Investors Pile Into Nigerian Debt

Nigeria is attracting a fresh wave of investor interest as high-yielding local debt draws in global capital, but the surge is also exposing a structural weakness in the country’s financial system. While government securities offer some of the most attractive returns in global markets, private businesses remain starved of the long-term funding needed to expand.

Yields of around 20 per cent on short-term government bills have proved difficult for both domestic and international investors to ignore. Banks, insurers and pension funds have increased their exposure, while foreign investors have returned in force following currency reforms and a broader shift towards frontier markets.

Yet this focus on sovereign debt has come at a cost. Capital has flowed into short-dated instruments, leaving businesses with limited access to longer-term finance. That imbalance has created an opening for private credit providers seeking to bridge the gap.

TLG Capital, a London-based investment firm, is among those attempting to reshape the market. The group operates Nigeria’s first naira-denominated private credit fund aimed at small and medium-sized enterprises, offering institutional investors returns that exceed 10-year government debt by three to five percentage points.

Zain Latif, the firm’s founder, describes the strategy as a response to a persistent shortage of long-duration capital. While government securities provide attractive yields with relatively low regulatory costs, they do little to support corporate investment. Businesses, by contrast, require a mix of longer-term funding for capital expenditure and shorter-term facilities for day-to-day operations.

The rise of private credit reflects a broader transformation in Nigeria’s capital markets. High interest rates have anchored demand for sovereign debt, but they have also crowded out lending to the real economy. For banks, the appeal of government securities lies not only in their returns but also in their liquidity and regulatory treatment, making them a more straightforward option than corporate lending.

Foreign investors have added momentum to the trend. Before the recent disruption triggered by the Iran conflict, overseas funds held an estimated $15bn to $16bn of Nigeria’s domestic debt, up sharply from less than $6bn a year earlier. The increase has been driven in part by the devaluation of the naira, which has improved the entry point for investors, as well as a global search for higher yields.

The backdrop has also been shaped by wider market dynamics. A weaker US dollar and a prolonged rally in the bonds of larger emerging markets have encouraged investors to look further along the risk spectrum. Frontier markets such as Nigeria, offering double-digit returns, have become increasingly attractive as a result.

At the same time, Nigeria’s ability to generate foreign currency has improved. Reforms in the oil sector have begun to boost output and revenues, strengthening the supply of dollars and supporting investor confidence. According to Luis Costa, global head of emerging markets strategy at Citi, the country is finally benefiting more consistently from its oil industry after years of underinvestment.

Despite these improvements, the structure of Nigeria’s public finances remains heavily reliant on short-term borrowing. Domestic government debt stood at N77.8tn, or about $52.7bn, as of late 2025, with much of it requiring frequent refinancing. Efforts are under way to increase tax revenues, which remain low relative to GDP, but progress is gradual. The government has also made limited use of dollar-denominated debt, increasing its dependence on the local market.

This reliance on short-term instruments has shaped the behaviour of the banking sector. Nigerian banks continue to depend largely on short-term deposits and have limited access to international bond markets for longer-term funding. As a result, government securities have become a core holding, offering high yields with manageable risk.

For the corporate sector, however, the consequences are clear. Access to affordable, long-term financing remains constrained, limiting the ability of businesses to invest and grow. Private credit funds are attempting to address this gap by providing more flexible financing structures tailored to local conditions.

TLG’s model involves working closely with domestic banks, using guarantees as collateral to reduce risk. One recent transaction included a $10mn loan to Falcon Aerospace, a Nigerian aviation company. By partnering with local institutions, the firm aims to identify opportunities while navigating the complexities of Nigeria’s credit market.

Institutional demand is also evolving. Nigeria’s pension funds and insurers, which collectively manage more than N20tn in assets, are increasingly seeking longer-duration investments to match their liabilities. Private credit offers a potential solution, combining higher returns with exposure to the domestic economy, although it carries greater risk than government debt.

Recent market volatility has highlighted the fragility of current capital flows. The global sell-off triggered by the Iran conflict prompted significant outflows from emerging and frontier markets. In Egypt, a comparable destination for yield-focused investors, billions of dollars were withdrawn from domestic debt, leading to a sharp depreciation of the currency.

Nigeria experienced a milder but still noticeable effect. The naira weakened against the dollar, which investors attributed partly to the unwinding of positions in similar carry trades. This occurred despite the supportive effect of higher oil prices, which would typically strengthen the currency.

According to Richard Briggs, a portfolio manager at Robeco, the movement was likely linked to broader portfolio adjustments rather than a deterioration in Nigeria’s fundamentals. Over the longer term, he argues, stronger oil revenues should provide support for the currency.

Nigeria’s local debt market has yet to regain its former standing among global investors. The country was once included in a major emerging market bond index but was removed in 2015 after a collapse in oil prices reduced liquidity and made trading more difficult. Although investor interest has returned, the market remains sensitive to both domestic policy shifts and global conditions.

There are, however, signs of improving macroeconomic stability. Inflation has fallen sharply from close to 25 per cent in early 2025 to around 15 per cent a year later, although changes in methodology have influenced the figures. The decline has allowed the central bank to begin easing monetary policy, with a modest rate cut earlier this year.

Further reductions are expected, though policymakers face a delicate balancing act. Lower rates could support economic growth, but they also risk putting pressure on the currency if capital flows reverse. Analysts expect the central bank to proceed cautiously, adjusting policy in response to both domestic conditions and global developments.

For investors, the attraction of Nigeria lies in its combination of high yields and improving fundamentals. For businesses, the challenge is whether that capital can be redirected towards productive investment. The emergence of private credit suggests a possible path forward, but its success will depend on whether it can scale in a market still dominated by sovereign debt.

The current dynamic points to a broader transition in Nigeria’s financial system. As capital markets deepen and institutional investors diversify, funding may gradually shift towards the real economy. The pace of that shift will depend on the stability of the macro environment and the ability of new financing models to withstand the pressures that have long shaped the country’s markets.