Credit Risk Modelling and Capital Adequacy in Nigerian Microfinance Banks: An Actuarial Approach

This study applies actuarial risk modelling techniques to assess credit risk and capital adequacy in microfinance banks operating in Nigeria. Microfinance banks serve millions of low-income borrowers who lack access to conventional banking credit, but persistently high non-performing loan ratios have threatened the solvency of many institutions. Actuarial methods, particularly those used in credit risk quantification and economic capital modelling, offer a structured framework for assessing portfolio-level default risk that complements traditional banking supervision approaches. This study uses loan portfolio data from 12 microfinance banks operating in Ogun, Anambra, and Kano States for the period 2020 to 2023. Probability of default, loss given default, and exposure at default parameters are estimated using logistic regression and survival analysis applied to loan-level historical performance data. Economic capital requirements are computed using Value-at-Risk methodology at a 99.9 percent confidence level. Findings reveal that regulatory minimum capital ratios underestimate the economic capital required to absorb credit risk in several sampled institutions, particularly those with high agricultural lending concentrations. Correlated default patterns within sector-concentrated portfolios amplify tail risk beyond simple additive measures. The study concludes that actuarial economic capital modelling identifies meaningful capital shortfalls in Nigerian microfinance institutions that conventional ratio-based supervision may miss. It recommends that the CBN pilot an actuarial economic capital assessment framework for microfinance bank supervision.

Keywords: credit risk, capital adequacy, microfinance banks, actuarial modelling, probability of default.