Amid Volatility: 10 Banks Exposure to Oil & Gas Down 22.2% to N12.2tn

Nigerian banks are significantly de-risking their exposure to the volatile oil and gas sector, with the exposure of 10 major banks declining by 13.4 per cent to N12.22 trillion in the 2025 financial year from N15.7 trillion in 2024, representing an overall 22.2% reduction to N12.2tn. This trend is driven by global market uncertainties, the sector's contribution to non-performing loans (NPLs), and stringent regulatory directives from the Central Bank of Nigeria (CBN). This article explores the legal and regulatory frameworks, including the Banks and Other Financial Institutions Act (BOFIA) 2020, CBN prudential guidelines, and the impact of IFRS 9, that are compelling banks to re-evaluate their lending portfolios and adopt more robust risk management strategies, with significant implications for financial stability and economic diversification.

The Nigerian banking sector is undergoing a significant recalibration of its lending portfolio, particularly concerning its exposure to the oil and gas industry. Recent reports indicate a substantial decline in the aggregate exposure of major Nigerian banks to the sector, reflecting a strategic de-risking in response to persistent global market volatility and domestic economic challenges. This shift is not merely a commercial decision but is deeply intertwined with a complex web of legal and regulatory imperatives designed to bolster financial system stability and mitigate systemic risks.

This development holds profound implications for both the banking industry and the broader Nigerian economy, which remains heavily reliant on hydrocarbon revenues. For legal professionals, understanding the drivers behind this de-risking – from prudential guidelines to accounting standards and new industry legislation – is crucial for advising financial institutions, energy companies, and investors. The reduced appetite for oil and gas financing signals a potential redirection of capital, influencing future investment landscapes and necessitating innovative legal and financial structures.

This article will delve into the statutory and regulatory frameworks governing bank lending in Nigeria, examining how these instruments, alongside international accounting standards, are shaping banks' risk appetites. It will further analyze the practical and legal challenges arising from this de-risking trend, offering insights into its implications for practitioners navigating Nigeria's evolving financial and energy sectors.

The regulatory landscape for Nigerian banks is primarily shaped by the Central Bank of Nigeria (CBN) Act 2007 and the Banks and Other Financial Institutions Act (BOFIA) 2020. The CBN Act establishes the apex bank's authority over monetary and financial policies, including promoting a sound financial system in Nigeria. BOFIA 2020, which repealed its 1991 predecessor, significantly enhanced the CBN's regulatory and supervisory powers, incorporating international best practices and addressing contemporary financial challenges.

Central to the CBN's oversight are its prudential guidelines, which mandate robust risk management frameworks for banks, covering credit, market, and operational risks. These guidelines impose strict limits on exposure, such as the stipulation that a bank's total outstanding exposure to any single obligor or group of related borrowers shall not exceed 20% of the bank's shareholders' fund unimpaired by losses. Furthermore, the CBN has historically used tools like the Loan-to-Deposit Ratio (LDR) to influence lending, adjusting it from a minimum of 60% to 65%, and more recently reducing it to 50% in April 2024, to manage liquidity and encourage lending to the real sector.

Another critical factor is the adoption of International Financial Reporting Standard 9 (IFRS 9) in 2018. IFRS 9 replaced the incurred loss model with a forward-looking Expected Credit Loss (ECL) model, requiring banks to provision for potential losses earlier. This has led to increased provisioning levels, particularly for 'Stage 2 loans' – those exhibiting a significant increase in credit risk, often including restructured loans to the oil and gas sector. The implementation of IFRS 9 has thus directly impacted banks' profitability and capital adequacy, compelling a more conservative approach to high-risk sectors.

The observed decline in banks' exposure to the oil and gas sector is a direct consequence of the interplay between market dynamics and stringent regulatory enforcement. The sector's historical contribution to Non-Performing Loans (NPLs) has prompted banks to make substantial loan provisions, as mandated by CBN prudential guidelines. This is further exacerbated by the forward-looking provisioning requirements of IFRS 9, which necessitates a proactive assessment of credit risk, making loans to volatile sectors like oil and gas inherently more capital-intensive due to higher expected credit losses.

Recent CBN directives underscore the regulator's commitment to de-risking the financial system. The "Restriction of Banking Services to Non-Performing Large Ticket Obligors" circular, issued in March 2026, explicitly instructs banks to deny additional credit facilities to large obligors with non-performing loans, with sanctions under BOFIA 2020 for non-compliance. This measure directly impacts oil and gas entities with existing distressed facilities. Additionally, the CBN's "Exposure Draft Guidelines on Ring-Fencing Operations of Closely Linked Entities," released in June 2026, aims to limit intra-group exposures and prevent financial distress from spreading across corporate groups, further tightening the lending environment.

The Petroleum Industry Act (PIA) 2021, while designed to reform and attract investment into Nigeria's oil and gas sector, also introduces new fiscal frameworks and regulatory complexities. While it aims to create a more transparent and conducive environment, the initial phases of its implementation, including new taxes and host community development trusts, may present short-term uncertainties for financiers. Banks must now navigate these new legal and fiscal provisions when assessing the viability and risk profile of oil and gas projects, potentially contributing to a cautious lending approach.

From a comparative perspective, the global push towards environmental, social, and governance (ESG) considerations and green financing also influences Nigerian banks. While not yet explicitly codified as primary lending restrictions in Nigeria, these global trends exert market pressure, encouraging banks to diversify away from fossil fuel-intensive sectors and explore opportunities in renewable energy and other sustainable ventures. This external pressure, combined with domestic regulatory tightening, creates a powerful incentive for banks to reduce their oil and gas exposure.

However, a potential gap exists in balancing de-risking with the need for critical investment in the energy sector, especially for indigenous players. While prudential measures are vital for stability, an overly restrictive lending environment could stifle growth and hinder the development of domestic capacity in a sector still crucial to Nigeria's economy. The challenge for the CBN and other policymakers is to foster a stable financial system without inadvertently impeding strategic national development objectives in the energy space.

The significant reduction in Nigerian banks' exposure to the oil and gas sector is a multifaceted development driven by a convergence of global market volatility, domestic economic realities, and a robust, evolving regulatory framework. The Central Bank of Nigeria, through instruments like BOFIA 2020, its prudential guidelines, and recent circulars, is actively steering banks towards more prudent risk management and diversification. The impact of IFRS 9 has further intensified this shift by demanding more rigorous and forward-looking provisioning for credit losses.

For legal practitioners, these trends necessitate a deep understanding of financial regulations, particularly those relating to credit risk, capital adequacy, and sectoral exposure. Advising banking clients requires a comprehensive assessment of compliance with CBN directives, including single obligor limits and restrictions on lending to non-performing large-ticket obligors. For energy sector clients, legal counsel must guide them through the implications of reduced traditional financing options, the complexities of the Petroleum Industry Act 2021, and the increasing importance of alternative funding mechanisms and robust corporate governance to attract investment in a de-risking environment. Practitioners should closely monitor future CBN policy pronouncements, particularly those related to sectoral lending, green finance initiatives, and the ongoing implementation of the PIA, as these will continue to shape the financial landscape for Nigeria’s critical energy sector.