Nigerian banks are particularly vulnerable to climate-related risks as significant portions of their loan portfolios are exposed to oil, gas and agriculture, sectors that will experience profit pressure from global decarbonisation and increasing extreme weather, Fitch Ratings has warned.
The rating agency said banks face increasing climate risk that could impact asset quality and credit profiles in the coming decades.
In a new report titled “African Banks Have Structural Exposure to Climate Risk; Credit Implications Evolving,” Fitch Ratings said that while immediate impact on African lenders is still manageable, both transition and physical risks will increase over time, posing “significant challenges for banking systems across the continent.”
Fitch noted that a key vulnerability is Nigeria’s heavy reliance on hydrocarbons and agriculture.
A sizable chunk of Nigerian banks’ loan books have exposure to sectors that could be impacted by global decarbonization policies, technological transitions and changing investor preferences.
“Oil and gas, mining and heavy industry remain core activities in a number of countries, with Nigerian banks being among the most exposed due to the country’s dependence on hydrocarbons and agriculture,” Fitch said.
The agency cautioned that more stringent international climate commitments could harm the profitability of carbon-intensive industries and render certain assets “stranded,” thereby increasing credit risks for lenders with concentrated exposures.
Agricultural borrowers are also facing increased uncertainty as floods, droughts and other extreme weather events become more frequent and severe.
Fitch said these developments could depress collateral values, impair borrowers’ ability to repay and result in higher credit losses across the banking sector.
The report also highlighted a growing regulatory focus on climate-related policy across Africa. As part of Nigeria’s broader climate commitments, the country is developing carbon-pricing and carbon-market systems.
These measures are in support of sustainability goals but may increase operating costs for businesses in the affected sectors, with potential knock-on effects for banks through weaker borrower performance, Fitch said.
African banks are generally exposed to high transition risks due to their exposure to sectors susceptible to emissions-reduction policies and technological change. Transition risks dominate the near-term outlook, but Fitch expects physical climate risks to rise in prominence by 2050, as higher temperatures, flooding, droughts and other hazards weigh on economic growth.
Fitch listed West Africa as one of the most vulnerable regions and said the indirect effects for Nigeria could be significant.
Climate shocks can depress household incomes, lower corporate profitability and increase macroeconomic volatility, which can lead to higher credit risk for banks.
Collateral related to real estate and agriculture could also decline in value over time, driving up loan-to-value ratios and impairment charges.
“Fitch estimates that Nigeria could score between 50-55 on its Climate Vulnerability Signals (Climate.VS) framework by 2050, placing it in a similar bracket to Ghana, Egypt, Kenya and South Africa,” it said.
“There are risks but also opportunities for banks that act early,” Fitch said. The report pointed to growth in green finance, sustainable lending and climate-focused investment products as potential paths to diversification and resilience.
It recommended that banks embed climate considerations into their risk management frameworks, diversify sector exposures and engage customers on low-carbon transition strategies.
Fitch also cited increasing regulatory scrutiny. The Central Bank of Nigeria has initiated development of frameworks to strengthen climate-risk classification, governance and transparency in the financial sector. Banks that fail to adapt may face reputational damage, reduced investor confidence and funding constraints as global capital shifts towards institutions with stronger sustainability credentials, the agency warned.
Nigeria is walking a fine line between growth and climate commitments. The country, which is a major producer of oil and gas and has huge natural gas reserves, has also committed to cut emissions under the Paris Agreement.
The transition is likely to be gradual, Fitch said, but banks must start preparing now.
“Institutions that can adjust to climate risks and capitalize on emerging green finance opportunities are expected to be better placed to remain resilient and support sustainable economic growth,” the report said.
Recall that last month, Fitch warned that Nigeria’s proposed $5 billion Total Return Swap (TRS) with First Abu Dhabi Bank could hide risks to the sovereign’s debt and complicate future debt restructuring.
While TRSs offer cheaper financing and diversify funding sources, they come with “significant structural and transparency risks,” according to Fitch’s report Emerging Market Sovereigns’ Use of Total Return Swaps Raises Risks: Balancing Transparency and Recovery Risks Against Financing Flexibility.
