Why Nigerian Banks Now Treat Land and Buildings as Risky Collateral

Why Nigerian Banks Consider Land and Buildings High-Risk Collateral for Loans

Lenders in Nigeria are increasingly reclassifying land and buildings as high‑risk collateral, following a wave of demolitions, title revocations and regulatory enforcement. What was once viewed as secure loan security is now raising serious credit‑risk concerns, undermining both formal and informal lending practices across the country.

From Reliable Security to Uncertain Collateral

Historically, land and built property served as the bedrock of collateral for bank loans in Nigeria. Under the former paradigm, a valid title deed or Certificate of Occupancy (C of O) plus property improvements offered sufficient security for banks to extend credit.

Today, frequent demolitions and the enforcement of building approval rules and land‑use regulations by federal and state authorities have exposed structural and regulatory weaknesses in using real estate as loan collateral. In recent months, lenders have flagged significant risk of title revocation, eviction or regulatory restructuring, especially where documentation or approvals are unclear.

Core Challenges: Title Risks, Regulatory Uncertainty, Valuation Difficulties

A large share of land in Nigeria remains untitled or unofficially held. Experts estimate up to 70% of properties are presented with problematic documentation, creating uncertainty over legal ownership. Without verifiable, government‑endorsed title documentation, banks cannot guarantee their ability to reclaim collateral in the event of default.

Even where titles are valid, properties may fail to meet urban‑planning or building‑permit standards. Several demolitions of “unauthorised developments” have led to a loss of collateral value or to the outright invalidation of property titles. This unpredictability deters lenders and reduces the acceptability of real estate as collatera

Valuation Gaps and Illiquidity

Banks and estate surveyors frequently report wide discrepancies between market valuations and conservative internal bank valuations. This divergence lowers the loan‑to‑value ratios lenders are willing to approve. Additionally, real estate often lacks liquidity; properties in certain areas may take a long to sell, complicating recovery in default cases.

Key Challenges

• Unclear Ownership and Titles
  A significant proportion of Nigerian land lacks formal documentation, and properties may carry disputed or incomplete titles, limiting a lender’s ability to recover assets in the event of default.

• Regulatory Compliance Risks
  Even when legal titles exist, many properties fail to meet planning approvals or building regulations. Recent enforcement actions and demolitions highlight the risk of properties losing value or being deemed invalid as collateral.

• Valuation and Liquidity Gaps
  Bank valuations often diverge from market rates, and some properties are difficult to sell, particularly in less liquid markets. These gaps reduce loan-to-value ratios and further discourage banks from relying on real estate collateral.

Impact on Lending and the Real Estate Sector

• Tighter Credit Conditions: Banks are limiting exposure to property-backed loans or requiring additional security, constraining access to financing for SMEs, developers, and homebuyers.

• Housing Finance Bottleneck: Reduced availability of mortgage credit could slow homeownership growth, particularly among middle-income Nigerians.

• Shift to Alternative Collateral: Financial institutions are exploring income-based lending, movable assets, and other non-traditional collateral to maintain credit flow.

Conclusion

The recent reclassification of land and buildings as risky collateral marks a pivotal shift in Nigeria’s credit and real estate environment. For banks, it reduces exposure to unpredictable regulatory and legal events. For borrowers and the wider economy, it signals a tightening in access to traditional mortgage and credit financing. Restoring trust in real estate as collateral will require concerted reforms in land registration, documentation, regulatory certainty, and valuation standards. Without these reforms, the potential of real estate to underpin Nigeria’s housing finance and broader economic growth may remain constrained.