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MANAGEMENT OF BAD DEBTS IN MICRO FINANCE BANKS IN NIGERIA (CASE STUDY: SIX SELECTED MICRO FINANCE BANKS IN ANAMBRA STATE)

Abstract
Bad debts constitute a major challenge to the survival and profitability of Microfinance Banks (MFBs) in Nigeria. This study examined the management of bad debts in six selected MFBs in Anambra State. The specific objectives were to identify the causes of bad debts, evaluate the strategies adopted for managing them, and assess their effectiveness. The study adopted a survey research design. Primary data were collected through questionnaires administered to 120 staff and management of the selected banks, while secondary data were sourced from CBN reports and bank records. The six selected banks are Uzondu Microfinance Bank, Chukwunenye Microfinance Bank, Bestway Microfinance Bank, Ihiala Microfinance Bank, Topclass Microfinance Bank, and Adazi-Enu Microfinance Bank. Data were analysed using descriptive statistics and chi-square test. Findings revealed that poor credit appraisal, weak monitoring, economic hardship, and lack of collateral are major causes of bad debts. Effective strategies include strict loan appraisal, regular monitoring, loan recovery teams, and provisioning. The study recommends improved credit policies, staff training, and collaboration with credit bureaus to reduce bad debts. The research contributes to better risk management practices in Nigeria’s microfinance sector.

CHAPTER ONE

INTRODUCTION
1.1 Background to the Study
Microfinance banks (MFBs) in Nigeria have emerged as pivotal institutions in fostering financial inclusion, particularly for low-income households, small-scale entrepreneurs, and the unbanked segments of society. Established under the Central Bank of Nigeria’s (CBN) regulatory framework since the 2005 Microfinance Policy, these banks aim to provide accessible credit, savings, and other financial services to underserved populations, thereby promoting poverty alleviation, economic empowerment, and grassroots development (Babalola, 2025). The sector’s growth has been notable, with over 1,300 licensed MFBs operating nationwide by 2023, serving millions of clients, especially in rural and semi-urban areas like Anambra State, where traders, artisans, and small agribusinesses form the core clientele (Ogunsanwo et al., 2020).

Anambra State, located in southeastern Nigeria, exemplifies this dynamic, hosting numerous MFBs that cater to a vibrant market economy driven by commerce in cities like Onitsha and Awka. These institutions extend microloans often without traditional collateral, relying instead on group guarantees, character assessments, and community ties to mitigate risks. However, the microfinance sector in Nigeria faces persistent challenges, chief among them being the high incidence of non-performing loans (NPLs), commonly referred to as bad debts. Bad debts occur when borrowers fail to repay loans as scheduled, leading to asset quality deterioration and threatening the banks’ operational viability.

According to recent CBN data, the average NPL ratio in the microfinance sub-sector stood at 10.97% between 2014 and 2023, significantly surpassing the regulatory threshold of 5% (Babalola, 2025). This trend has been exacerbated by economic volatilities, including the 2020 COVID-19 pandemic, which disrupted borrower incomes, and subsequent inflationary pressures reaching 29.9% in 2023, eroding purchasing power and business profitability (Odongo et al., 2025). Scholars attribute this to inherent vulnerabilities in microfinance lending, such as information asymmetry, where borrowers possess more knowledge about their repayment capacity than lenders and moral hazards, including loan diversion for non-productive uses (Ogunsanwo et al., 2020).

In Anambra State, where MFBs serve a dense population of traders and small businesses, these issues are amplified by regional factors like market competition, infrastructural deficits, and occasional communal conflicts that disrupt economic activities. The sustainability of MFBs is critically undermined by bad debts, as they erode capital bases, increase provisioning requirements, and limit funds available for new lending. Research indicates that poor credit management practices, including lax appraisal processes and inadequate post-disbursement monitoring, contribute significantly to this problem (Babalola, 2025).

For instance, the Nigeria Deposit Insurance Corporation (NDIC) reported that by December 2023, 534 out of 1,306 licensed MFBs had either closed or had their licenses revoked, with bad debts cited as a primary cause in 40.9% of cases (Babalola, 2025). This has prompted regulatory interventions, such as the CBN’s introduction of the Global Standing Instruction (GSI) in 2020, allowing automated debt recovery from defaulters’ accounts across banks, and the establishment of Credit Guarantee Companies (CGCs) to share risks on MSME loans (Babalola, 2025). Despite these measures, the sector’s NPL ratios fluctuated markedly, dipping to 5.94% in 2021 due to post-pandemic relief but rising to 12.72% in 2023 amid economic recovery challenges (Babalola, 2025).

