I have noted that the voyage of Nigeria’s large companies to commercial papers should be considered a huge risk vector in our financial system. I have explained that just a few years ago, commercial papers were not important enough to be explained in most O’Level economics textbooks in Nigeria. But in the last decade, commercial papers have assumed unusual positioning in the nation.

Commercial paper is a short-term, unsecured promissory note issued by corporations, typically used to finance short-term liabilities like payroll and accounts payable. It’s a way for companies to raise money quickly and efficiently, especially for operating needs. 

The apex bank seems to have noticed: “Fresh concerns are emerging over credit risk in Nigeria’s lending market as the Central Bank of Nigeria (CBN) reveals a sharp uptick in loan defaults by large private non-financial corporations (PNFCs) and other financial corporations (OFCs). This is despite an overall improvement in loan performance across smaller business segments and households, and against the backdrop of the Nigerian financial industry preferring big corporates.“

Yes, the small businesses are taking care of their bills while the big companies are not doing well. But of course, big companies have a dump called AMCON where they can exit those loans (sure, things have changed). But here is the deal: I am not overly worried about a sovereign debt-induced paralysis in Nigeria as oil is still flowing, my challenge is that corporate debts can rattle the nation.

So, it is very refreshing that the Central Bank of Nigeria is looking at corporate debt risks now and the exposures the banks have in their books. That said, why do companies need to borrow this way, turning short-term loans into long-term ones? Maybe capital is not flowing easily into the nation due to the gyrating nature of the Naira. And that means fixing this debt matter must also include stabilizing the currency.

Fresh concerns are emerging over credit risk in Nigeria’s lending market as the Central Bank of Nigeria (CBN) reveals a sharp uptick in loan defaults by large private non-financial corporations (PNFCs) and other financial corporations (OFCs).

This is despite an overall improvement in loan performance across smaller business segments and households, and against the backdrop of the Nigerian financial industry preferring big corporates. Last week, the African Development Bank (AfDB) President, Akinwumi Adesina, accused the Nigerian financial industry of operating on outdated risk models and rigid credit structures that deny SMEs and young entrepreneurs funding, focusing on big corporates.

The apex bank’s Credit Conditions Survey Report for the first quarter of 2025, released this week, showed that large corporates and financial institutions recorded negative default index scores of -0.6 each—a reversal from the relatively strong repayment behavior seen in previous quarters. The default index, which reflects the net balance of lender responses, signals worsening conditions when it falls below zero.

For most of 2024, large PNFCs and OFCs had shown steady improvement. In the final quarter of that year, large corporates had posted a positive default index of 4.3, following 4.9 in Q3. OFCs had performed even better, returning default scores of 5.0 and 6.8 in the same periods. But the first three months of 2025 saw that progress unravel, pointing to renewed pressure on these borrowers’ debt-servicing capabilities.

In contrast, smaller firms appear to be stabilizing. Small businesses posted a modest but positive default index of 0.5—albeit a drop from 9.0 in Q4 2024. Medium-sized PNFCs also maintained positive momentum, with their score settling at 3.0. According to the report, lenders are observing stronger repayment behaviors in these categories, a development linked to tighter underwriting practices and improving cash flows in the SME space.

The CBN’s findings also reveal continued gains in household loan performance. Secured household loans recorded a default index of 3.9, while unsecured personal loans climbed to 5.0, reflecting a sustained rebound from the troubling levels of 2022 and early 2023 when consumer defaults had posed a major threat to lender balance sheets.

This improvement in household repayment behavior coincides with rising demand for personal credit, particularly overdrafts and personal loans, though appetite for mortgage and credit card lending appears to have waned in Q1 2025. Lenders, however, are not responding with blanket approval; the data shows a more cautious stance, with tightening of credit scoring criteria across most lending categories.

The broader credit environment remains dynamic. Demand for credit increased during the quarter, especially for corporate and secured lending, driven largely by working capital needs and inventory financing. But lenders are becoming more selective. Loan approvals rose for secured and corporate borrowers, while falling for unsecured loans, suggesting a tightening of risk tolerance even amid higher borrowing interest.

There’s also been a noticeable shift in loan pricing. Lenders widened the spread over the Monetary Policy Rate (MPR) for both secured and unsecured household loans, indicating tighter risk pricing. Corporate loans followed a similar pattern, with wider spreads reported—except in the case of OFCs. Curiously, spreads narrowed for these financial firms, even as their default rates worsened.

Some analysts believe this divergence may reflect lenders’ expectations that OFCs could receive liquidity support or government intervention. Others suggest it may be an attempt to keep key financial players afloat to avoid broader systemic implications. Either way, the move has sparked questions about the rationale behind such pricing flexibility for borrowers who are increasingly showing signs of stress.

The implication of rising defaults among large borrowers is significant. These entities typically account for a sizable portion of total commercial credit exposure, and any deterioration in their performance can have ripple effects throughout the financial sector. The CBN report, while noting that it does not represent the Bank’s official policy position, warns that worsening conditions in this segment could lead to higher loan loss provisioning, reduced appetite for large-ticket lending, and a potential tightening of credit policy in the coming months.

For now, the more resilient performance of SMEs and households offers some buffer. However, the strain at the top of the lending market points to vulnerabilities that could test the banking sector’s risk management capacity amid ongoing macroeconomic uncertainty.

