Banks don’t like bad loans. But some investors do. For them, non-performing loans are more than red flags; they’re potential assets waiting to be re-priced, restructured, and resold.
In Nigeria, bad debt is on the rise again. The full-year 2024 financial statements of seven major banks revealed that non-performing loans (NPLs) surpassed N1.57 trillion, despite reported improvements in loan quality.
By April 2025, at least 11 commercial banks had exceeded the 5 per cent prudential limit, following an industry-wide loan reclassification during annual risk assessments. According to Mustapha Akinwunmi, a member of the CBN’s Monetary Policy Committee (MPC), the NPL ratio rose to 5.62 per cent as a result of these reclassifications.
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This marked a significant increase from the previous year, when only six banks were in breach. The specific banks involved were not disclosed.
The spike isn’t hard to explain. Currency volatility, tighter monetary policy, and persistent inflation have made debt servicing harder, especially for businesses in sectors exposed to global shocks and local policy reforms. Oil and gas, manufacturing, agriculture, and retail trade, once favoured by lenders, are now showing signs of strain.
Still, while this shift worries banks, it is drawing attention from a different crowd: distressed asset investors.
A market that hasn’t yet arrived
“Nigeria has never developed a mature secondary market for trading bad loans. The closest the country came was the creation of the Asset Management Corporation of Nigeria (AMCON) in 2010, which absorbed toxic bank assets after the global financial crisis.” Says Oyekan Idris, a capital market analyst
But in the years since, AMCON has drifted into lengthy litigation battles, limiting its role to that of a slow-moving debt recovery agency rather than a dynamic market player.
Yet conditions today are different. This new wave of bad loans is more diverse in origin, spanning unsecured consumer credit, SME finance, and energy sector exposures, and comes at a time when investor appetite for high-yield emerging market assets is rebounding.
“There’s clearly a gap in the market,” says a restructuring consultant in Lagos. “We have loan originators, we have delinquent assets, but we don’t yet have enough buyers with a risk appetite for this space.”
“Unlocking a secondary market could free up liquidity, reduce systemic risk, and expand credit to the real economy, especially to smaller firms struggling to access finance through traditional channels.”
Early interest, but pathways remain foggy
As Nigeria’s stock of non-performing loans surged past N1.57 trillion in 2024 and climbed further in early 2025, distressed debt investors have begun circling.
Sector insiders point to growing exploratory interest from investment firms based in Dubai, South Africa, and the UK, with appetite spanning unsecured consumer loans, oil and gas exposures, and commercial real estate portfolios.
Yet no meaningful transactions have been concluded. Pricing mismatches, legal ambiguity over asset recovery, and the absence of a structured secondary market continue to stall movement.
The market lacks the institutional plumbing seen in more mature jurisdictions: enforceable collateral rights, transparent valuation models, and a functioning platform for distressed asset sales.
Still, the signal is unmistakable: capital is watching from the sidelines. And with 2025 already showing a nominal rise in NPL volumes despite stable ratios, opportunity may lie in wait for investors willing to brave the risk and regulatory grey zones.
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The pricing dilemma
In markets like Italy or Spain, NPL trades rely on well-established asset registries, central data rooms, and predictable court enforcement timelines. Nigeria lacks all three. Many loan files are incomplete, collateral is either poorly documented or contested, and timelines for legal recovery are uncertain.
“The problem isn’t the credit loss,” says a senior credit officer at a Tier-1 bank. “It’s the inability to quantify recovery; you don’t know if you’re buying a 40 per cent write-down or a 90 per cent loss.”
Still, that hasn’t stopped comparisons with Europe. In Italy, for instance, Cerberus and Banca Ifis purchased billions of euros in bad loans at steep discounts, recovering value through aggressive workout strategies and structured settlements.
Nigeria, some argue, could follow a similar path, but only if regulators and market players build the right infrastructure.
Some reforms are in place; more are needed.
Some building blocks for a distressed debt market are in place. The Secured Transactions in Movable Assets Act (STMA) and the National Collateral Registry (NCR) allow lenders to register claims on movable collateral like inventory or equipment, a tool especially vital for MSME credit.
Nigeria’s Credit Reporting Act has also expanded the scope of credit data, with fintechs, landlords, and utility firms now contributing borrower information.
But foundational does not mean complete. Credit bureau coverage remains patchy. And while the Central Bank has explored a national NPL registry, execution has lagged.
More importantly, the country lacks the market “plumbing” essential for investor confidence, clear pricing benchmarks, enforceable collateral procedures, and a formal platform for trading impaired loans. In the absence of specialised SPVs or a true marketplace, investing in bad debt remains highly bespoke and relationship-driven.
Until these structural pieces are in place, Nigeria’s NPL opportunity may be visible—but not yet investable
Why it matters
Nigeria’s banks, for now, remain profitable. Most are well capitalised, and the average NPL ratio, though rising, is still manageable. But holding on to bad loans eats up capital, limits fresh lending, and weakens credit transmission in a fragile economy.
Unlocking a secondary market could free up liquidity, reduce systemic risk, and expand credit to the real economy, especially to smaller firms struggling to access finance through traditional channels.
For bold investors with patience and local understanding, this could be a rare window.
Bad loans may weigh down banks. But for the right buyer, they’re just undervalued assets in need of a new price tag.
