Fresh concerns are emerging over credit risk in Nigeria’s lending market as the Central Bank of Nigeria (CBN) reveals a sharp uptick in loan defaults by large private non-financial corporations (PNFCs) and other financial corporations (OFCs).
This is despite an overall improvement in loan performance across smaller business segments and households, and against the backdrop of the Nigerian financial industry preferring big corporates. Last week, the African Development Bank (AfDB) President, Akinwumi Adesina, accused the Nigerian financial industry of operating on outdated risk models and rigid credit structures that deny SMEs and young entrepreneurs funding, focusing on big corporates.
The apex bank’s Credit Conditions Survey Report for the first quarter of 2025, released this week, showed that large corporates and financial institutions recorded negative default index scores of -0.6 each—a reversal from the relatively strong repayment behavior seen in previous quarters. The default index, which reflects the net balance of lender responses, signals worsening conditions when it falls below zero.
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For most of 2024, large PNFCs and OFCs had shown steady improvement. In the final quarter of that year, large corporates had posted a positive default index of 4.3, following 4.9 in Q3. OFCs had performed even better, returning default scores of 5.0 and 6.8 in the same periods. But the first three months of 2025 saw that progress unravel, pointing to renewed pressure on these borrowers’ debt-servicing capabilities.
In contrast, smaller firms appear to be stabilizing. Small businesses posted a modest but positive default index of 0.5—albeit a drop from 9.0 in Q4 2024. Medium-sized PNFCs also maintained positive momentum, with their score settling at 3.0. According to the report, lenders are observing stronger repayment behaviors in these categories, a development linked to tighter underwriting practices and improving cash flows in the SME space.
The CBN’s findings also reveal continued gains in household loan performance. Secured household loans recorded a default index of 3.9, while unsecured personal loans climbed to 5.0, reflecting a sustained rebound from the troubling levels of 2022 and early 2023 when consumer defaults had posed a major threat to lender balance sheets.
This improvement in household repayment behavior coincides with rising demand for personal credit, particularly overdrafts and personal loans, though appetite for mortgage and credit card lending appears to have waned in Q1 2025. Lenders, however, are not responding with blanket approval; the data shows a more cautious stance, with tightening of credit scoring criteria across most lending categories.
The broader credit environment remains dynamic. Demand for credit increased during the quarter, especially for corporate and secured lending, driven largely by working capital needs and inventory financing. But lenders are becoming more selective. Loan approvals rose for secured and corporate borrowers, while falling for unsecured loans, suggesting a tightening of risk tolerance even amid higher borrowing interest.
There’s also been a noticeable shift in loan pricing. Lenders widened the spread over the Monetary Policy Rate (MPR) for both secured and unsecured household loans, indicating tighter risk pricing. Corporate loans followed a similar pattern, with wider spreads reported—except in the case of OFCs. Curiously, spreads narrowed for these financial firms, even as their default rates worsened.
Some analysts believe this divergence may reflect lenders’ expectations that OFCs could receive liquidity support or government intervention. Others suggest it may be an attempt to keep key financial players afloat to avoid broader systemic implications. Either way, the move has sparked questions about the rationale behind such pricing flexibility for borrowers who are increasingly showing signs of stress.
The implication of rising defaults among large borrowers is significant. These entities typically account for a sizable portion of total commercial credit exposure, and any deterioration in their performance can have ripple effects throughout the financial sector. The CBN report, while noting that it does not represent the Bank’s official policy position, warns that worsening conditions in this segment could lead to higher loan loss provisioning, reduced appetite for large-ticket lending, and a potential tightening of credit policy in the coming months.
For now, the more resilient performance of SMEs and households offers some buffer. However, the strain at the top of the lending market points to vulnerabilities that could test the banking sector’s risk management capacity amid ongoing macroeconomic uncertainty.
Bank executives and financial analysts say this development is not entirely surprising. They cite inflationary pressures, currency volatility, and weak consumer demand as factors that continue to erode profit margins for large firms, making it harder to meet loan obligations. With tighter monetary policy driving up interest rates and increasing the cost of capital, the pressure is mounting on firms that previously enjoyed more favorable credit conditions.