Green transition puts Nigerian banks’ biggest borrowers under pressure, Fitch warns

Nigeria’s banking sector faces growing risks as the global shift toward a low-carbon economy threatens the fortunes of its biggest borrowers in the oil, gas, and agriculture sectors, according to Fitch Ratings.

The global rating agency said Nigerian lenders are among the most exposed in Africa to climate-related risks because a significant share of their loan books is tied to carbon-intensive industries and climate-sensitive sectors that could come under increasing pressure from decarbonisation policies and more frequent extreme weather events.

In a report titled African Banks Have Structural Exposure to Climate Risk: Credit Implications Evolving, Fitch said that while climate risks pose only a limited threat to banks’ credit profiles in the near term, both transition and physical risks are expected to intensify over the coming decades, reshaping asset quality and lending conditions across the continent.

“Nigerian banks are among the most exposed due to the country’s reliance on hydrocarbons and agriculture,” the agency said.

Yes, Nigeria is transitioning into a low-carbon economy. The country has committed to achieving net-zero carbon emissions by 2060. It aims to cut emissions by \(20\%\) to \(47\%\) by 2030. The Nigeria Energy Transition Plan guides this effort across five key areas: power, cooking, transport, industry, and oil and gas.

The warning comes as governments, investors, and financial institutions accelerate efforts to reduce greenhouse gas emissions under global climate commitments, increasing pressure on industries with large carbon footprints.

According to Fitch, stricter climate policies, technological advances, and changing investor preferences could undermine the profitability of oil and gas companies, mining firms, and heavy industries, leaving some assets stranded and making it harder for borrowers to service their debts.

For Nigerian banks, whose lending portfolios remain heavily concentrated in these sectors, the implications could include weaker loan performance, rising non-performing loans, and pressure on earnings.

Agriculture, another major source of bank lending, faces a different but equally significant threat.

Fitch said increasingly frequent floods, droughts, and other extreme weather events could disrupt agricultural production, weaken borrowers’ repayment capacity and reduce the value of farmland and other collateral pledged against loans.

The agency warned that climate-related shocks could eventually translate into higher credit losses across the banking industry as household incomes decline, corporate profitability weakens, and macroeconomic volatility increases.

Beyond direct lending exposures, Fitch noted that climate risks could affect banks through declining collateral values.

Real estate and agriculture-linked assets may lose value over time, pushing up loan-to-value ratios and increasing impairment charges for lenders.

Using its Climate Vulnerability Signals (Climate.VS) framework, Fitch estimates Nigeria will record a combined climate-risk score of between 50 and 55 by 2050, placing it alongside Ghana, Egypt, Kenya, and South Africa among African countries facing elevated climate-related financial risks.

The report also highlights growing regulatory attention to climate-related financial risks.

Nigeria is developing carbon-pricing and carbon-market frameworks as part of its broader climate commitments under the Paris Agreement.

While these initiatives are expected to support the country’s transition to a lower-carbon economy, Fitch said they could increase operating costs for businesses in affected industries, creating additional financial pressure that may eventually filter through to banks.

The agency noted that the Central Bank of Nigeria has begun strengthening climate-risk governance through frameworks designed to improve climate-risk classification, disclosure, and transparency within the financial sector.

Banks that fail to adapt to evolving regulatory and investor expectations could face reputational damage, weaker investor confidence and reduced access to international funding as global capital increasingly favours institutions with stronger environmental credentials.

Despite the risks, Fitch believes the transition also presents new opportunities for lenders.

The agency said demand for green finance, sustainable lending, and climate-related investment products is expected to grow as businesses seek financing for cleaner technologies and climate adaptation projects.

Banks that diversify their sector exposures, integrate climate considerations into risk-management frameworks and support customers through the low-carbon transition are likely to strengthen their long-term resilience.

“Institutions that effectively manage climate risks and capitalise on emerging green finance opportunities are expected to be better positioned to remain resilient and support sustainable economic growth,” Fitch said.

The latest warning follows another report by Fitch last month, in which the agency cautioned that Nigeria’s proposed $5 billion Total Return Swap (TRS) arrangement with First Abu Dhabi Bank could obscure sovereign debt risks and complicate any future debt restructuring.

The agency said that although the financing structure could broaden funding sources and reduce borrowing costs, it also introduces structural and transparency risks that investors should monitor closely.