• Nigeria plans to finance a record ₦23.85tn deficit ($15.9bn) domestically in 2026, keeping sovereign yields high and prospectively, boosting banks’ interest income.
• With rates elevated and inflation easing, lenders holding over half of local debt stand to expand margins as government issuance accelerates.
• Heavy domestic borrowing may stabilize public finances but risks crowding out private credit and sustaining high borrowing costs for businesses.

Nigeria’s banking sector is poised to emerge as one of the main beneficiaries of the federal government’s 2026 fiscal strategy, as authorities pivot decisively toward domestic markets to finance a record budget deficit of ₦23.85 trillion ($15.9 billion). The approach, outlined by President Bola Tinubu in his 2026 budget presentation, aims to source nearly 80% of deficit financing locally, a move expected to sustain elevated yields on government securities and secure strong, low-risk returns for banks.

Presenting what he described as a “Budget of Realism and Growth” to the National Assembly on December 19, Tinubu announced total spending of ₦58.18 trillion ($38.8 billion) against projected revenues of ₦34.33 trillion ($22.9 billion). The resulting fiscal gap, equivalent to 4.28% of GDP, comes as Nigeria’s nominal output is projected to reach ₦556 trillion ($370.7 billion) in 2026. To limit exposure to foreign exchange volatility, the government has opted to rely primarily on domestic borrowing, reinforcing the role of local banks as the main buyers of Federal Government of Nigeria (FGN) bonds and Treasury bills.

The policy backdrop remains supportive for lenders. The Central Bank of Nigeria (CBN) has kept its Monetary Policy Rate at a historic high of 27% as inflation slowed to 14.45%, anchoring yields on long-term government paper in the 16–19% range.

Beyond balance sheets, the budget’s structure underscores the centrality of domestic capital markets in funding public investment. Capital expenditure is set at ₦26.08 trillion ($17.4 billion), with priority given to transport infrastructure, including the Lagos–Kano rail corridor, and power grid upgrades. These projects are largely underpinned by local debt issuance, reinforcing the feedback loop between fiscal policy and banking sector profitability.

However, the scale of domestic borrowing—estimated at around ₦19 trillions ($12.7 billion) —raises concerns about crowding out. With sovereign yields approaching 19%, private sector borrowers, particularly manufacturers, may continue to face prohibitively high financing costs, potentially constraining credit growth outside the public sector. Also, the inflation slowdown is more methodological rather than the result of real economy dynamics.

Regionally, Nigeria’s strategy marks a clear departure from peers such as Ghana and Kenya, which have relied more heavily on Eurobonds. By internalizing its financing needs, Africa’s largest economy—accounting for roughly 67% of ECOWAS GDP—reduces its vulnerability to external shocks and aligns with the self-reliance narrative promoted under the AfCFTA. Yet, with more than 20 African countries in or near debt distress, international rating agencies are expected to closely monitor whether domestic absorption capacity can sustain such volumes without destabilizing financial markets.

For now, the 2026 budget offers a measure of stability and predictability for Nigeria’s financial system, anchoring bank liquidity in high-quality sovereign assets. The real test will come with monthly auctions starting in January 2026. Any weakening in demand from banks or pension funds could force the CBN to step in, challenging the government’s commitment to non-inflationary financing.

Until then, the carry trade remains one of the most profitable plays in Lagos. As for september 30, 2025, top six nigerian banks (Access Holdings, Zenith Bank, First HoldCo, United Bank for Africa (UBA), Guaranty Trust Holding Company (GTCO), and Stanbic IBTC) has enjoyed this environment of high lending rates. Interest revenu for them stood at ₦11.72 Trillion ($8.08 Billion), and contributing to upto 80% of their total income.

Idriss Linge