Regulatory forbearance is a policy tool used by central banks that permits banks and financial institutions to maintain operations despite falling below required capital thresholds.
It is a provisional measure that allows the restructuring of assets such as non-performing loans. According to Gloria Igwe, an economist and financial researcher, regulatory forbearance is employed to “address the challenges faced by a bank or group of banks in the event of a financial or macroeconomic crisis.”
Globally, regulatory forbearance has been used by banking regulators to prevent short-term banking crises from escalating. For example, in South Korea, following the Asian Financial Crisis of the 1990s, Basel capital requirements were temporarily reduced to 6 percent. Similarly, in Japan, during the real estate crisis of the 1990s and early 2000s, struggling banks were given bailouts rather than being shut down or forced into recapitalisation.
In India, during the 2008 global financial crisis, the Reserve Bank of India allowed banks to restructure stressed assets without immediately classifying them as non-performing, thereby sidestepping the need for large provisions. Likewise, during the COVID-19 pandemic, the United States government permitted mortgage providers to defer payments for defaulters without downgrading those loans to non-performing status.
Additionally, banks were allowed to tap into regulatory reserves, as liquidity buffers were temporarily relaxed to support economic stability.
In Nigeria, the Central Bank of Nigeria (CBN) also deployed regulatory forbearance at the onset of the COVID-19 crisis. Key measures included a one-year extension of moratoriums on loan repayments. Banks were further advised to consider time-limited restructuring of loan terms for sectors severely affected by the pandemic, including oil and gas and agriculture. The CBN also slashed interest rates on its intervention facilities to 5 percent, though this was subsequently returned to 9 percent in July 2022. In 2023, the CBN extended forbearance on certain prudential limits, including violations of the single obligor threshold and the net open position.
Read Also: CBN clamps down on banks under regulatory forbearance – Businessday NG
Controversies around regulatory forbearance
Despite its short-term benefits, regulatory forbearance remains a subject of significant controversy, largely due to its historical misuse and long-term consequences when poorly managed.
The United States’ Savings and Loan (S&L) crisis of the 1980s is one of the most cited examples. Analysts widely attribute the crisis to lenient forbearance policies, where regulators hesitated to enforce strict oversight even as asset quality deteriorated. The eventual fallout led to the collapse of more than one-third of S&L institutions in the country.
Yet, the policy has not always ended in disaster. In contrast, South Korea’s use of regulatory forbearance following the 1990s crisis is often credited with helping to stabilize the country’s financial system without triggering systemic failure.
Why does it matter?
On Friday, June 13, 2025, the Central Bank of Nigeria issued a directive targeting banks under regulatory forbearance. According to the circular, these banks must suspend dividend payouts, defer executive bonuses, and halt investments in foreign subsidiaries or offshore ventures. This suspension is to remain in place until regulatory forbearance has been fully lifted, and an independent verification confirms that capital adequacy and provisioning levels meet current regulatory requirements.
The move has had immediate implications for investor sentiment in the Nigerian equities market. Just a day after the directive was released, early morning trades on the Nigerian Exchange (NGX) showed a significant sell-off in banking stocks. Although some banking equities rebounded later, the NGX Banking Index ultimately fell by 3.98 percent on June 16. This erosion of investor confidence underscores the impact of the CBN’s measures on market dynamics.
Long-term effects are also taking shape. A report by Renaissance Capital suggests that the suspension of dividends may persist through 2028 for the banking arms of Access Holdings, First Bank Holdco, and Zenith Bank. In the interim, non-banking subsidiaries within these groups may shoulder the burden of rewarding shareholders.
Renaissance Capital also noted that the forbearance suspension could hinder capital-raising efforts amid the ongoing recapitalisation drive. Banks like UBA, Fidelity Bank, and FCMB—which still fall short of the N500 billion capital threshold—could find it more challenging to attract equity investors under these constraints.
This concern has sparked industry-wide questions. Speaking to BusinessDay, analysts at Emerging & Frontier Capital queried, “How will tier II banks raise capital when they cannot return capital to shareholders?”
A broader shift in focus
Beyond market volatility and recapitalisation challenges, the CBN’s policy shift could significantly reshape the asset quality metrics of Nigerian banks.
Loans classified as Stage II—those exhibiting early signs of default—are often subject to regulatory forbearance. When interest income from these loans is recognised before actual cash is received, it inflates reported profits without a corresponding rise in real cash flow.
For many Nigerian banks, Stage II loans are rising, while cash inflows lag behind. This mismatch reflects a growing concern: the illusion of profitability. According to Renaissance Capital, the CBN’s new posture aims to recalibrate this narrative by emphasising cash profits as a more accurate measure of bank health than traditional accounting profits.
