Nigerian banks are especially exposed to climate-related risks as large parts of their loan books are exposed to oil, gas and agriculture, sectors that face profit pressure from global decarbonisation and rising extreme weather, Fitch Ratings has warned.
The rating agency said banks are facing growing climate risk that could affect asset quality and credit profiles in the coming decades.
In a new report titled “African Banks Have Structural Exposure to Climate Risk; Credit Implications Evolving,” Fitch Ratings said that while immediate impact on African lenders is still manageable, both transition and physical risks will increase over time, posing “significant challenges for banking systems across the continent.”
Fitch said a key vulnerability was Nigeria’s heavy dependence on hydrocarbons and agriculture.
A significant chunk of Nigerian banks’ loan books are exposed to sectors which could be hurt by global decarbonization policies, technological transitions and shifting investor preferences.
“Oil and gas, mining and heavy industry remain core activities in a number of countries, with Nigerian banks being among the most exposed due to the country’s dependence on hydrocarbons and agriculture,” Fitch said.
The agency warned tougher international commitments on climate could damage profitability in carbon-intensive industries and leave some assets “stranded” which would raise credit risks for lenders with concentrated exposures.
Agricultural borrowers also are facing more uncertainty as floods, droughts and other extreme weather events become more frequent and more severe.
These developments could impair the ability of borrowers to repay, depress collateral values and result in higher credit losses across the banking sector, said Fitch.
The report also noted an increase in regulatory focus on climate-related policy across Africa. Nigeria is developing carbon-pricing and carbon-market systems as part of its broader climate commitments.
These measures support sustainability goals but could increase operating costs for businesses in the affected sectors, with potential knock-on effects for banks through weaker borrower performance, Fitch said.
African banks are generally vulnerable to high transition risks given their exposure to sectors at risk from emissions-reduction policies and technological change. Transition risks dominate the near-term outlook, but Fitch expects physical climate risks to become more prominent by 2050, as higher temperatures, flooding, droughts and other hazards weigh on economic growth.
West Africa is listed as one of the most vulnerable regions and Fitch said the indirect effects for Nigeria could be significant.
Climate shocks can depress household incomes, lower corporate profitability and increase macroeconomic volatility, which may lead to higher credit risk for banks.
Real estate and agriculture related collateral could also lose value over time, increasing loan-to-value ratios and impairment charges.
“Fitch estimates Nigeria could score between 50-55 on its Climate Vulnerability Signals (Climate.VS) framework by 2050, putting it in a similar bracket to Ghana, Egypt, Kenya and South Africa,” it said.
“There are risks but there are also opportunities for banks that act early,” Fitch said. The report highlighted growth in green finance, sustainable lending and climate-focused investment products as possible avenues to diversification and resilience.
It recommended that banks integrate climate considerations into their risk management frameworks, diversify sector exposures, and engage customers on low-carbon transition strategies.
Fitch also cited increasing regulatory scrutiny. The Central Bank of Nigeria has started working on frameworks to enhance climate-risk classification, governance and transparency in the financial sector. The agency warned that banks that fail to adapt may face reputational damage, reduced investor confidence and funding constraints as global capital shifts towards institutions with stronger sustainability credentials.
Nigeria is walking a fine line between growth and climate commitments. The country, a major producer of oil and gas and possessing vast natural gas reserves, has also pledged to cut emissions under the Paris Agreement.
Fitch said the transition is likely to be gradual but that banks need to start preparing now.
“Institutions that are able to adapt to climate risks and benefit from emerging green finance opportunities are expected to be better positioned to remain resilient and support sustainable economic growth,” the report said.
Recall that last month Fitch warned that Nigeria’s proposed $5 billion Total Return Swap (TRS) with First Abu Dhabi Bank could obscure risks to the sovereign’s debt and make future debt restructuring more difficult.
While TRSs provide cheaper financing and diversify funding sources, they also carry “significant structural and transparency risks,” according to Fitch’s report Emerging Market Sovereigns’ Use of Total Return Swaps Raises Risks: Balancing Transparency and Recovery Risks Against Financing Flexibility.
