shortfall calculated by the CBN’s independent analysis — whichever is higher — within an 18-month period.
Once determined, the new capital level will become the bank’s risk-based capital requirement until the next stress-testing cycle, which will occur six months after the completion of the capital-raising process.
For banks that record no capital shortfall, the CBN said they will be subject to a standard 12-month stress-testing cycle.
All banks have been directed to submit the results of their board-approved stress-testing reports to the CBN on or before April 30, 2026.
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