 has directed banks in the country to conduct a comprehensive stress test on their credit portfolios){kind=link}
The Central Bank of Nigeria (CBN) has directed banks in the country to conduct a comprehensive stress test on their credit portfolios beginning from April 1, 2026, as part of measures to ensure the continued stability of the nation’s banking system.
A source at the apex bank confirmed that the directive was communicated through a letter sent to the Chief Executive Officers of banks, noting that the correspondence was not intended for public circulation.
According to the source, the instruction forms part of routine regulatory oversight aimed at strengthening the resilience of the financial system.
The CBN stated that the directive aligns with the provisions of Sections 13 and 63 of the Banks and Other Financial Institutions Act 2020, which empowers the regulator to require banks to maintain adequate capital to cover risks arising from their operations.
The apex bank stated in the letter: “This is without prejudice to the contents of the CBN ‘Guideline on Stress Testing for Nigerian Banks’ issued in March 2019.”
It explained that banks are required to assess the resilience of their loan portfolios over a 12-month period under simulated adverse economic conditions.
According to the CBN: “Banks are expected to stress the resilience of their credit portfolio over a 12-month period by simulating deterioration in asset quality, governance risk and significant change in industry dynamics such as fall in commodity prices, foreign exchange rate movement, structural shift in obligor operating market dynamics (supply chain disruption, contracting demand, etc.), portfolio variables, among others.”
The regulator noted that the exercise is intended to determine the potential impact of adverse scenarios on banks’ Non-Performing Loans (NPLs), loan loss provisions and their Capital Adequacy Ratio (CAR).
In terms of methodology, the CBN instructed banks to apply the stress test to all credit exposures, both on-balance sheet and off-balance sheet, including director and insider-related exposures. The exercise will assume a staged migration of exposures to higher risk classifications in line with prudential guidelines issued in July 2020.
The apex bank further explained that banks must first establish a baseline for the stress-testing exercise.
It said: “However, where a bank’s FinA returns indicates a deterioration in specific exposures as at stress testing date, these should be adopted as the baseline amount and performance status.”
The regulator added: “In addition to classification of credit portfolio across performing, watchlist (specialized loans), substandard, doubtful and lost, baseline position shall include exposure at default, current provisioning level, collateral value and risk weighted position.”
According to the CBN, the primary stress scenario should assume a progressive deterioration of the credit portfolio over the 12-month period.
The apex bank added that exposures in sectors showing signs of weakening should attract additional provisioning.
The CBN stated: “Where there are signs of potential deterioration in industry dynamics, exposures shall be further stressed and deteriorated with at least an additional 10 percent provisioning applied.”
On insider-related facilities, the regulator said: “Director/Insider-Related Credits: To appropriately address governance and insider-related risks, all insider-related exposures shall be treated under a severe stress assumption and assumed to be in default. These shall be fully provided for in the banks’ stress scenarios.”
After completing the exercise, banks are expected to disclose the impact of the stress test on their capital positions.
According to the CBN: “Following the conclusion of stress testing, banks are expected to report: pre-stress CAR, post-stress CAR, and capital shortfall (if any).”
The apex bank added that banks will be required to raise additional capital where necessary.
“It is pertinent to note that banks shall be required to raise 100% of their reported stressed capital shortfall or 50% of the shortfall computed from CBN stress analysis of the banks (whichever is higher), within an 18-month period,” the regulator stated.
The CBN further explained that once the required capital level is communicated, it will become the bank’s risk-based capital requirement until the next cycle of stress testing, which will take place six months after the completion of the capital-raising exercise.
For banks that do not record any capital shortfall, the CBN stated that a 12-month stress-testing cycle will apply.
The regulator also directed that all lenders must submit the results of their board-approved stress-testing reports on or before the close of business on April 30.