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Non-performing loans (NPLs) in Nigerian banks, as a percentage of total loans, have been on the decline. A falling NPL ratio signals an overall improvement in the health of Nigeria’s banking sector.
However, when viewed alongside lending trends, this decline could indicate that lending activities have either slowed down or become more conservative. It could also mean banks may have enhanced their loan recovery strategies by restructuring delinquent loans, improving their debt recovery systems, and implementing better loan monitoring practices.
This suggests that Nigerians, particularly those in high-risk industries, may find it harder to access credit. If this trend leads to a credit crunch for businesses and individuals needing loans to expand or sustain operations, it could dampen economic growth.
NPLs refer to bank loans that are either unlikely to be repaid by the borrower or are subject to late repayment.
According to data from Global Economy and the Central Bank of Nigeria (CBN), the NPL ratio decreased from 4.86% in 2015 to 3.9% in 2024.
Nigeria experienced a sharp rise in non-performing loans between 2015 and 2017, with the percentage increasing from 4.86% to 14.81%. The economic downturn and currency depreciation following the 2016 recession were key drivers of this increase.
As the economy recovered, NPLs fell, reaching 6.02% by 2020 and 3.9% by 2024.
Notably, Nigeria ranks 14th globally in terms of NPL percentages, but its NPL ratio is lower than the global average.
The global average NPL ratio of 5.5% serves as a benchmark. Countries with NPL ratios below this average, such as Nigeria, Mauritius and Botswana, demonstrate better bank performance and lower risk exposure.
However, a reduction in NPLs does not necessarily indicate that fewer borrowers are defaulting. It might also suggest that banks and lenders are issuing fewer loans, either due to cautious lending practices or concerns about the economic environment.
Fewer loans mean fewer opportunities for defaults, contributing to a reduction in NPLs. Banks may have tightened lending standards, ensuring that loans are granted to more creditworthy borrowers, which reduces default.
According to the International Monetary Fund’s (IMF) Global Financial Stability Report (April 2023), higher interest rates can discourage both banks from lending and borrowers from taking loans due to the increased cost of debt servicing. This trend was observed globally when central banks began to raise interest rates in response to stubborn inflation in 2022.
In Nigeria, the Central Bank of Nigeria (CBN) has raised interest rates 29 times since January 2022.
A Dataphyte report noted that the increase in the interest rate, also known as the Monetary Policy Rate (MPR), would affect the cost of credit, making loans more expensive for businesses and consumers. The rise in interest rates is also expected to increase yields on personal savings and bank deposits, impacting dividends for bondholders and shareholders.