CBN orders banks to conduct stress test from April
Central Bank of Nigeria Directs Stress Testing of Banking Portfolios
By Babajide Komolafe
The Central Bank of Nigeria (CBN) has mandated banks to carry out extensive stress testing on their credit portfolios starting April 1, 2026. This initiative is part of ongoing efforts to ensure the stability of the country’s banking system.
A source at the CBN confirmed that the directive was communicated via a confidential letter to the Chief Executive Officers of various banks. The instruction is intended to enhance regulatory oversight and strengthen the resilience of the financial sector.
This directive aligns with the provisions of Sections 13 and 63 of the Banks and Other Financial Institutions Act 2020, which allows the CBN to require banks to maintain adequate capital to mitigate risks related to their operations.
In the letter, the CBN emphasized adherence to previously issued guidelines on stress testing for Nigerian banks, originally released in March 2019. Banks will be tasked with assessing the robustness of their loan portfolios over a 12-month period using simulated adverse conditions.
The CBN’s guidance specifies that banks should evaluate the impacts of deteriorating asset quality, governance risks, and significant changes in market dynamics, including fluctuations in commodity prices and exchange rates. The exercise aims to gauge the potential effects on banks’ Non-Performing Loans (NPLs), loan loss provisions, and Capital Adequacy Ratios (CAR).
Methodologically, banks are required to apply the stress test to all credit exposures, covering both on-balance sheet and off-balance sheet items, including exposures related to directors and insiders. The CBN instructed banks to assume a gradual migration of exposures to higher risk classifications, following prudential guidelines established in July 2020.
As part of the process, banks must establish a baseline for their assessments. If a bank’s financial returns indicate a decline in specific exposures at the time of testing, those values will be utilized as the baseline figures.
The CBN further outlined that banks’ credit portfolios should be classified as performing, watchlist, substandard, doubtful, or lost, while baseline assessments must include exposure at default, current provisioning levels, collateral values, and risk-weighted positions.
The primary stress scenario should consider a steady decline in the credit portfolio over the year. For sectors exhibiting signs of weakness, additional provisioning will be required. Specifically, where industry dynamics suggest possible deterioration, banks must stress those exposures further and apply an additional 10 percent provisioning.
Regarding insider-related loans, the CBN specified that these should be treated under severe stress assumptions, with all such exposures presumed to be in default and fully provided for in stress scenarios.
After the stress tests are conducted, banks are obligated to disclose the findings, specifically their pre-stress CAR, post-stress CAR, and any capital shortfalls. The CBN noted that banks with reported capital shortfalls will need to raise 100% of the identified shortfall or 50% based on the CBN’s stress analysis—whichever is greater—within 18 months.
This adjusted capital requirement will remain in effect until the next stress testing cycle, which will occur six months following the capital raise deadline. For banks that do not experience capital shortfalls, a 12-month cycle of stress testing will continue.
The CBN has set a deadline for banks to submit their board-approved stress-testing reports by the close of business on April 30.
