How Government borrowing tests Nigeria’s Private-Sector Credit Market

Nigeria's growing reliance on domestic borrowing is straining the private-sector credit market, heightening concerns that the government's ability to offer attractive yields on its securities could limit access to affordable credit for businesses and households. As the Federal Government finances sizable fiscal deficits through the domestic market, Nigerian banks continue to be major buyers of government securities.

The International Monetary Fund (IMF) in its 2026 Article IV assessment highlighted limitations on private-sector credit extension, citing banks' holdings of government securities and tight monetary conditions as contributing factors.

Nigerian banks' holdings of government securities amounted to about 22% of total bank assets, raising questions about whether the additional capital acquired by banks would translate into more lending to businesses or remain invested in government securities. While private-sector credit has shown a marginal increase, it has not surpassed its February 2026 peak of ₦94.61 trillion.

The IMF projects continued growth in private-sector credit at 14.2% in its recent forecast, but the concern lies in whether government borrowing is monopolizing financial resources that could otherwise fuel private investment, particularly long-term lending to manufacturers, SMEs, and infrastructure businesses.

The IMF has noted a correlation between higher bank holdings of sovereign debt and weaker growth in private-sector credit, suggesting a potential crowding-out effect when banks focus more of their balance sheets on government securities. Nigeria's domestic debt market has become increasingly appealing to investors due to elevated yields, with short-term federal government debt offering around 20%, drawing both international investors and domestic banks, pension funds, and insurers.

The consequences are far-reaching. A manufacturer struggling to secure affordable long-term financing may curtail investment, operate below capacity, or depend more on internally generated funds. SMEs might abandon expansion plans, while property or infrastructure projects could become commercially unviable as financing costs rise.

Government entities, at all levels, face substantial expenditure obligations and continue to rely on borrowing to finance budget deficits, with debt-service costs consuming a significant portion of government revenue, thereby increasing the incentive to tap domestic capital markets when foreign financing becomes expensive or constrained.