Nigeria’s booming banks and collapsing economy

Nigeria’s banking industry appears to be booming, largely driven by the policies of the Central Bank of Nigeria (CBN), under the leadership of Governor Olayemi Cardoso, while the real economy continues to experience sluggishness.

At a time when millions of Nigerians are increasingly slipping into poverty, when inflation continues to erode household incomes, when the business world is collapsing due to unbearable operational costs, and when migration has become a survival strategy for many young professionals, Nigerian banks are announcing extraordinary profits, stronger capital positions and unprecedented liquidity growth.

Based on bank financial reports, the financial system appears healthy. In reality, the economy where people work, trade and survive is experiencing difficulties.

The growing disconnect between financial sector prosperity and economic suffering now represents one of the greatest threats to Nigeria’s long-term economic stability and its ambition to build a $1 trillion economy.

The numbers are truly impressive. Shareholders’ funds of Nigerian banks have reportedly surged to about N27 trillion following the recapitalization exercise. The top five banks now have balance sheets estimated at more than N164 trillion. Tier 1 banks collectively generated trillions in profits in the first quarter of 2026 alone, while sectoral recapitalization exercises raised over N4.56 trillion.

Usually, these numbers will provide confidence about the future of the economy. Stronger banks are thought to lead to stronger businesses, more jobs, industrial expansion and broader economic opportunities. But Nigeria’s experience proves otherwise.

Instead of functioning as engines of productive growth, banks have increasingly become custodians of liquidity trapped within the financial system itself. That’s the real danger.

Even when banking liquidity increased sharply, lending to the productive economy remained weak and limited. Reports show that banks deposited N24.13 trillion with the CBN, while increasing investments in government securities and treasury bills because this is safer, more profitable and less risky than lending to businesses operating in Nigeria’s harsh economic climate. This fact presents a dangerous contradiction.

Developing countries in dire need of industrialization, manufacturing growth, infrastructure expansion and job creation cannot afford a banking system that prioritizes financial security over productive economic risks.

A sustainable economy cannot develop if the real sector lacks funds. But this is where Nigeria now stands.

Although there is enormous liquidity in the banking system, growth in loans to the private sector still lags behind the pace of liquidity expansion. The implications are clear. Financial sector strength no longer translates into real economic development. This is not how a healthy economy works.

Typically, banks in developing countries are expected to function as catalysts for economic transformation. In economically successful countries, commercial banks finance the manufacturing, agriculture, innovation, infrastructure and entrepreneurship sectors because these sectors generate employment, productivity and national wealth.

Small and Medium Enterprises (SMEs), in particular, are globally recognized as the backbone of grassroots economic development. Nigeria is no exception.

SMEs account for more than 70 percent of registered businesses, account for almost half of Nigeria’s GDP and generate between 84 and 90 percent of employment opportunities. Despite the importance of these loans, SMEs reportedly receive only around 0.5 to one percent of total commercial bank loans. This is not just a policy failure. This is an economic tragedy.

Every rejection of an SME loan is a rejection of a job opportunity. Every failed business represents another frustrated entrepreneur. Every frustrated businessman will be a Nigerian thinking about migration.

This is how economic dysfunction turns into human displacement. The phenomenon called “Japa” did not appear out of thin air. This is closely related to economic despair. When productive citizens lose confidence in their country’s economic future, migration ceases to be a lifestyle choice and becomes a survival mechanism.

Unbeknownst to policymakers, Nigeria could not realistically build a $1 trillion economy while productive sectors remained financially constrained.

A closer look at the trend of events helps reveal that these dangers become more acute when viewed against the backdrop of the recent outcome of the 305th Monetary Policy Committee (MPC) meeting, where the CBN maintained the Monetary Policy Rate (MPR) at 26.5 percent in its efforts to maintain disinflation and macroeconomic stability.

It can be understood and confirmed that controlling inflation is important, but in fact, at 15.69 percent, inflation is still very high and continues to weaken purchasing power. Food prices still remain high. Transportation costs are still unbearable. Consumer demand weakens. The middle class is shrinking rapidly.

