Loan Default and Financial Performance of Rural Community Banks in Kebbi State

This study examines the impact of loan defaults on the financial performance of rural community banks in Kebbi State, North West Nigeria. Rural community banking serves as a critical financial access point for farmers, artisans, and low-income households in underserved areas. However, high loan default rates driven by agricultural income volatility and weak credit appraisal processes have threatened the viability of many community banking institutions in the Northwest. This study adopts a survey design and collects primary data from 80 credit officers and management staff of 10 registered community banks in Kebbi State. Secondary financial data were also extracted from institutional records for the period 2020 to 2023. Loan default is measured using the non-performing loan ratio, while financial performance is proxied by return on assets and net interest margin. Regression analysis is applied. Results show that the non-performing loan ratio has a significant negative relationship with both return on assets and net interest margin, confirming that loan defaults substantially erode profitability in community banks. Weak collateral enforcement and limited borrower credit history verification were identified as root causes of default. The study concludes that robust credit risk management is essential for sustaining rural banking operations in Kebbi State. It recommends that community banks adopt group lending methodologies and collaborate with state agricultural agencies to provide borrower support programs that reduce default risk.

Keywords: loan default, microfinance banks, Kebbi State, non-performing loans, rural finance.