By Blaise Udunze

In a healthy economy, banks serve as the arteries through which capital flows to productive enterprises, creating jobs, stimulating innovation, and driving national prosperity. In Nigeria, however, the reverse has become true as the financial system now thrives not by financing growth, but by funding government deficits. It is an irony where banks grow richer as the economy grows weaker.

Government securities such as FGN Bonds, Treasury Bills, and Open Market Operation (OMO) Bills that were once meant to manage liquidity or finance short-term fiscal gaps have now become the lifeblood of Nigeria’s banking profitability. These instruments are considered risk-free and are backed by the full faith of the federal government. With the Central Bank of Nigeria (CBN) consistently raising interest rates to attract foreign capital and tame inflation, the yields on these securities have remained highly attractive, making them an irresistible refuge for banks seeking easy profits without the burden of lending risks.

The appeal is understandable with guaranteed returns without the uncertainties of default, collateral disputes, or policy instability. In contrast, lending to the private sector, especially manufacturing, agriculture, and SMEs, comes with high default rates, weak collateral frameworks, and volatile market conditions. Facing these odds, banks have turned away from real-sector lending, preferring to feed off the government’s insatiable appetite for domestic borrowing.

Monetary policy has only deepened this pattern. The CBN’s tightening stance, reflected in elevated Monetary Policy Rates (MPR) and Cash Reserve Ratios (CRR), has made commercial lending less attractive. When interest rates rise, so do returns on T-bills and bonds, prompting banks to reallocate capital toward government securities. Moreover, regulatory provisions permit banks to count government securities as part of their liquidity ratio, making the choice both profitable and compliant.

Macroeconomic instability, exchange rate volatility, inflation, and unpredictable fiscal direction further discourage long-term private lending. At the same time, many small and medium enterprises lack the collateral or formal structures required to access loans. Even when eligible, the prohibitive cost of borrowing, often above 27 percent, makes credit commercially unviable.

According to the CBN’s Financial Stability Report (2023), Nigerian banks held over N21 trillion in government securities, which was more than 40 percent of their total assets. Between 2020 and 2024, the Nigerian Economic Summit Group (NESG) observed that banks’ exposure to government instruments grew by 20-25 percent annually, while credit to the real sector expanded by less than 10 percent. The message is clear, revealing that the banking system has become addicted to sovereign debt.

Recent disclosures from the country’s largest banks provide empirical evidence of this troubling trend.

–       UBA’s H1 2025 interim report shows gross earnings of N1.61 trillion, with interest income of N1.33 trillion. Remarkably, N1.29 trillion of that interest income, which is nearly the entire figure, came from investment securities (amortised cost and FVOCI). This means the bank’s earnings were driven overwhelmingly by returns from government instruments rather than productive lending.

– Access Holdings, in its FY 2024 report, noted that improved yields were “supported by higher returns from investment securities and fixed-income trading activities,” confirming that the bulk of its profit growth came from government instruments rather than credit expansion.

–       GTCO’s FY 2024 and H1 2025 statements similarly highlighted higher yields on fixed-income securities and FX revaluation gains as major profit drivers, again underscoring the dominance of non-lending income sources.

–       Zenith Bank’s investor updates for FY 2024 and Q1 2025 openly stated that “deliberate exposure to government securities boosted earnings,” pointing to a strategic shift toward sovereign debt holdings as a core profit engine.

The data reveals a uniform pattern across Nigeria’s banking industry: profits are being driven by government securities and FX-related gains, not by lending that creates jobs or stimulates production. In UBA’s case, interest from securities alone almost matched its total interest income, illustrating how lending has become a marginal activity. Access, Zenith, and GTCO’s disclosures also confirm that 2024 and early 2025 profitability was underpinned by investment securities and trading gains, which is a model that rewards financial inertia rather than developmental impact.

This trend has far-reaching implications. When banks channel funds toward government debt instead of private enterprise, the productive sector suffers chronic credit starvation. Nigeria’s private-sector credit-to-GDP ratio, hovering around 15-18 percent, pales in comparison to over 100 percent in developed economies and 45-60 percent in emerging markets. With limited access to capital, businesses shrink, factories close, and unemployment deepens. The economy becomes trapped in a cycle of low productivity, weak growth, and worsening inequality.

While banks celebrate record profits, those profits are increasingly disconnected from the real economy. This “risk-free banking” model may appear sound, but it is economically corrosive. It fuels short-term gains at the expense of long-term growth and exposes the system to sovereign risk. Should the government’s fiscal position deteriorate or interest rates spike further, the value of these securities could plummet, leaving banks overexposed and vulnerable.

The CBN has tried to correct course through its Loan-to-Deposit Ratio (LDR) directive, mandating that at least 65 percent of deposits be lent to the real sector. But compliance has been inconsistent and often artificial. Some banks engage in creative accounting or short-term consumer loans to meet the benchmark, without truly supporting productive sectors. The real challenge lies in policy incoherence when a government is too dependent on domestic borrowing and a regulatory environment that fails to reward productive risk-taking.

Nigeria’s financial system urgently needs to return to its primary role: fueling enterprise, not feeding bureaucracy. The government must reduce its borrowing appetite through fiscal discipline and tax reforms. The CBN should create a balanced incentive framework that rewards real-sector lending through credit guarantees, differentiated reserve requirements, and stable macroeconomic policies.

For banks, the call is moral, strategic, and patriotic. True banking is not merely about profit maximization but about building the foundation of national prosperity. The health of the sector depends on the strength of the economy it serves.

Nigeria cannot continue banking on the wrong side of growth. Every Treasury Bill purchased instead of a manufacturing loan and every bond bought in place of agricultural credit widens the gulf between financial success and economic failure. It is time for a reset to make banking once again the engine of real growth, not a spectator profiting from decline.

Blaise, a journalist and PR professional writes from Lagos, can be reached via: [email protected]