But maintaining high interest rates also has painful consequences. Simple arithmetic tells us that higher interest rates mean higher borrowing costs. Higher borrowing costs mean higher production costs. Higher production costs exacerbate inflationary pressures and weaken business survival rates.

It also shows that for manufacturers and companies in Nigeria struggling with a weak naira, volatile currency exchange rates, expensive diesel prices, energy insecurity and declining consumer demand, access to affordable credit has become almost impossible.

Many companies no longer borrow money to expand production or hire workers. They borrow just to survive. This is economic suffocation.

Meanwhile, banks continued to earn huge profits from government securities and high-yielding financial investments. Reports show that big banks in Nigeria generated more than N6.68 trillion from investment securities and government bonds rather than financing productive companies capable of stimulating growth and employment.

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The government’s interest in borrowing shows no signs of slowing. Public borrowing reportedly rose above N39 trillion. Historically, excessive government borrowing has discouraged private sector investment because banks naturally preferred to lend to the government rather than expose themselves to the risks associated with businesses operating in an unstable economy.

The results are predictable. The real sector weakened while speculative and non-productive financial activities flourished. This explains why Nigeria increasingly resembles a financial system disconnected from the realities of ordinary people.

As banks celebrated increasing profits, poverty and hunger worsened across the country. Unemployment continues to rise. Small businesses die quietly. Household purchasing power collapsed due to inflationary pressures.

But the financial system appears more liquid than before. This contradiction should worry policymakers. The recapitalization exercise itself now raises difficult questions.

What is the real purpose of stronger banks if stronger banks do not strengthen national productivity?

If recapitalization only empowers banks to deepen investment in government debt instruments while producers, farmers, exporters and SMEs still lack affordable credit, then this recapitalization exercise risks being financially impressive but economically empty.

Indeed, current monetary conditions appear to reward financial conservatism over productive risk-taking.

Tight Cash Reserve Requirements (CRR), rising interest rates, and broader macroeconomic uncertainty continue to hinder aggressive lending to the private sector. It’s understandable that banks are looking for security. But countries did not industrialize through excessive financial prudence.

No economy thrives when capital circulates primarily in treasury bills and government securities, rather than flowing into manufacturing, agriculture, logistics, housing, innovation, and production.

This is the greatest danger facing Nigeria today. Economic crises rarely start with recession statistics alone. Sometimes, this begins when financial institutions become detached from the reality of the broader economy’s suffering. This began when growth occurred only on bank balance sheets but disappeared in households, factories and streets.

Without productive credit expansion, economic growth becomes artificial and exclusive. Without affordable financing, businesses cannot grow. Without business expansion, jobs will not appear. It is also important to remember that without jobs, insecurity, poverty and migration will inevitably worsen. The implications for social stability are enormous.

One of the sad facts is that a society already burdened by inflation, debt pressures and widespread distrust now faces a system in which economic opportunities continue to shrink despite the apparent prosperity of the financial sector. One of the lurking dangers is that this will deepen resentment, weaken trust in institutions and threaten long-term economic cohesion.

The CBN’s fight against inflation may be necessary, but monetary stability alone cannot replace productive economic expansion. Financial stability without inclusive growth is ultimately unsustainable.

The real economy is more important than banking optics. Nigeria urgently needs policies that incentivize real sector lending, reduce structural risks facing producers and SMEs, strengthen credit infrastructure, lower production constraints and direct liquidity to productive economic activities.

In fact, it is time for Nigeria to start rethinking the growing reliance on debt-based fiscal management that continues to discourage private investment. Development cannot occur when government loans drain the financial oxygen that the business world needs.

Ultimately, banking profitability should not be an isolated island of prosperity surrounded by a struggling productive economy.

A country cannot celebrate banking profits worth trillions of naira while millions of its citizens sink further into economic despair. No society can afford to sustain such contradictions indefinitely.

If Nigeria truly hopes to build a resilient and inclusive economy, then the banking sector must once again become a vehicle of national development and not simply a beneficiary of government debt and monetary tightening.

Otherwise, the country risks creating a paradoxical economy where banks get richer while society gets poorer and financial prosperity exists only on paper while economic hardship dictates daily life.

By: Blaise Udunze