Nigeria’s NPL Crisis Isn’t Accidental: Weak Loan Monitoring and Poor Enforcement Are Crippling the Economy

Story: written by Daniel December 5,2025
Nigeria’s banking industry is in distress. More than a decade after the Federal Government established the Asset Management Corporation of Nigeria (AMCON) to curb the surge in Non-Performing Loans (NPLs), the problem has not only persisted—it has intensified. By 2025, default rates across small businesses, large companies and individual borrowers continue to rise sharply, according to recent figures from the Central Bank of Nigeria (CBN).

While inflation, naira depreciation and global shocks are frequently blamed, the real issue runs deeper. Nigeria’s NPL explosion is not a random economic misfortune—it is the predictable consequence of poor loan supervision, unsafe lending practices and a weak enforcement framework that allows borrowers to evade repayment. When defaulters face minimal repercussions, many begin to treat credit as free cash. This pushes honest businesses into a chokehold of high interest rates, scarce credit and shrinking productivity.

Weak enforcement—not inflation—is the engine of persistent defaults
A 2025 study published in the European Journal of Accounting, Finance and Investment shows that loan defaults account for 74% of the decline in bank profitability. This financial pressure undermines banks’ ability to repay depositors or support the economy. Even when inflation hits 28%, weak enforcement practices, not macroeconomic shocks, remain the dominant cause of defaults.

CBN’s Q2 2025 Credit Conditions Survey reveals staggering declines in repayment among SMEs—the worst-hit category—followed by large corporates and other financial institutions. Despite this, access to credit increased, proving borrowers are still getting loans but choosing not to repay them. The NAU Journal of Commercial and Property Law points to insider abuses, unsecured lending beyond approved limits, and a lack of accountability as the real drivers of the crisis.

AMCON’s persistent legal bottlenecks reinforce the problem. Although billions were spent after the 2009 crash, unresolved disputes and weak legal structures continue to fuel bad loans. International comparisons also show that countries with strict enforcement, like Malaysia, maintain low NPL rates—while Nigeria’s leniency sustains high default levels.

How weak enforcement throttles productivity
When borrowers default without consequences, banks tighten lending and raise interest rates above 30%. Small and Medium Enterprises (SMEs)—which employ over 80% of Nigeria’s workforce and contribute half of GDP—bear the brunt. Private sector credit fell sharply in early 2025, leaving a ₦3.5 trillion gap. Banks increasingly favour secured corporate loans and government securities rather than lending to productive sectors.

This credit squeeze kills growth, inflates production costs and forces transparent businesses to shoulder the burden created by chronic defaulters. Less than 5% of SME loans reach the intended recipients, creating a vicious cycle of stagnation.

Serial default is becoming a deliberate business model
In Nigeria, defaulting on loans often comes with fewer consequences than repaying them. Borrowers exploit system loopholes by using proxies, diverting funds and issuing dud cheques. Before BVN standardisation in 2015, repeat offenders manipulated identity gaps. Now, fintech channels are being exploited for loan-diversion schemes and laundering activities.

Legal consequences remain rare. Even though the Dishonoured Cheques Act carries up to two years’ imprisonment for issuing dud cheques—as affirmed in Abubakar v. FRN (2022)—most offenders escape accountability. Although cheque transactions hit ₦5.15 trillion in Q1 2025, rising by 51%, trust in commercial transactions continues to erode as many businesses now prefer cash-based operations.

CBN’s 2025 penalties for chronic defaulters, including blacklisting, repayment bans and fines, are steps forward—but evasion remains widespread. Weak enforcement simply encourages more widespread abuse.

Why restructuring fails without accountability
Loan restructuring often seems like a solution—until it becomes an incentive for default. Without strict conditions, borrowers take haircuts, renegotiate terms and resume the same behaviour. AMCON’s burdensome legal disputes and limited enforcement capacity mirror this failure. After the 2009 financial clean-up, NPLs fell to 5% but eventually returned to pre-AMCON levels because personal accountability was absent.

The International Journal of Economics and Financial Issues highlights flaws in banks’ risk-management systems that allow the cycle to continue. In countries like Malaysia, strong recovery frameworks and efficient ADR processes ensure quick resolution and discourage moral hazard.

Early investigation is the missing piece
Evidence across global credit systems shows that early detection of loan diversion dramatically increases recovery. Forensic techniques—BVN tracing, asset mapping, cashflow analysis—help identify fraudulent intent before restructuring becomes necessary. Where Nigeria’s anti-graft bodies (like the EFCC) collaborate with banks, recovery rates increase significantly.

CBN’s BVN system already reduced identity fraud, and expanding similar tools to loan monitoring could quadruple recovery outcomes, as seen in structured recovery models used by international debt-resolution firms.

Bridging Nigeria’s enforcement gap
Policy reforms are urgently needed. Nigeria must update its credit system with laws that criminalise wilful default, mandate full public credit disclosure, and streamline loan recovery processes. Other African countries offer useful models: Kenya recovers 38% through robust credit-bureau systems, while South Africa achieves 52% via fast-track courts. Nigeria can replicate these structures.

The National Assembly must strengthen legislation on dud cheques, loan diversion and cross-bank default tracking. The judiciary must implement swift, specialised NPL courts. CBN must tighten compliance enforcement, expand blacklist access and impose heavier penalties for insider lending abuse.

From leniency to accountability: Nigeria must choose growth
Ending Nigeria’s NPL crisis is not about punishment—it is about rescuing the productive economy. With strict enforcement, SMEs receive credit, manufacturers expand, and infrastructure investments resume. GDP could rise beyond 3% if capital starts flowing to productive sectors instead of being trapped in endless cycles of default.

Strengthening accountability across the financial system is essential. CBN reforms, lender vigilance and responsible borrowing practices must align to protect depositors’ funds and restore trust.

Kreeno Consortium supports Nigeria’s financial stability by integrating forensic debt recovery, credit discipline and intelligence-based investigation. Its model emphasises evidence-driven, lawful enforcement, early detection of loan diversion and asset tracing that reduces losses and rebuilds lender confidence.