By Abimbola Adegbite
In a developing economy such as Nigeria, sustainable economic growth is usually anchored on domestic policy initiatives driven by the government and the Organised Private Sector (OPS).
The OPS, which includes MSMEs, represent the bedrock of national economic growth. In that regard, they enjoy considerable recognition from the government and financial institutions as engines of business and economic development.
However, businesses, both local and foreign, encounter challenges when obtaining financing. Small, medium-sized and even commercial enterprises can be affected by this. A central challenge in this arena is assessing credit risk, which is crucial to lending decisions.
Understanding Credit Risk: A Critical Component of Decision-Making
Credit risk is the potential that a borrower may fail to meet their financial obligations, an essential consideration that banks must carefully evaluate before extending credit.
For financial institutions, credit risk assessment involves a sophisticated blend of advanced technology and human expertise. This comprehensive system assesses factors such as a borrower’s economic health, business model, and market conditions, enabling more informed lending decisions.
In essence, credit analysts are integral to this assessment process. They conduct rigorous evaluations that encompass quantitative data and qualitative insights for each business. Such holistic analyses are crucial for identifying viable initiatives and ensuring that loans are granted based on sound principles.
Analysts consider industry trends, historical performance, potential growth trajectories, and economic forecasts to build an accurate picture of a borrower’s creditworthiness.
High-quality credit assessments serve multiple functions beyond merely providing risk mitigation for banks. They also enhance the confidence of local entrepreneurs seeking financial support.
When banks offer reliable creditworthiness evaluations, it fosters trust in the lending process, which is vital for enabling SMEs to secure the financial backing they need to grow and innovate. This means that a well-structured credit assessment can also identify exceptional businesses that might otherwise be overlooked, creating opportunities in segments previously considered too risky.
Reputation and Capabilities: Key Factors for Lenders
In addition to credit risk, lenders are increasingly scrutinising borrowers’ reputations and operational capabilities in lending decisions.
Banks must assess the track records of businesses applying for loans, examining factors such as financial management practices, the quality of their products or services, and their commitment to fulfilling contractual obligations.
A solid history of timely repayments, robust financial controls, and a transparent operational structure can greatly enhance a company’s chances of securing funding.
Current Landscape of Non-Performing Loans in Nigeria
Recent Q3 2025 reports indicate stabilisation and improvements in non-performing loans (NPLs) across several Nigerian banks, driven by enhanced recovery initiatives, regulatory reclassifications, and proactive provisioning. While economic pressures such as inflation and FX volatility persist, these developments underscore the importance of robust credit risk management. Notable banks with updated NPL metrics include:
Access Bank: Recorded an NPL ratio of approximately 2.8% in its Q3 2025 financial report, demonstrating superior asset quality and leadership among Tier-1 peers through aggressive loan recoveries and strong coverage.
Zenith Bank: Reported NPLs of around 3.0%, marking a continued decline from prior periods via write-offs and portfolio monitoring, supporting sustained profitability with a ROAE above 25%.
First Bank of Nigeria: Saw its NPL ratio improve to approximately 8.5%, a reduction from earlier highs. However, it remains elevated and highlights the need for ongoing enhancements in risk frameworks and impairment strategies.
Guaranty Trust Bank: Noted an NPL ratio of 4.5%, reflecting positive momentum with improved coverage at 146.9%, even as the loan book expanded 20.5% to N3.36tn.
United Bank for Africa (UBA): Reported NPLs of about 5.6%, maintaining stability amid 10% loan growth and economic headwinds, with coverage at around 58% bolstering resilience.
Ecobank Nigeria: Experienced an NPL ratio of around 5.3% at the group level (proxy for Nigeria operations), benefiting from remediation programs that reduced ratios from 6.7% in December 2024.
Stanbic IBTC Bank: Recorded an NPL ratio of approximately 4.2% in its H1 2025 financial report, with a management target below 5% for the full year, supported by effective write-backs and resilient asset quality amid strong profit growth.
The stabilising NPL landscape across these institutions points to a maturing banking sector response to challenges, with the average NPL rate across Nigerian banks estimated at around 5.0% as of Q3 2025. This progress reinforces the critical role of effective credit risk assessment strategies in maintaining financial stability and fostering long-term economic growth.
While 11 banks exceeded the 5% threshold in April 2025 (pushing the industry average to 5.62%), subsequent reports show stabilisation or declines, with IMF projections at 4.5% (expected to rise modestly). High impairment charges (N1.96tn across the top 8 banks in 9M 2025) signal caution, but effective risk management has mitigated systemic risks.
Rigorous due diligence and “enhanced credit assessments” remain vital, especially for outliers like FirstBank, Access Bank, Uba, and others, but the sector’s average stability (projected ~3.8-4.5% for full-year 2025) suggests improved resilience.
Broader Impacts: Creating a Supportive Ecosystem
In light of this context, the commitment to provide financing for businesses, especially SMEs and local businesses, accelerates local production and boosts home-grown products and services; thereby contributing to the drive for ‘Made in Nigeria’ products – a crucial stimulant for the Nigerian economy. Financial institutions are increasingly aware that supporting local businesses can yield significant economic benefits while ensuring a more robust and resilient banking environment.
By dedicating resources to encourage sustainable lending practices, banks can foster innovation and growth among local businesses.
Ultimately, a supportive ecosystem for local businesses, characterised by adequate financing and a commitment to community development, is essential for the overall growth of the economy.
As banks navigate the challenges of credit risk assessment, their efforts not only help to sustain individual enterprises but also contribute to the long-term health and prosperity of the national economy.
