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ASSESSMENT OF NON-PERFORMING LOANS (NPLs) IN NIGERIAN BANKS: CAUSES, MANAGEMENT STRATEGIES, AND IMPLICATIONS FOR ECONOMIC GROWTH
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
Non-performing loans (NPLs) constitute a persistent challenge within the Nigerian banking sector, formally defined as loans wherein borrowers fail to meet scheduled payments of principal or interest for a period exceeding 90 days. Such loans not only cease to generate income for financial institutions but also erode profitability, impair liquidity, and pose systemic risks to financial stability, a critical pillar for sustaining economic development in an emerging economy like Nigeria (Nwosu et al., 2020). The Nigerian economy’s heavy reliance on oil revenues renders it particularly vulnerable to external shocks, such as oil price volatility, which historically correlate with surges in NPLs. Illustratively, during the 2016 recession precipitated by declining oil prices, NPL ratios escalated sharply, compelling banks to allocate substantial provisions for bad debts and curtail new lending activities (Umar & Sun, 2016).
Recent data underscores the persistence of elevated NPL levels. According to the Central Bank of Nigeria (CBN), the banking sector’s NPL ratio climbed to an estimated 7% in 2025, surpassing the prudential threshold of 5%, following the cessation of regulatory forbearance measures implemented during the COVID-19 pandemic (Central Bank of Nigeria, 2026). This uptick reflects the crystallization of previously restructured loans into non-performing status, exacerbated by prevailing economic pressures, including inflationary trends, currency depreciation, and repayment challenges faced by households and corporate entities (CBN Credit Conditions Survey, Q4 2025, as reported in various sources, 2026). Notably, lenders reported heightened default rates across secured, unsecured, and corporate lending portfolios in the fourth quarter of 2025, notwithstanding marginal improvements in credit accessibility within select segments (Nigeria Communications Week, 2026).
The determinants of NPLs in Nigeria span macroeconomic, institutional, and borrower-specific dimensions. Macroeconomic variables such as inflation, interest rates, GDP growth, and corruption exert significant influence on NPL levels by modulating borrower repayment capacity and institutional robustness (Ozgur & Yilanci, 2024). In Sub-Saharan Africa, including Nigeria, sluggish economic growth and systemic corruption compound NPL challenges by undermining credit discipline (Ozgur & Yilanci, 2024). Bank-specific factors encompass deficiencies in credit risk assessment, inadequate loan monitoring, lenient lending standards, and aggressive credit expansion during economic booms sans rigorous due diligence, culminating in elevated defaults during downturns (Ayuba et al., 2025). Borrower-related inefficiencies, including financial mismanagement and over-leveraging, are particularly pronounced in cyclical sectors such as real estate and manufacturing.
Post-2009 global financial crisis reforms, initiated to address vulnerabilities in Nigeria’s banking system, included the establishment of the Asset Management Corporation of Nigeria (AMCON) to absorb and manage toxic assets. While these measures temporarily mitigated NPL ratios, recurring economic volatilities have perpetuated the issue. Empirical analyses of African banks corroborate that NPLs adversely impact profitability by escalating provisioning costs and non-interest expenses, thereby constraining lending capacity and economic growth (Ademola & Adegoke, 2025). In Nigeria, studies consistently identify an inverse relationship between NPLs and bank performance metrics, including return on assets and return on equity (Ezeudu & Eze, 2020; Nwosu et al., 2020).
Nigerian banks employ multifaceted NPL management strategies, encompassing stringent credit management protocols such as exhaustive loan appraisal, proactive monitoring, reduced collection cycles, loan restructuring, collateral enforcement, and engagement of debt recovery agencies (Ayuba et al., 2025). The CBN reinforces these efforts through prudential regulations, including capital adequacy mandates and stress testing, to bolster sectoral resilience (Central Bank of Nigeria, n.d.). Despite these interventions, elevated NPLs continue to stifle private-sector credit, dampen investment, and hinder GDP expansion. Research affirms a long-term negative nexus between NPLs and economic growth in Nigeria, as heightened NPLs diminish banks’ lending appetite and deter credit allocation to productive sectors (London Journal of Social Sciences, 2022; Chukwu & Muritala, 2024).
1.2 Statement of the Problem
The Nigerian banking sector continues to grapple with elevated levels of non-performing loans (NPLs), with the NPL ratio reaching 7% in 2025, exceeding the 5% prudential threshold despite regulatory interventions (Central Bank of Nigeria, 2026; Nairametrics, 2026). This persistence is attributed to deficiencies in risk management frameworks, macroeconomic volatility, institutional inefficiencies, and the cessation of forbearance policies, leading to significant financial losses for banks (Nwosu et al., 2020). Elevated NPLs compel banks to increase loan loss provisions, thereby eroding capital adequacy and constraining credit availability to productive enterprises and households. This, in turn, inhibits economic growth, investment, and employment generation (Ademola & Adegoke, 2025).
