Why Aggressive Loans and Short-Term Targets Harm Banks and Borrowers

Nigeria’s banking sector has weathered storms of change—oil shocks, inflation, regulatory reforms—yet a lingering crisis remains: rising loan defaults.

It’s not simply bad luck or borrowers lacking integrity. Often, the banks themselves, driven by aggressive market-push strategies and chasing short-term income, create instability. By selling risky assets and funding long-term projects like aircraft or vessels with short-term deposits, they build mismatched financing structures.

This misalignment hides in plain sight, sowing fragility for banks and hardship for borrowers alike. In this research article, we explore the real drivers of defaults—looking beyond blaming borrowers and shining a light on the systemic pressures within Nigeria’s banking system.

CBN Statistics: Defaults Rising Amid Credit Expansion

The Central Bank of Nigeria’s (CBN) Q2 2025 Credit Conditions Survey shows rising defaults across secured, unsecured, and corporate loans despite increased credit supply and approvals.

• Households faced higher repayment stress on mortgages, personal loans, and credit cards.

• Corporates of all sizes recorded elevated defaults.

• Loan spreads widened for households.

• Asset quality weakened for corporates.

This suggests a paradox: while banks are expanding credit, the quality of loans is deteriorating. Borrower stress and macroeconomic pressures are outweighing lending expansion, raising systemic risk if left unchecked.

NDIC Reports: Lessons from Heritage Bank

The Nigerian Deposit Insurance Corporation (NDIC) has not recently published a detailed loan default report, but its watchdog role remains crucial.

When the CBN revoked Heritage Bank’s license in June 2024 over compliance failures, the NDIC stepped in to liquidate the bank. That case underscored the dangers of mismatched portfolios and unchecked risk.

By 2024, NDIC had closed 651 failed banks:

• 50 Deposit Money Banks (DMBs)

• 55 Primary Mortgage Banks (PMBs)

• 546 Microfinance Banks (MFBs)

This highlights the real-world consequences when aggressive deposit drives and income-chasing collide with fragile asset-liability structures.

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IMF/World Bank Insights

Since 2009, the IMF has provided technical assistance to the CBN to strengthen supervisory capacity. Yet challenges remain, including weak validation of banks’ interbank and external asset/liability data.

Globally, asset-liability mismatch is a top risk: when a bank’s assets and liabilities differ in currency, tenor, or interest rate terms.

In Nigeria, this risk is amplified by:

• High inflation

• Currency volatility

• Short-dated deposit funding

This combination makes mismatches more dangerous and destabilizing.

Key Insights: What’s Fueling the Crisis?

1. Market Push Over Customer Fit
Banks, motivated by fee income and volume, push products without aligning tenors with needs. Long-term ventures like aviation require patient funding, yet depositors often prefer short-dated products—forcing banks to stretch liquidity.

2. Asset-Liability Gaps Breeding Instability
Funding long-term assets with short-term deposits exposes banks to liquidity shocks. For example, FCMB’s liquidity ratio rose from 36.6% in 2023 to 40.6% in 2024 as it tried to cushion against mismatches.

3. Short-Term Income Targets Driving Risk Sales
Zenith Bank’s 2024 report revealed:

• Stage-2 (watch-list) loans hit 37% of gross loans by September 2024, worsened by FX devaluation.

• Cost of risk climbed to 7.3%, over twice the industry average (~3%).

4. Economic Headwinds as Amplifiers
Inflation and currency depreciation worsen fragility.

• Headline inflation eased to 21.88% in July 2025 (down from 22.22% in June).

• But food inflation rose to 22.74% YoY in July 2025, up from 21.97% in June—showing persistent consumer pressure.

Table: Snapshot of Key Banking Metrics, 2024

• NPL ratio: 4.5% by year-end 2024 (within CBN’s 5% threshold).

• Mid-year improvements: dropped to 3.81% in May from 4.79% in April.

• Full-year average: ~3.9%, stronger than prior years.

While stable overall, stress pockets appeared in some major banks:

• Access, Fidelity, Zenith, Stanbic IBTC: NPLs between 3–4%.

• GTCO: NPL above 5% (breaching threshold).

• UBA: Stage-3 (credit-impaired) loans at 6.64%.

Consequences for Borrowers and Banks

1. Borrowers Trapped in Mis-matched Loans
   Example: A vessel owner with a 15-year asset financed by a 6-month loan must constantly roll over debt, exposed to rising rates and refinancing risk.

2. Banks Straining Reserves and Liquidity
   Ballooning Stage-2 loans mean higher provisions. Zenith’s high provisioning in 2024 shows how chasing income can quickly erode capital when defaults rise.

3. Systemic Fragility Mounting
   Heritage Bank’s collapse is a warning: misaligned portfolios can shake confidence, trigger license revocations, and force NDIC interventions.

4. Macro Stresses Compound Fragility
   In Nigeria’s inflationary, FX-volatile environment, loose asset-liability matching is reckless. Borrowers default, banks scramble, and the cycle deepens.

Conclusion: Healing the Mismatch

Nigeria’s loan default crisis is not simply about weak borrowers or governance gaps. It stems from how banks push for sales and short-term income, creating mismatched portfolios that crack under macroeconomic stress.

The way forward requires:

• Financing long-term assets with longer-tenor funding.

• Strengthening liquidity buffers and stress-testing (CBN/IMF-backed).

• Incentivizing client-centric lending over volume-driven targets.

• Leveraging NDIC and CBN data to detect early risks in Stage-2 loans, provisioning ratios, and mismatches.

“Tradition should not mean rigidity but wisdom—where banks finance responsibly, borrowers receive tailored support, and both stability and prosperity grow together.”

Nigeria’s Non-Performing Loan (NPL) Position – June 2025

The Gross NPL ratio jumped to 17.6% in June 2025, far above the CBN’s 5% prudential threshold. This signals urgent corrective measures.

Strategic Implications & Recommendations

To address the rising risks, regulators must tighten oversight and intervene earlier before vulnerabilities escalate. Banks need to strengthen their credit risk management systems to stop loan quality from deteriorating further, while industries under particular stress should receive targeted relief to ease the pressure. At the same time, financial institutions must build stronger capital buffers to absorb shocks from rising defaults. Finally, collaborating with trusted debt recovery professionals, such as Kreeno Debt Recovery & Private Investigation Agency, can enhance collections, recover non-performing assets, and safeguard bank balance sheets.

By
Dr. Prisca Ndu
Global Director of Strategic Partnerships
KREENO DEBT RECOVERY & PRIVATE INVESTIGATION AGENCY
KREENO CONSORTIUM

Kreeno Place: Plot 1, Rufus Ojeagbase Street, WAEC Estate, Arogun Junction,
Mowe-Ofada Road, Mowe, Ogun State, Nigeria

Tel: +234 809 867 7827 | WhatsApp: +234 902 128 8737
Email: info@kreenoholdings.com | info@kreenoplus.com
 Web: www.kreenoholdings.com | www.kreenoplus.com

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