Bank executives and financial analysts say this development is not entirely surprising. They cite inflationary pressures, currency volatility, and weak consumer demand as factors that continue to erode profit margins for large firms, making it harder to meet loan obligations. With tighter monetary policy driving up interest rates and increasing the cost of capital, the pressure is mounting on firms that previously enjoyed more favorable credit conditions.

U.S. Securities and Exchange Commission announced on April 4, 2025, that certain stablecoins, specifically those referred to as “covered stablecoins” like USD Coin (USDC) and Tether (USDT), are not classified as securities under federal securities laws. This clarification came from the SEC’s Division of Corporation Finance, stating that these stablecoins—designed to maintain a 1:1 peg with the U.S. dollar, fully backed by low-risk, liquid reserves, and redeemable on demand—do not meet the definition of a security. As a result, transactions involving the minting or redeeming of these stablecoins do not require registration with the SEC.

However, the announcement has nuances. The SEC’s guidance applies strictly to stablecoins meeting specific criteria, such as being backed solely by USD or high-quality liquid assets, with no interest or profit promised to holders. Some sources suggest Tether’s USDT may not fully align with these standards due to its reserve composition, which includes assets like commercial paper, bitcoin, and gold, potentially complicating its status under the SEC’s framework. Commissioner Caroline Crenshaw dissented, arguing the guidance oversimplifies risks, particularly for retail investors relying on intermediaries, and may misrepresent the market’s stability.

This move reduces regulatory uncertainty for issuers like Circle (USDC) and potentially Tether, fostering innovation in payments and DeFi. Still, it’s a staff statement, not a binding rule, leaving room for future adjustments. Stablecoins remain subject to other regulations, like anti-money laundering rules from FinCEN. The crypto community largely welcomed the clarity, though debates persist about long-term implications and Tether’s compliance.

Companies like Circle (USDC) gain confidence to operate without SEC registration, reducing compliance costs and legal risks. Tether’s status is less clear due to its reserve mix, which may not fully meet the SEC’s “covered stablecoin” criteria. Clearer rules could boost adoption in payments, DeFi, and cross-border transactions, as businesses and developers face less uncertainty.

Exempting stablecoins from securities laws may encourage innovation and investment in USD-pegged assets, strengthening their role in crypto ecosystems. If USDT doesn’t fully qualify, it could face scrutiny or lose market share to compliant stablecoins like USDC. Without securities oversight, retail investors may face risks from intermediary failures (e.g., exchanges), as highlighted by Commissioner Crenshaw’s dissent. Non-qualifying stablecoins with riskier reserves could mislead users about stability.

Stablecoins still face oversight from FinCEN, CFTC, or state regulators, meaning compliance burdens persist. The SEC’s guidance is non-binding, so policy changes could reintroduce uncertainty. Stablecoins are DeFi’s backbone. Clarity could accelerate decentralized app development and liquidity. U.S. policy may influence other jurisdictions, potentially harmonizing stablecoin rules or creating competitive regulatory frameworks. Only specific stablecoins qualify, leaving algorithmic or crypto-backed ones in limbo. Challenges to the SEC’s stance could arise, especially if market disruptions expose flaws in the guidance. Overall, the decision fosters short-term growth but leaves gaps in investor protection and long-term regulatory certainty.

Stablecoins are a core component of DeFi, used in trading pairs, lending, and yield farming. Regulatory clarity for USDC (and possibly USDT) encourages their integration, boosting liquidity pools on platforms like Uniswap, Aave, or Curve. More users and developers may participate, knowing major stablecoins face less SEC scrutiny, driving higher transaction volumes.

DeFi protocols can build new financial products—like lending markets, derivatives, or synthetic assets—using stablecoins without fear of securities law violations. This fosters experimentation and novel use cases. Startups and developers gain confidence to launch stablecoin-based projects, potentially attracting venture capital and talent. Without SEC registration requirements, stablecoin issuers like Circle avoid hefty compliance costs, which could translate to lower fees or better services for DeFi users.

DeFi platforms integrating these stablecoins face fewer legal risks, reducing operational overhead and barriers to entry. Clarity makes stablecoins more appealing for institutional players entering DeFi, bridging traditional finance and crypto. This could lead to larger capital inflows into DeFi protocols. Retail users may feel safer using DeFi apps with SEC-endorsed stablecoins, expanding the user base.

If USDT doesn’t fully qualify as a “covered stablecoin” due to its reserve composition, DeFi protocols heavily reliant on it (a dominant stablecoin) could face disruptions or need to pivot to alternatives like USDC. SEC-compliant stablecoins are often centralized (e.g., Circle controls USDC). Overreliance may undermine DeFi’s decentralized ethos, creating points of failure if issuers face issues. Without securities oversight, DeFi users bear more responsibility for risks like smart contract bugs or intermediary failures, potentially leading to losses in volatile markets.

U.S. regulatory clarity could set a precedent, encouraging other jurisdictions to define stablecoin rules. Harmonized standards would ease cross-border DeFi operations, while conflicting rules could fragment markets. DeFi protocols may prioritize SEC-compliant stablecoins to attract global users, reshaping tokenomics and platform design. The SEC’s stance fuels DeFi growth by enhancing liquidity, innovation, and adoption while reducing costs. However, it introduces risks tied to stablecoin centralization, Tether’s uncertain status, and unaddressed investor protections, which could shape DeFi’s evolution.