Addressing the Increase in Bad Debts Across Nigerian Banks

The resurgence of bad debts in numerous Nigerian banks is becoming a significant concern. Recent official reports show that many banks have surpassed the regulatory threshold for bad or non-performing loans allowed within the sector.

This situation is troubling and requires prompt measures from both the banks and the relevant regulatory agencies. It echoes the challenging period of reckless credit expansion that once jeopardized the integrity of the nation’s banking sector. Individuals who faced the consequences of the financial instability after the global crisis of 2008-09 remember the severe setbacks brought on by ineffective credit management.

This previous crash inflicted severe repercussions on investors, the banking industry, and the federal government. Shareholders of various banks saw their investments deplete drastically. Some banks collapsed, prompting the government to invest billions of naira in bailout packages to mitigate the spillover effects threatening the entire financial system.

Following this crisis, the Central Bank of Nigeria (CBN) introduced regulatory frameworks aimed at reinforcing credit control and management to avoid the re- emergence of such extensive inadequate credit practices among banks. These measures included a limit of five percent on non-performing loans considered acceptable in the banking industry. Nonetheless, some banks have consistently exceeded this prudential guideline. Previously, in 2024, the World Bank provided an early warning, expressing concerns about this risk to the banking sector and the broader economy, citing that the non-performing loans (NPL) ratio had climbed above the acceptable limit, reaching 5.1 percent.

As of April 2025, at least 11 banks were reported to have gone beyond this threshold, elevating the average industry NPL ratio to 5.62 percent. The CBN explained that this revelation stemmed from a comprehensive industry-wide loan reclassification linked to a risk assessment initiative.

This decline in the credit quality of the banks mandates immediate attention. Nigeria cannot afford a repeat of the expensive bank bailouts. The establishment of the Asset Management Corporation of Nigeria served as a special vehicle to absorb bad debts and revitalize the banking sector, funded at a substantial cost to taxpayers. Presently, Nigeria cannot sustain the burden of another bailout scheme.

Historical evidence from the 2008-09 crisis shows that the accumulation of non-performing loans was partly exacerbated by lenient regulatory frameworks. Banking operators often display carelessness or unprofessional behavior in scenarios requiring strict oversight, as they do not experience the fallout from their poor decisions directly. This reality underlines the importance of robust regulatory bodies to keep such operators under continuous review.

From banks and their inspection divisions to the Central Bank of Nigeria, the Nigerian Deposit Insurance Corporation, and the Economic and Financial Crimes Commission, Nigeria possesses a sufficiently strong institutional framework to protect the stability of its banking system and secure depositors' interests.

Banks are obligated to adhere to established credit evaluation protocols, including the crucial know-your-customer (KYC) procedures. Unfortunately, this aspect of credit assessment is often overlooked by financial institutions. When influential individuals connected to banks, such as directors or their associates, seek loans, the KYC policy typically suffers. Consequently, a significant proportion of non-performing loans can be traced back to these powerful insiders. This issue demands urgent examination by banks. It is unethical for those entrusted with safeguarding public resources to become threats to the very assets they are meant to protect.

In addition to effective credit evaluation and approval, banks must continually assess the quality of the credits they extend. Thus, there is a need for enhanced competency within their inspection departments to promptly identify when borrowers begin to exhibit signs of default.

The onus is also on the CBN and the NDIC to conduct unannounced audits of banks' financial statements. This proactive approach is necessary to ensure accountability. Given the rising sophistication of fraudulent behaviors, these entities must remain vigilant in detecting wrongdoing ahead of the banks.

Lastly, the Daily Trust urges the Economic and Financial Crimes Commission to strengthen its effectiveness. This body, which has expressed zero tolerance for economic offenses, should intensify its efforts to combat malpractice within the banking sector. It should investigate all known dubious insider loans and hold accountable those involved as these actions constitute abuse of power and privilege. Such measures would serve as a strong deterrent against future misconduct.