Fitch warns climate risks threaten Nigerian banks’ credit quality

Fitch Ratings has warned that Nigerian banks face significant climate-related risks due to the country’s dependence on hydrocarbons and agriculture.

Nigerian banks are increasingly exposed to climate-related risks that could materially affect their credit profiles and asset quality over the coming decades, according to a new report by Fitch Ratings. In the report titled “African Banks Have Structural Exposure to Climate Risk; Credit Implications Evolving,” Fitch said that while the immediate impact of climate risks on African lenders remains manageable, both transition and physical risks are expected to intensify over time.

According to Fitch, Nigeria’s dependence on hydrocarbons and agriculture leaves its banking sector particularly vulnerable to climate-related shocks. The agency noted that 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.

“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 stated.

The rating agency warned that as international climate commitments become more stringent, some carbon-intensive industries may experience declining profitability, while 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. According to Fitch, these developments could weaken borrowers’ repayment capacity, reduce collateral values and lead to higher credit losses across the banking sector.

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 that they could increase operating costs for businesses in affected sectors, with potential knock-on effects on banks through weaker credit performance among borrowers.

Although transition risks remain the dominant concern in the near term, Fitch expects physical climate risks 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, the indirect effects could be substantial. Fitch noted that climate shocks may weaken household incomes, reduce corporate profitability and increase macroeconomic volatility, all of which could translate 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.

This echoes the 2016 banking crisis, when Nigerian banks were hit by a combination of oil price collapse, currency devaluation and rising non-performing loans. The mechanism then was different, but the result was the same: banks exposed to sectors they could not control faced existential threats.

The winners: banks that proactively adapt by integrating climate considerations into risk management frameworks, diversifying sector exposures and engaging customers on low-carbon transition strategies. The losers: banks that remain exposed to carbon-intensive industries and Nigerian borrowers who may find it harder to obtain credit as banks tighten lending standards.

Bottom Line: Nigerian banks are exposed to climate risks they cannot control. The question is whether they will adapt or wait for the crisis to arrive.