Nigeria’s Financial Reset: Where the rubber meets the road

Nigeria’s financial system is changing. It faces a major regulatory reset across banking, capital markets, fintech, FX intermediation, and cash usage. The trend is clear: higher capital, tighter compliance, clearer rules, and more market-based pricing, especially in foreign exchange. Officially, the goal is stability. In reality, it is during the adjustment phase that risk is most visible.

The regulatory reset is rebuilding buffers, but it is also reshaping how risk moves through the system. Recapitalisation, FX reform, Anti Money Laundering tightening, and perimeter clean-up are compressing solvency risk on regulated balance sheets and improving transparency. At the same time, credit risk, liquidity strain, operational pressure, model risk, and informal-market spillovers are surfacing elsewhere. The system may look stronger in aggregate, but risk is not disappearing; it is shifting.

Safer institutions, riskier outcomes

This risk shift appears most in the banking sector. Higher capital helps absorb losses, but also prompts banks to defend their balance sheets. They do this through tighter underwriting, a reduced appetite for long-tenor exposures, and a preference for safer, more liquid assets. As a result, credit becomes less available to SMEs, first-time borrowers, and long-term projects, even as capital ratios improve. Resilience increases, but intermediation weakens.

FX reform illustrates the same trade-off between credibility and exposure. Better price discovery and fewer distortions strengthen market confidence, but they also push volatility directly onto banks’ and corporates’ balance sheets. Market-determined rates mean sharper revaluations, more volatile earnings, and greater strain on treasury, Asset and Liquidity Management, and risk models built for a more managed regime. Transparency improves—but so does balance-sheet sensitivity.

Tightening cash policy and AML reforms further expose the frictions of the transition. Stricter controls strengthen oversight and traceability, but they also increase operational burdens and pose risks when unevenly implemented. Where digital rails or trust lag, activity does not disappear—it relocates, often into less visible or informal channels, complicating enforcement and risk monitoring.

Nonbank finance is being reset, too. Capital-market operators, fintechs, digital-asset platforms, and insurers now face clearer rules and higher standards. Over time, this boosts credibility and investor confidence. In the short term, it means higher funding costs, slower growth, and pressure on governance and execution—especially for newer firms that favored speed over compliance.

The trust gap investors actually price

Trust is the main constraint for investors. Compliance can be enforced; confidence cannot. Nigeria’s data shows stability: banks remain open, FX clears, and capital rebuilds. Yet behavior remains defensive: dollarisation persists, investors price exit risk, firms delay long-term investment, and households self-insure rather than rely on formal risk transfer.

Insurance best reveals this trust gap. Low insurance use is not just about income. It shows what people expect from claims payment, value protection, and enforcement. Where trust is weak, people and businesses focus on the short-term, hold cash, and absorb shocks privately. This quietly increases fragility, even as headline stability improves.

Nigeria’s financial reset teaches risk transmission, not rulemaking. Recapitalisation strengthens institutions but can shrink intermediation. FX liberalisation improves pricing but exposes balance sheets. Controls impose order but erode confidence if overused. Without trust, reforms miss their aims.

Stability buys time. Trust decides if that time builds lasting progress or simply delays the next crisis.

That is where the rubber meets the road.