The low price of oil has led to a sharp increase in non-performing loans at Nigerian banks.

The drop in oil prices and the concomitant decline in the value of the naira against the dollar are severely testing the resilience of the recently reformed banking sector, according to a report entitled, “Cheap oil will test Nigerian banks resilience,” by British researcher Oxford Analytica published on Nov. 25.

Oil and gas credit allocation reached 23.8 percent in the first half of 2015, up from 10 percent in the previous year, the report said.

The three largest Nigerian banks in asset terms, Zenith Bank, Guaranty Trust Bank and First Bank of Nigeria, grew their oil and gas portfolios 101 percent, 47 percent and 37 percent respectively in 2014.

“After oil companies and the public sector, banks are the next most vulnerable to falling oil prices. This is raising fresh concerns about the prospects of a repeat of the 2008-09 banking crisis,” the report said.

“Nigeria, being a monoeconomy, generating about 95 percent of its total revenue from oil, results in a huge loan portfolio from this activity is held by the banking sector. This is why banks could be negatively affected by the southward movement in oil prices,” banking industry analyst Sunday Owoicho Emmanuel told Anadolu Agency on Tuesday.

Emmanuel pointed out that many debtors to banks in the oil sector have had changes in their contracts with the state oil company, so the basis on which they received credit is no longer the same. This means that many are strained in servicing their loans, and banks are obliged to restructure their agreements with these debtors, often accepting substantial losses.

There is also a danger, Emmanuel said, of increased taxes on banks as the government earns less in tax from the oil industry.

“It is true that financing the oil and gas sector is high profitable to banks but this also comes at a considerably huge risk,” agreed Gbenga Olagunju, who works with the Lagos branch of the Heritage Bank.

“The risk of bad loans is now very high for banks that are most exposed to the oil sector because customers who borrowed to trade in the sector have found themselves in the troubled waters, and are unable to pay back on schedule,” he said.

“This could affect the capital reserves of the banks,” he noted. “If a bank with has lent substantial sums to customers who are not able to pay back on schedule, or at all, the bank will have to dig into its reserves.”

But Emmanuel said he doesn’t see the crisis resulting in banks failing, as they did during the financial crisis. “There are now a lot of structures on the ground to prevent that today,” he said.

Nonetheless, with 4.66 percent of total loans made to the oil sector, Nigerian banks are approaching the central bank’s limit of 5 percent, the Oxford Analytica report warned.

Should they go over the limit, costs from use of reserves will cut into banks’ profits, the report said. (Anadolu Agency)

•Photo shows Central Bank Headquarters.