Nigerian Banks Face Intensifying Climate Risks
Nigerian banks are increasingly exposed to climate-related risks that could materially affect their credit profiles and asset quality over the coming decades. This warning comes from a new report by Fitch Ratings, titled “African Banks Have Structural Exposure to Climate Risk; Credit Implications Evolving.”
While the immediate impact of climate risks on African lenders remains manageable, both transition and physical risks are expected to intensify over time. This will create significant challenges for banking systems across the continent.
According to Fitch, Nigeria’s dependence on hydrocarbons and agriculture leaves its banking sector particularly vulnerable to climate-related shocks. A substantial portion of Nigerian banks’ loan books is concentrated in sectors that could be adversely affected by global decarbonisation policies, technological shifts, and changing investor preferences.
Fitch stated that “Oil and gas, mining, and heavy industry remain central to economic activity in several countries, with Nigerian banks among the most exposed due to the country’s reliance on hydrocarbons and agriculture.”
Transition and Physical Risks Detailed
The rating agency warned that as international climate commitments become more stringent, some carbon-intensive industries may experience declining profitability. Certain assets could become stranded, increasing credit risks for lenders with concentrated exposures.
Agriculture-related borrowers also face growing uncertainty as extreme weather events, including floods and droughts, become more frequent and severe. These developments could weaken borrowers’ repayment capacity, reduce collateral values, and lead to higher credit losses across the banking sector.
Fitch highlighted that African banks generally face elevated transition risks due to their exposure to industries vulnerable to emissions-reduction policies and technological disruption. Although transition risks remain the dominant concern in the near term, physical climate risks are expected to become increasingly significant by 2050.
The agency projects that rising temperatures, flooding, droughts, and other climate-related hazards will weigh on economic growth across Africa, with West Africa identified as one of the most vulnerable regions. For Nigeria, indirect effects could be substantial, as climate shocks may weaken household incomes, reduce corporate profitability, and increase macroeconomic volatility, translating into higher credit risks for banks.
Real estate and agriculture-linked collateral could also lose value over time, leading to higher loan-to-value ratios and increased impairment charges. Using its Climate Vulnerability Signals (Climate.VS) framework, Fitch estimates that Nigeria could record a combined climate-risk score of between 50 and 55 by 2050, placing it alongside countries such as Ghana, Egypt, Kenya, and South Africa in terms of vulnerability.
Regulatory Scrutiny and Opportunities Emerge
Fitch also highlighted the growing regulatory focus on climate-related policies across Africa. Nigeria is currently developing carbon-pricing and carbon-market frameworks as part of broader efforts to support its climate commitments and transition objectives.
While such measures are expected to support sustainability goals, Fitch noted they could increase operating costs for businesses in affected sectors, with potential knock-on effects on banks through weaker credit performance among borrowers.
Despite the risks, opportunities exist for banks that proactively adapt to the evolving landscape. The agency pointed to the growth of green finance, sustainable lending, and climate-focused investment products as potential avenues for diversification and resilience.
Banks should begin integrating climate considerations into risk management frameworks, diversify sector exposures, and engage customers on low-carbon transition strategies. Regulators and stakeholders across Africa are placing greater emphasis on climate-risk management and disclosure.
In Nigeria, the Central Bank of Nigeria has begun developing frameworks aimed at improving climate-risk classification, governance, and transparency within the financial sector. Fitch warned that banks failing to adapt may face reputational risks, reduced investor confidence, and potential funding constraints as global capital increasingly flows toward institutions with stronger sustainability credentials.
Nigeria faces a delicate balancing act between supporting economic growth and advancing its climate commitments. While the country remains heavily dependent on oil and gas revenues and possesses significant natural gas reserves, it has also committed under the Paris Agreement to substantially reduce emissions and work toward net-zero targets over the long term.
Fitch concluded that the transition is likely to be gradual but warned that banks must begin preparing now for the structural changes ahead. Institutions that effectively manage climate risks and capitalize on emerging green finance opportunities are expected to be better positioned to remain resilient and support sustainable economic growth.
Fitch's Previous Warning on $5 Billion TRS
Last month, Fitch Ratings warned that Nigeria’s proposed $5 billion Total Return Swap (TRS) with First Abu Dhabi Bank could obscure sovereign debt risks and complicate any future debt restructuring. This warning was contained in a report titled “Emerging Market Sovereigns’ Use of Total Return Swaps Raises Risks: Balancing Transparency and Recovery Risks Against Financing Flexibility.”
Fitch noted that while Total Return Swaps can provide cheaper financing and diversify funding sources, they also carry significant structural and transparency risks.
