Nigeria’s banking sector has emerged from a sweeping recapitalization drive with stronger buffers and renewed investor interest, but a growing body of evidence suggests the core problem, how credit flows through the economy, remains largely unresolved.

In a pointed policy brief released Sunday, the Centre for the Promotion of Private Enterprise argued that the country’s financial system continues to favor liquidity over productivity, with lending patterns that do little to support industrial growth or job creation.

Signed by its chief executive, Muda Yusuf, the report commended the Central Bank of Nigeria for executing a smooth recapitalization programme. But it cautioned that stronger capital positions, on their own, do not guarantee a more effective banking system.

“Credit with maturity of less than one year accounts for about 55% of total credit, while long-term credit (above three years) accounts for only about 25%,” the CPPE noted. “This structure is not aligned with the financing needs of critical sectors such as manufacturing, agriculture, infrastructure and real estate.”

That mismatch goes to the heart of Nigeria’s development challenge. Long-term capital is essential for building factories, expanding farms, financing housing, and developing infrastructure. Yet the dominance of short-tenor lending means banks are effectively financing working capital and trading activity rather than fixed investment.

The scale of the problem is reflected in aggregate figures. Private sector credit stood at just 17% of GDP in 2025, far below the sub-Saharan African average of 25% and well under the 34% typical of lower-middle-income economies. For a country of Nigeria’s size and ambition, economists say that the gap translates into a significant constraint on growth.

Sectoral allocation reinforces the concern as services account for roughly 55% of total bank lending, while manufacturing receives only 14% and agriculture about 5%. The pattern mirrors the structure of returns in the economy: commerce and financial services offer quicker turnover and lower default risk, while production sectors require patience, scale, and tolerance for volatility.

Small businesses, widely regarded as the backbone of the economy, remain largely excluded. SMEs account for about half of GDP and more than 80% of employment, yet receive barely 1% of total bank credit. In comparable African markets, that figure is closer to 5%.

Consumer credit, often a driver of domestic demand in more mature economies, is also underdeveloped at just 7% of total lending, compared with a regional range of 15% to 25%. The implication is a credit system that is neither fueling production nor significantly supporting consumption at scale.

Behind these patterns lies a set of entrenched structural distortions.

Government borrowing remains a dominant force in the domestic financial market, offering banks relatively high returns with minimal risk. This has created a persistent crowding-out effect, where private sector borrowers struggle to compete for funds.

At the same time, tight monetary policy and elevated interest rates have raised the cost of credit to levels that many businesses, particularly in manufacturing and agriculture, cannot absorb. Even when funds are available, the pricing often makes long-term projects unviable.

Risk perception is another barrier. Banks continue to impose stringent collateral requirements, effectively excluding a large segment of SMEs that lack formal assets despite viable business models. Weak credit infrastructure, including limited credit history data and enforcement challenges, further compounds the problem.

There is also a question of incentives. The current framework rewards short-term lending and trading activities, reinforcing a cycle in which capital circulates within low-risk segments rather than being deployed into transformative investments.

These dynamics persist even as headline indicators point to progress. The CBN governor, Olayemi Cardoso, recently disclosed that 32 banks have met revised minimum capital requirements under the recapitalization programme. Lenders have collectively raised about N4.61 trillion in fresh capital, indicating strong investor appetite and growing foreign participation.

Regulators say the exercise is already strengthening confidence in the sector and enabling Nigerian banks to expand regionally. But CPPE’s analysis suggests that resilience and reach are not the same as effectiveness.

The real test, the think tank argues, is whether banks can intermediate more efficiently—mobilizing savings and directing them into sectors that generate output, employment, and export capacity.

That shift will likely require more than capital. Analysts point to the need for complementary reforms: reducing the government’s domestic borrowing footprint, easing monetary conditions as inflation stabilizes, strengthening credit guarantee schemes, and improving the legal and institutional framework for lending.

There is also a broader strategic question. Nigeria’s push for economic diversification, away from oil and toward manufacturing and agriculture, depends heavily on access to affordable, long-term finance. Without it, industrial policy risks being undermined by a financial system that is structurally misaligned with national priorities.