Anambra State provides an apt case study due to its concentration of MFBs over 50 operating as of 2023 and its economic profile, which mirrors national trends in micro-entrepreneurship. Local MFBs like those in Awka and Nnewi often extend loans to market traders and artisans, but face repayment issues stemming from seasonal business cycles and external shocks (Ogunsanwo et al., 2020). Empirical studies highlight that effective bad debt management is essential for MFBs to achieve outreach goals, with scholars emphasizing the need for robust risk assessment frameworks tailored to Nigeria’s informal economy (Odongo et al., 2025).

This background underscores the urgency of examining bad debt management in selected Anambra MFBs, as it not only affects institutional survival but also broader socioeconomic development objectives aligned with Nigeria’s Sustainable Development Goals (SDGs), particularly SDG 1 (No Poverty) and SDG 8 (Decent Work and Economic Growth).

1.2 Statement of the Problem
Despite regulatory reforms and institutional efforts, micro finance banks (MFBs) in Nigeria continue to face significant challenges related to elevated levels of non-performing loans (NPLs), which consistently exceed the Central Bank of Nigeria’s (CBN) benchmarks (Babalola, 2025). This persistent issue has led to severe liquidity constraints, as funds tied up in delinquent loans cannot be redeployed for new credit disbursements, thereby stifling the sector’s growth potential. In Anambra State, where MFBs play a crucial role in supporting small-scale enterprises, high default rates have resulted in declining profitability, with many institutions reporting net losses due to substantial provisioning costs, often amounting to 20-30% of their loan portfolios (Ogunsanwo et al., 2020).

The problem is further compounded by weaknesses in credit appraisal mechanisms, where MFBs frequently neglect borrower credit histories or fail to adequately assess economic vulnerabilities, resulting in adverse selection and elevated default rates (Odongo et al., 2025). Additionally, inadequate loan monitoring practices exacerbate the issue, as early warning signs of financial distress such as declining business performance or misuse of funds often remain undetected until defaults occur (Babalola, 2025). External economic pressures, including inflation, currency devaluation, and supply chain disruptions, have intensified these challenges, with borrower defaults increasing by 15-20% since 2020 (Babalola, 2025).

These financial strains have eroded the capital base of MFBs, leading to regulatory interventions such as license revocations by the Nigeria Deposit Insurance Corporation (NDIC) for undercapitalized institutions, thereby reducing financial access for underserved populations (Ogunsanwo et al., 2020). The broader consequences include deepening borrower indebtedness, credit blacklisting, and eroding public confidence in the microfinance system, ultimately hindering Nigeria’s financial inclusion goal of achieving 80% adult banking penetration by 2025 (Odongo et al., 2025). Without targeted policy and operational interventions, these systemic challenges threaten the sustainability of MFBs in Anambra State and across Nigeria.

Objectives of the Study

The main objective is to examine the management of bad debts in selected MFBs in Anambra State.

Specific objectives include:

1. To identify the primary causes of bad debts, such as poor appraisal and economic factors.
2. To evaluate the strategies employed for managing bad debts, including monitoring and recovery mechanisms, and their alignment with CBN guidelines.
3. To assess the effectiveness of these strategies in reducing NPL ratios and enhancing sustainability.

1.4 Research Questions

1. What are the major causes of bad debts in the selected MFBs, including internal operational flaws and external economic pressures?
2. What strategies are adopted for managing bad debts, such as credit policies?
3. How effective are these strategies in mitigating defaults and improving financial performance?

1.5 Research Hypotheses

HO1: There is no significant relationship between poor credit appraisal and the incidence of bad debts in selected Anambra MFBs (Babalola, 2025). HO2: Loan monitoring strategies do not significantly reduce bad debt levels in these institutions

1.6 Significance of the Study

This study will provide actionable insights for MFB management in Anambra to refine credit practices, benefiting operational efficiency and profitability (Babalola, 2025). Regulators like the CBN can use findings to enhance policies, such as strengthening GSI implementation (Ogunsanwo et al., 2020). Future researchers will gain a foundation for comparative analyses across states, advancing scholarship on microfinance risk management (Odongo et al., 2025).

1.7 Scope of the Study

The study is delimited to six selected MFBs in Anambra State, focusing on bad debt management practices from 2021 to 2025, incorporating post-pandemic recovery data (Babalola, 2025).

1.8 Limitations of the Study

Potential reluctance from MFBs to disclose sensitive NPL data may bias responses, while time constraints limit sample size; however, these are mitigated through ethical assurances and focused surveys.

1.9 Definition of Terms

• Bad Debt: A loan deemed unlikely to be repaid, requiring full provisioning after prolonged default.
• Microfinance Bank: A CBN-licensed entity providing microcredit and financial services to low-income clients without traditional collateral.
• Non-Performing Loan: A loan overdue by 90 days or more, classified as substandard, doubtful, or lost per CBN guidelines