Why Arbitration Is the Way to Go for Banks to Reduce Trillions in Non-Performing Loans
In the commercial world of banking, time is money, but in Nigeria, the clock often moves far too slowly when debts go bad. While the economy expands in pockets of fintech and oil, Nigerian banks are sitting on a silent volcano: trillions of naira locked in non-performing loans (NPLs).2
According to a 2024 sectoral review, eight deposit money banks reported a combined NPL exposure of ₦2.59 trillion, up from ₦1.29 trillion in 2023, a 101% rise in just one year. Across all listed banks, bad loans and impairments have cost the industry an estimated ₦3.77 trillion since 2023, eroding capital and trust. The Central Bank of Nigeria (CBN) has repeatedly warned that several lenders are brushing close to, or have breached, the prudential threshold of 5% for NPL ratios. 3
In plain terms, the Nigerian banking system is bleeding value through loan defaults and litigation; the traditional recovery route is too slow to stop the haemorrhage.
Litigation: A Leaky Bucket in a Storm
For decades, Nigerian banks have turned to the courts for loan recovery. Yet, litigation is an ill-suited tool for a fast-moving, high-value financial ecosystem. The reasons are familiar and painful.4
Court processes move at a glacial pace, with commercial cases dragging on for 5 to 10 years, even before it gets to appeals.5 Adjournments, procedural objections, and enforcement hurdles often mean that by the time judgment is delivered, the value of collateral has shrunk, borrowers have moved assets, and the debt has multiplied under interest.
Beyond the cost of time, there’s the operational costs: legal fees, filing charges, bailiff services, and reputational exposure.6 A bank’s pursuit of a delinquent debtor becomes public drama, splashed across headlines, denting its image and sometimes spooking investors. Litigation in Nigeria, for most lenders, has become a long, costly, and uncertain bet.7
The Solid Case for Arbitration: Quiet Speed and Smart Recovery
Arbitration, by contrast, offers what modern banking desperately needs: speed, confidentiality, and enforceability.8
An arbitration clause embedded in a loan or mortgage agreement transforms dispute resolution from a marathon to a sprint. While a court case might crawl for years, a well-managed arbitration can deliver an award in under six months, depending on the rules adopted.9
In a sector where asset depreciation and currency volatility can wipe out loan security overnight, speed is not luxury; it’s survival. Arbitration delivers it.
Confidentiality that Protects Reputation
Unlike open court proceedings, arbitration protects the confidentiality of the disputes. A bank can pursue recovery without reputational backlash, protecting relationships with high-net-worth clients or corporate borrowers. Confidentiality encourages candour and often facilitates settlement, an outcome both pragmatic and humane in today’s fragile business environment.10
Expertise that Understands the Deal
Arbitration allows banks to select arbitrators who actually understand banking and finance, not generalist judges juggling criminal and civil dockets. A tribunal of financial and legal experts can interpret complex clauses in loan facilities, debenture deeds, and syndicated credit agreements with precision.
Cases such as Union Bank v. Tropics Securities Ltd and Afribank (Nig.) Ltd have shown that where disputes hinge on technical or contractual interpretation, arbitration can produce faster, sounder results than traditional litigation.
Binding and Enforceable Outcomes
Arbitral awards, under the Arbitration and Mediation Act 2023, are as binding as court judgments and are enforceable both domestically and internationally under the New York Convention. For banks dealing with cross-border borrowers, this provides a crucial advantage: recovery can transcend borders.
Reducing NPLs: From Theory to Strategy
How, exactly, can arbitration move the needle on trillions of naira in bad loans?
Here’s the roadmap:
Embed Arbitration Clauses Early: Every facility agreement, guarantee, and collateral documentation should include an arbitration clause, domestic or international, depending on the borrower’s structure.
Trigger Early ADR: Don’t wait for default to snowball. Once a borrower shows signs of stress, invoke negotiation or mediation under the arbitration framework to restructure or settle.
Engage Specialist Arbitrators: Banking and finance arbitrators can interpret covenants, repayment schedules, and security interests faster and more accurately.
Design for Enforcement: Fast-track arbitration rules (like those of the Lagos Court of Arbitration or the Nigerian Institute of Chartered Arbitrators) allow for simplified hearings and direct enforcement.
Treat Recovery as Capital Recycling: Each Naira recovered through arbitration is capital freed up for new lending, reducing the NPL ratio and improving balance-sheet liquidity.
