Credit Risk Mitigation with Real Estate Collaterals in Nigeria’s Commercial Banks

Abstract

The practice of posting collaterals to mitigate credit risk is commonplace in bank lending. Real estate is an important collateral instrument especially in developing countries. This study investigated credit risk mitigation with real estate collaterals by commercial banks in Nigeria to establish if real estate is a reliable collateral instrument, the role of real estate valuation and the key issues the banks consider in the process. Response was elicited from a sample of commercial banks in a cross-sectional survey with a structured questionnaire. Data analysis employed descriptive statistics. Findings indicate that real estate is a very reliable collateral instrument and that its valuation is a significant aspect of the risk mitigation process. The reliability of valuation opinion is the most important expectation of the banks from the valuers and the banks are satisfied with valuation advice provided by valuation firms. The banks consider the reputation of the borrower the most important factor to mitigate credit risk with real estate collateral and the quality of borrower’s title to the real estate the most important aspect of the collateral instrument for risk mitigation. Overall, the findings suggest negligence and inadequate due diligence on the part of the banks in the process of credit risk mitigation with real estate collaterals. There is need for adequate documentation of real estate titles and transactions for more efficient risk mitigation practice.

Key words: Bank lending, Credit risk mitigation, Collateral, Nigeria; Real estate, Secured lending