Explainer: What Cardoso’s banking reforms have changed in one year

One year into Olayemi Cardoso’s drive to strengthen Nigeria’s banking system, the Central Bank of Nigeria (CBN) says its reforms have reshaped how banks are supervised, managed risks and prepared for future shocks. The measures, outlined in the apex bank’s latest Annual Report, show a shift from reacting to banking problems to identifying vulnerabilities before they threaten financial stability.

At the heart of the reforms is a risk-based supervisory framework that places greater emphasis on prevention. Rather than relying solely on routine compliance checks, the CBN intensified both offsite surveillance of banks’ financial returns and onsite examinations, including special investigations, to detect emerging risks early. The approach, backed by the CBN Act 2007 and the Banks and Other Financial Institutions Act (BOFIA) 2020, is aimed at ensuring the banking industry remains safe, sound and resilient.

One of the most significant policy changes during the period was the increase in the minimum capital requirement for banks, a move intended to strengthen lenders’ capacity to absorb losses and support larger financing needs in the economy. The CBN also standardised reporting requirements for foreign currency exposures, adjusted the Cash Reserve Requirement framework and applicable rates, and reduced the minimum Loan-to-Deposit Ratio requirement as part of broader efforts to improve risk management and banking sector stability.

The reforms were accompanied by more rigorous stress testing of the banking industry. The CBN conducted top-down stress tests on 34 commercial and merchant banks to assess their ability to withstand adverse economic conditions. The findings showed that the industry remained resilient under mild and moderate stress scenarios but would become vulnerable if subjected to severe and prolonged economic shocks.

One area examined was liquidity, or banks’ ability to meet customers’ withdrawal demands. The tests showed that the industry’s liquidity ratio would decline to 40.31 percent from a baseline of 60.27 percent under stress but would still remain above the regulatory minimum of 30.00 percent. However, the CBN found that under prolonged withdrawal pressure, equivalent to a four-day bank run, the liquidity ratio could fall to 25.73 percent, below the prudential threshold. While this suggests banks currently maintain adequate liquidity buffers, the results also indicate that those buffers could weaken significantly under an extreme crisis.

The regulator also assessed whether banks had sufficient capital to withstand rising loan defaults. Its credit default stress tests found that the industry’s Capital Adequacy Ratio (CAR) remained above the regulatory minimum under moderate increases in non-performing loans. However, under a severe scenario in which bad loans rose to 50 percent, the industry’s capital ratio would fall below the required threshold, reinforcing the rationale behind the recapitalisation programme and the need for stronger capital planning.

Beyond credit risk, the CBN tested how banks would respond to a combination of credit, interest rate and exchange rate shocks. The results showed that while liquidity remained broadly resilient, solvency came under pressure across mild, moderate and severe scenarios because the industry’s capital adequacy ratio stood at a relatively fragile 12.35 percent. Liquidity ratios remained comfortably above regulatory requirements even under severe simulations, highlighting the sector’s ability to continue financial intermediation despite market disruptions.

The report also identified structural risks that continue to shape the industry’s resilience. Credit concentration remains a major concern, with oil and gas accounting for 26.68 percent of total banking sector lending, making it the single largest exposure. The sector is followed by other industries at 21.18 percent, finance and insurance at 12.83 percent, manufacturing at 11.44 percent, general commerce at 8.31 percent, general lending at 7.55 percent, agriculture at 6.39 percent and government at 5.61 percent. Such concentration means that a significant downturn in the oil and gas sector could have wider implications for bank asset quality.

Another notable addition to the CBN’s supervisory framework is climate-risk assessment. For the first time, the apex bank evaluated the potential impact of environmental events such as floods, droughts and wildfires, as well as transition risks associated with the shift to greener technologies and lower carbon emissions. The exercise found that while banks remain operationally sound, climate-related shocks could weaken their solvency positions to varying degrees, underscoring the need to integrate climate risk into governance, capital planning and supervision.

The report also showed progress in reducing contagion risk within the financial system. Total interbank exposures declined sharply to N709.06 billion in 2025 from N2.05 trillion a year earlier, indicating lower interconnectedness among banks and reducing the likelihood that distress at one institution could spread across the system. Although interbank activities remain concentrated, with 10 banks accounting for 96.46 percent of placements and eight banks responsible for 94.10 percent of borrowings, the CBN noted that all placements were fully collateralised, limiting potential spillover risks.

The Cardoso-led reforms also extended to non-interest banking. During the year, the CBN strengthened Nigeria’s Islamic finance ecosystem by deepening engagement with international institutions such as the International Islamic Liquidity Management (IILM) Corporation and the Islamic Financial Services Board (IFSB). A key milestone was the signing of a Memorandum of Understanding between the IILM and Jaiz Bank Plc, making the bank a primary dealer in IILM instruments and giving it access to high-quality Shari’ah-compliant international liquidity management tools. The initiative is expected to improve liquidity management within the non-interest banking segment and deepen the industry’s resilience.

Taken together, the report suggests that Cardoso’s first year of banking reforms has focused on strengthening the foundations of financial stability rather than responding to immediate crises. Through tighter supervision, stronger capital requirements, enhanced stress testing, improved foreign exchange risk monitoring and the incorporation of climate risk into regulatory oversight, the CBN is seeking to build a banking system that is better equipped to withstand future economic shocks.

As Cardoso noted, the objective extends beyond financial regulation. “The Central Bank of Nigeria is committed to achieving monetary and price stability. This is not just a technical objective, but it has real-life implications for the well-being of our citizens. Through targeted policies, transparent market operations, and coordination between monetary and fiscal authorities, we can ensure a more stable exchange rate, control inflation, and create an enabling environment for businesses and individuals to thrive.”