Nigeria’s banking sector faces mounting climate-related risks that could materially weaken banks’ credit profiles, impair asset quality, and increase loan losses over the coming decades, with the impact expected to become more pronounced by 2050, according to a new report by Fitch Ratings.
In its latest report, “African Banks Have Structural Exposure to Climate Risk; Credit Implications Evolving,” the global credit rating agency said Nigerian banks rank among the most vulnerable financial institutions in Africa because of their significant lending exposure to the country’s oil and gas and agriculture sectors, both of which are increasingly susceptible to the effects of climate change and the global transition to a low-carbon economy.
Advertisement
Although Fitch noted that the immediate effect of climate-related risks on African banking systems remains manageable, it warned that both transition risks and physical climate risks will intensify over time, creating structural challenges for banks’ balance sheets, profitability, and long-term financial stability.
According to the report, Nigeria’s economic dependence on hydrocarbons and agriculture leaves its banking industry particularly exposed to climate-related shocks.
A substantial share of banks’ loan portfolios is concentrated in carbon-intensive industries that could come under increasing pressure from stricter global emissions regulations, technological disruption, changing investor preferences, and declining demand for fossil fuels.
Advertisement
“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,” Fitch said.
The rating agency warned that as governments and investors accelerate efforts to reduce carbon emissions, some carbon-intensive businesses may experience declining earnings, while others could see assets become stranded, increasing the likelihood of loan defaults and higher credit losses for banks with concentrated sector exposures.
Fitch also identified agriculture as another major source of vulnerability for Nigerian lenders.
The agency said rising incidences of floods, droughts, changing rainfall patterns, and other extreme weather events are likely to undermine agricultural productivity, weaken borrowers’ repayment capacity, and reduce the value of assets pledged as collateral.
Advertisement
According to the report, these developments could lead to higher non-performing loans, lower collateral values, increased impairment charges, and greater pressure on banks’ capital positions over time.
Beyond direct sector exposures, Fitch said climate-related shocks are expected to have broader macroeconomic implications for Nigeria. Weaker household incomes, reduced corporate profitability, slower economic growth, and increased macroeconomic volatility could further erode borrowers’ ability to service debts, worsening credit conditions across the financial system.
The agency projects that physical climate risks, including rising temperatures, flooding, droughts, and other weather-related hazards will become increasingly significant by 2050, particularly in West Africa, which it identified as one of the world’s most climate-vulnerable regions.
Using its proprietary Climate Vulnerability Signals (Climate.VS) framework, Fitch estimates that Nigeria could record a combined climate-risk score of between 50 and 55 by 2050.
Advertisement
This would place the country alongside Ghana, Egypt, Kenya, and South Africa among African economies with elevated exposure to long-term climate risks.
The report also highlighted the evolving regulatory landscape surrounding climate risk management. According to Fitch, governments and financial regulators across Africa are introducing policies aimed at improving climate resilience and supporting the transition to low-carbon economies.
In Nigeria, authorities are developing carbon-pricing and carbon-market frameworks to support the country’s climate commitments under the Paris Agreement and facilitate progress toward long-term net-zero emission targets.
While these initiatives are expected to strengthen environmental sustainability, Fitch cautioned that they could also increase operating costs for businesses operating in emissions-intensive industries, potentially weakening their financial performance and increasing credit risks for banks that finance them.
The agency further noted that the Central Bank of Nigeria (CBN) has begun strengthening regulatory expectations around climate-risk governance, disclosure, and classification within the banking sector. As supervisory requirements evolve, banks will likely face greater scrutiny regarding how they identify, measure, and manage climate-related financial risks.
Fitch warned that institutions that fail to adapt could face reputational damage, reduced investor confidence, and tighter access to funding as international capital increasingly favours financial institutions with stronger environmental, social, and governance (ESG) credentials.
Despite the challenges, the report identified significant opportunities for Nigerian banks willing to reposition their business models. Fitch said growing demand for green finance, sustainable lending, renewable energy financing, and climate-focused investment products could provide new revenue streams while improving long-term resilience.
The agency urged banks to begin integrating climate considerations into enterprise risk management frameworks, diversify sector exposures, strengthen climate-risk assessments, and work closely with customers to support their transition toward lower-carbon business models.
Fitch concluded that while Nigeria’s transition to a low-carbon economy is expected to be gradual, the structural risks associated with climate change are becoming increasingly material.
Banks that proactively manage these risks while expanding sustainable finance activities are expected to be better positioned to preserve asset quality, maintain stronger credit profiles, and support the country’s long-term economic development.