The Impact of Climate Change on Agricultural Credit Risk in Rural Areas: A Case Study of First Bank of Nigeria
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Background of the Study
Climate change poses significant challenges to the agricultural sector, particularly in rural areas where farming is largely dependent on predictable weather patterns. First Bank of Nigeria has observed that climate-related events—such as droughts, floods, and extreme temperature fluctuations—increase the risk associated with agricultural lending. These climatic variations affect crop yields, disrupt production cycles, and ultimately reduce farmers’ ability to repay loans (Ogunleye, 2023). In response, the bank has integrated climate risk considerations into its credit risk assessment models, using advanced data analytics and weather forecasting tools to better predict potential loan defaults and adjust credit terms accordingly (Ibrahim, 2024).
The bank’s approach to managing climate risk involves developing flexible loan products that account for seasonal variations and incorporating climate-indexed insurance products to mitigate losses. These measures are designed to protect both the bank and its rural borrowers, ensuring that lending remains sustainable even in the face of adverse climatic events (Adebayo, 2024). Digital tools facilitate real time monitoring of weather conditions, enabling proactive risk management and timely intervention when adverse conditions are detected. However, the unpredictable nature of climate change and the limitations of current predictive models continue to challenge the accuracy of risk assessments, thereby affecting loan performance and overall portfolio quality (Chinwe, 2025).
Statement of the Problem
Climate change has introduced unprecedented volatility in agricultural production, thereby heightening the credit risk associated with rural agricultural lending. First Bank of Nigeria faces significant challenges in quantifying and managing this risk, as traditional credit risk models do not fully capture the impacts of extreme weather events (Ogunleye, 2023). The limited accuracy of climate forecasting and the inherent unpredictability of weather patterns result in gaps in risk assessment, leading to higher default rates and reduced loan performance. Moreover, many rural farmers are ill-equipped to adapt to climate-induced disruptions, further compounding the risk for lending institutions.
Additionally, the integration of climate risk data with existing credit models is hampered by infrastructural constraints and data quality issues in rural areas. Regulatory uncertainties and a lack of standardized guidelines for incorporating climate change factors into lending decisions further exacerbate the problem. As a result, the bank’s ability to manage credit risk effectively is compromised, undermining financial stability and limiting agricultural investment. This study seeks to investigate the impact of climate change on agricultural credit risk in rural areas, focusing on First Bank of Nigeria’s risk management strategies and proposing recommendations for improving the integration of climate risk factors into credit models.
Objectives of the Study
• To assess the impact of climate change on agricultural loan repayment and credit risk.
• To identify limitations in current risk assessment models regarding climate-related factors.
• To recommend strategies for enhancing climate risk integration in credit evaluation.
Research Questions
• How does climate change affect agricultural loan performance in rural areas?
• What are the limitations of current risk models in addressing climate variability?
• What measures can improve the integration of climate data into credit risk assessments?
Research Hypotheses
• H1: Extreme weather events significantly increase agricultural loan defaults.
• H2: Improved climate data integration enhances credit risk prediction.
• H3: Flexible loan terms adapted to climate variability reduce default rates.
Scope and Limitations of the Study
This study focuses on First Bank of Nigeria’s agricultural lending in rural areas from 2023 to 2025. Limitations include the unpredictable nature of climate events and regional differences in climate resilience.
Definitions of Terms
• Climate Change: Long-term alterations in temperature and weather patterns.
• Agricultural Credit Risk: The potential for loan defaults due to factors affecting agricultural productivity.
• Risk Assessment Models: Tools used to evaluate the likelihood of loan repayment failures.
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