Challenges and Considerations in Arbitration
Arbitration is not without its limitations, some of which are:
Enforcement: Awards are binding under the Arbitration and Mediation Act 2023 and the New York Convention, but enforcing them against uncooperative or asset-hiding borrowers can be challenging.
Cost: Faster than litigation, arbitration can still be expensive due to arbitrator fees and institutional charges.
Limited Discovery: Arbitrators have less power than courts to compel production of documents or witness testimony, which can hinder asset tracing.
Finality: Awards are final with limited appeal options, making errors hard to correct.
Despite these considerations, arbitration remains the preferred mechanism for NPL recovery in Nigeria, thanks to its speed, confidentiality, and the ability to appoint arbitrators with specialized expertise in banking and finance which is an advantage that litigation cannot match.
A Mindset Shift for Nigerian Banks
For too long, arbitration has been seen as a tool for big corporations or cross-border deals. That mindset must change. Arbitration is a business recovery strategy, not just a legal option.
Banks should invest in in-house arbitration desks, train recovery officers in ADR, and collaborate with arbitral institutions like the Lagos Court of Arbitration (LCA) and the Nigerian Institute of Chartered Arbitrators (NICArb) to develop sector-specific panels.
In jurisdictions like Singapore and the UAE, banking arbitration is already mainstream helping lenders maintain asset quality, attract foreign investment, and recycle capital efficiently. Nigeria can and should follow suit.
Conclusion: From Trillions Lost to Trillions Recovered
The Nigerian banking industry is grappling with a significant NPL challenge and cannot litigate its way out of a ₦3.77 trillion debt. The NPL ratio has hovered around 4.5 % and continues to pose risks to profitability and asset quality. The future lies in smart, fast, enforceable dispute resolution, and arbitration offers exactly that.
In a nation where the economy’s pulse beats to the rhythm of credit, arbitration could well be the defibrillator that restores financial vitality. It is the bridge between debt and recovery, between loss and liquidity, between frustration and finality.
For banks ready to move from courtroom battles to boardroom solutions, arbitration isn’t just the way forward, it’s the way home.
References:–
-1 Ingves, Stefan, and Gören Lind, 1997, “Loan Loss Recoveries and Debt Resolution Agencies: The Swedish Experience,” in Banking Soundness and Monetary Policy: Issues and Experiences in the Global Economy, ed. by Charles Enoch and John H. Green (Washington:International Monetary Fund). -11 (2012) LPELR-9339 (CA),
-12 Section 57(1) of the Arbitration and Mediation Act 2023 (Nigeria) provides that an arbitral award shall be final and binding on the parties.
-13 Section 90 incorporates the New York Convention, enabling enforcement of foreign arbitral awards in Nigeria.Enforcement risks: Ishie‑Johnson E. ‘Challenges of Enforcing Arbitration Awards in Nigeria’ (Opinion Nigeria, 6 days ago) https://opinionnigeria.com/challenges-of-enforcing-arbitration-awards-in-nigeria‑by‑ishie‑johnson‑emmanuel‑esq/ accessed 10 November 2025.
-15 Cost considerations: Oke Akinkugbe A. O. ‘Arbitration in Nigeria: An Exposé on Its Cost and Expenses’ (Mondaq, 2025) https://www.mondaq.com/nigeria/arbitration-dispute-resolution/1183162/arbitration-in-nigeria-an-expos%C3%A9-on-its-cost-and-expenses accessed 10 November 2025.
-16 IFC, Access to Finance Africa FY13 Overview (International Finance Corporation 2013).
Central Bank of Nigeria, ’CBN seeks 5% non-performing loans ceiling for banks’ (Proshare, 8 November 2023) https://www.proshare.co/articles/cbn-seeks-5-non-performing-loans-ceiling-for-banks?category=Capital+Market&classification=Read&menu=Market accessed 8 November 2025.-17 Sapna Jhangiani KC & Eden Li, ‘Let’s Bank on Arbitration … Why Or Why Not?’ (Singapore Law Gazette, 2023) https://lawgazette.com.sg/practice/practice-matters/lets-bank-on-arbitration-why-or-why-not/ accessed [date].
-18 Nwosu CP, Okedigba DO & Anih DO, ‘Non-Performing Loans and Profitability of the Nigerian Commercial Banks’ (2021) CBN Journal of Applied Statistics 9(2)
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