The picture is currently one of contradiction. Banks are stronger, better capitalized, and more liquid than they have been in years. Yet the flow of credit remains narrow, short-term, and concentrated in sectors that do not drive structural transformation.

Besides CPPE, financial analysts believe that until that changes, the benefits of recapitalization may remain largely confined to balance sheets, rather than the broader economy policymakers are seeking to rebuild.

Foreign investor activity on the Nigerian Exchange Limited showed signs of life in February, but the underlying signal remains one of caution, with capital exits still exceeding inflows despite a notable rebound in participation.

The latest Domestic and Foreign Portfolio Investment Report shows foreign inflows rose sharply by 39.39% to N66.71 billion, suggesting a tentative return of offshore interest after a weak start to the year. Yet that optimism was tempered by a continued rise in outflows, which climbed 9.12% to N72.32 billion, leaving a net outflow of N5.61 billion.

While narrower than January’s N18.42 billion net exit, the February figure extends a pattern that has defined Nigeria’s equities market in recent years: foreign investors are willing to trade, but remain reluctant to stay.

The dual increase in inflows and outflows points to a market driven more by short-term positioning than long-term conviction. Analysts say part of the inflow rebound likely reflects bargain hunting as equity prices adjust, alongside tactical allocations aimed at capturing yield in a high-interest-rate environment. However, the persistence of outflows indicates that many investors continue to take profits quickly or reduce exposure at the first sign of volatility.

In absolute terms, foreign participation is rising, with total transactions increasing 21.81% to N139.03 billion. But in relative terms, its footprint is shrinking. Foreign investors accounted for just 9.01% of total market activity in February, down from 13.24% in January — a reminder that the market’s recent surge has been overwhelmingly domestic in origin.

Total turnover on the exchange jumped 78.93% to N1.542 trillion, driven almost entirely by local investors. Institutional players led with N854.83 billion, while retail participation stood at N548.50 billion. Combined, domestic investors accounted for more than 90% of all transactions, reinforcing their role as the market’s primary source of liquidity.

This dominance has become structural. Over time, Nigeria’s equities market has evolved into one largely sustained by local capital, partly due to recurring bouts of foreign investor retreat triggered by currency instability, inflation, and policy uncertainty. While this has insulated the market from abrupt external shocks, it has also limited the depth and diversity of capital flows.

The year-to-date numbers reinforce that trend. Foreign inflows totaled N114.57 billion in the first two months of 2026, compared with outflows of N138.60 billion, resulting in a net exit of N24.03 billion. Foreign participation accounted for just 10.53% of overall transactions, dwarfed by domestic activity at 89.47%.

Behind these figures lies a familiar set of concerns. Currency risk remains at the forefront. For foreign investors, returns in naira terms can be quickly eroded by exchange rate depreciation, making the timing of entry and exit critical. Questions around liquidity in the foreign exchange market and the ease of repatriating funds continue to weigh on sentiment.

At the same time, elevated inflation and tight monetary conditions complicate the outlook. While higher interest rates can attract yield-seeking capital, they also signal underlying economic stress and can dampen corporate earnings, limiting the appeal of equities.

From the analysts’ perspective, February’s data suggests that some investors are willing to test the waters, but not yet commit fully. The improvement in inflows points to selective confidence, possibly tied to specific sectors or undervalued stocks. However, the continued rise in outflows indicates that broader concerns about macroeconomic stability remain unresolved.

The sharp increase in total market turnover adds another layer to the picture. It is seen as a reflection of strong domestic engagement, but also hints at increased trading activity rather than sustained investment—a dynamic that can amplify volatility if sentiment shifts.

For the market to attract durable foreign capital, analysts say a clearer policy framework will be essential, particularly around exchange rate management and inflation control. Stability in these areas would reduce the risk premium currently attached to Nigerian assets and encourage longer-term allocations.

However, foreign investors appear content to engage opportunistically rather than strategically — stepping in when valuations are compelling, but stepping out just as quickly when risks resurface. Currently, the Nigerian market is thriving on the strength of domestic participation, even as it waits for a more decisive return of foreign capital.