The problem is further compounded by exogenous factors such as systemic corruption, which weakens credit discipline across Sub-Saharan Africa, including Nigeria (Ozgur & Yilanci, 2024). Given the pivotal role of banks in development financing, unchecked NPL growth poses systemic risks, potentially triggering bank distress and broader financial instability (Osayi, 2024). Recent Central Bank of Nigeria (CBN) data reveals a surge in defaults among households, small and medium enterprises (SMEs), and corporate borrowers in Q4 2025, driven by prevailing economic challenges, necessitating targeted policy measures (Punch Newspapers, 2026). Without a rigorous examination of causative factors and mitigation strategies, NPLs will persistently erode bank profitability, disrupt credit intermediation, and impede national economic advancement (Chukwu & Muritala, 2024).
1.3 Objectives of the Study
- Determine causes of non-performing loans in Nigerian banks.
- Examine management strategies for non-performing loans in Nigerian banks.
- Analyze implications of non-performing loans for economic growth in Nigeria.
1.4 Research Questions
- What causes non-performing loans in Nigerian banks?
- What management strategies address non-performing loans in Nigerian banks?
- What implications arise from non-performing loans for economic growth in Nigeria?
1.5 Significance of the Study
This research offers valuable insights for Nigerian financial sector stakeholders, including the CBN, bank management, and policymakers, to improve credit risk management and lower NPL levels (Ayuba et al., 2025). By identifying key causes such as macroeconomic instability and weak credit practices, it supports the development of stronger risk frameworks to enhance bank stability and credit flows. For the economy, clarifying NPL implications can guide policies promoting sustainable growth through better credit allocation (London Journal of Social Sciences, 2022).
Academically, it enriches the body of knowledge on NPLs in emerging markets, particularly in oil-dependent economies, by providing context-specific evidence (Ademola & Adegoke, 2025).
1.6 Scope and Limitations
The study covers NPLs in Nigerian deposit money banks from 2015 to 2025, relying on secondary data from CBN reports, financial statements, and academic literature. It focuses on commercial banks, excluding microfinance and non-bank institutions.
Limitations include potential inaccuracies in self-reported bank data, restricted access to confidential information, and reliance on secondary sources that may overlook qualitative aspects like internal decision processes.
1.7 Definition of Terms
- Non-Performing Loans (NPLs): Loans where interest or principal payments are overdue by 90 days or more, no longer generating income for the lender.
- Credit Management: Systematic processes for loan evaluation, approval, monitoring, and recovery to minimize defaults.
- Economic Growth: Sustained rise in national output of goods and services, measured by real GDP growth.
References
Ademola, A. O., & Adegoke, K. A. (2025). The effect of non-performing loans on the profitability of banks in Africa. International Journal of Applied Research in Business and Management. https://www.wr-publishing.org/index.php/ijarbm/article/download/175/175/700
Ayuba, J., Kumshe, H. M., & Abubakar, M. B. (2025). Effect of credit management on non-performing loans among listed deposit money banks in Nigeria. International Journal of Banking and Finance Research, 11(7), 7-21. https://www.iiardjournals.org/abstract.php?id=62362&j=IJBFR&pn=Effect+of+Credit+Management+on+Non-Performing+Loans+among+Listed+Deposit+Money+Banks+in+Nigeria
Central Bank of Nigeria. (n.d.). Non-performing loans and profitability of the Nigerian commercial banks. https://www.cbn.gov.ng/Out/2021/RSD/Non-Performing%20Loans%20and%20Profitability%20of%20the.pdf
Central Bank of Nigeria. (2026). Macroeconomic outlook for Nigeria report. https://www.cbn.gov.ng/Out/2025/CCD/CBN%20Macroeconomic%20Outlook%20for%20Nigeria%20Report_28_122025_DG.pdf
Chukwu, G. N., & Muritala, T. A. (2024). Impact of non-performing loan on bank performance in Nigeria. Journal of Law and Sustainable Development. https://ojs.journalsdg.org/jlss/article/view/3796
Ezeudu, I. J., & Eze, O. R. (2020). Impact of non-performing loan on bank performance in Nigeria: A case study of selected deposit money banks. Journal of Business & Economic Policy, 7(4). https://jbep.thebrpi.org/journals/Vol_7_No_4_December_2020/7.pdf
Nwosu, C. P., Okedigba, D. O., & Anih, D. O. (2020). Non-performing loans and profitability of the Nigerian commercial banks. Central Bank of Nigeria Economic and Financial Review, 58(3). https://www.cbn.gov.ng/Out/2021/RSD/Non-Performing%20Loans%20and%20Profitability%20of%20the.pdf
Ozgur, O., & Yilanci, V. (2024). Corruption, economic growth, and non-performing loans in Sub-Saharan Africa: An empirical analysis (2011–2019). Journal of Quantitative Economics. https://doi.org/10.1007/s40953-024-00420-y
Umar, M., & Sun, G. (2016). The rising incidence of non-performing loans and the nexus of economic performance in Nigeria: An investigation. European Journal of Business and Management, 8(5). https://www.eajournals.org/wp-content/uploads/The-Rising-Incidence-of-Non-Performing-Loans-and-the-Nexus-of-Economic-Performance-in-Nigeria.pdf