The Central Bank of Nigeria (CBN) has issued a directive to all commercial banks to commence comprehensive stress tests on their credit portfolios from April 1, 2026. This regulatory measure is part of the apex bank's ongoing efforts to fortify the stability and resilience of Nigeria's banking system.

The instruction, which forms part of routine regulatory oversight, is grounded in Sections 13 and 63 of the Banks and Other Financial Institutions Act 2020. These sections empower the CBN to mandate that banks maintain capital levels sufficient to cover operational risks. The directive complements the CBN's existing 'Guideline on Stress Testing for Nigerian Banks' issued in March 2019.

Banks are required to evaluate the robustness of their loan portfolios over a 12-month horizon by simulating scenarios that include deteriorating asset quality, governance risks, and significant shifts in industry dynamics. These simulated adverse conditions may encompass a fall in commodity prices, foreign exchange rate movements, and structural changes in obligor operating market dynamics, such as supply chain disruptions or contracting demand. The exercise aims to quantify the potential impact of these adverse events on banks' Non-Performing Loans (NPLs), loan loss provisions, and Capital Adequacy Ratio (CAR).

In terms of methodology, the stress test is to be applied to all credit exposures, both on-balance sheet and off-balance sheet. This includes director and insider-related exposures. Banks are to assume a staged migration of exposures to the next risk classification, adhering to prudential guidelines established in July 2020. A baseline for the exercise must be established, with FinA returns indicating deterioration in specific exposures as at the stress testing date to be adopted as the baseline amount and performance status.

The baseline position for each bank must include the classification of its credit portfolio across performing, watchlist (specialized loans), substandard, doubtful, and lost categories. It will also encompass exposure at default, current provisioning levels, collateral value, and risk-weighted position. The primary stress scenario is designed to model a progressive deterioration of the credit portfolio over the 12-month period.

Exposures within sectors exhibiting signs of weakening will necessitate additional provisioning. The CBN stated that where potential deterioration in industry dynamics is observed, exposures shall be further stressed with at least an additional 10 percent provisioning applied. Significantly, all director/insider-related credits are to be treated under a severe stress assumption, considered to be in default, and fully provided for within the banks' stress scenarios to address governance and insider-related risks.

Following the completion of the stress tests, banks must report the impact on their capital positions, specifically detailing their pre-stress CAR, post-stress CAR, and any capital shortfall. The regulator has stipulated that banks will be required to raise 100% of their reported stressed capital shortfall or 50% of the shortfall computed from the CBN's stress analysis of the banks, whichever is higher, within an 18-month period. Once communicated, this raised capital level will serve as the bank's risk-based capital requirement until the next stress testing cycle.

For banks that do not report a capital shortfall, a standard 12-month stress testing cycle will apply. All lenders are mandated to submit their board-approved stress-testing reports to the CBN by the close of business on April 30, 2026.