MSMEs Face $236bn Funding Gap As Bank Lending Remains At 4%

Nigeria’s Micro, Small and Medium Enterprises (MSMEs) are grappling with a massive financing shortfall estimated at about $236 billion, as only 4 per cent of the country’s 40 million small businesses currently have access to formal bank loans.

The figure underscores the deepening credit constraints facing the sector, which remains a major driver of employment and economic output, despite limited access to structured financing.

Industry stakeholders and financial experts attribute the situation to weak financial documentation by small businesses, high borrowing costs, and stringent collateral requirements imposed by commercial banks. They warn that these challenges are pushing many MSMEs further away from the formal financial system.

A report by Stears titled “MSME Lending in Nigeria, Ghana and Kenya” estimated that Nigerian MSMEs face a funding gap of $236 billion, despite contributing over 50 per cent of Gross Domestic Product (GDP) and nearly 70 per cent of employment in the country.

The report noted that while MSMEs remain central to Nigeria’s economy, access to formal credit continues to be severely restricted.

Similarly, the 2025 Informal Economy Report by Moniepoint revealed a growing reluctance among small businesses to seek loans, citing harsher lending conditions and elevated interest rates.

According to the report, 51 per cent of respondents said they had never taken a loan and had no intention of doing so, up from 30 per cent in the previous year.

“This shows a decline in credit appetite across the informal and small business landscape. A major reason for this could be tighter lending conditions and a higher interest environment,” the report stated.

Speaking with LEADERSHIP, Founder and Chief Executive Officer of the Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf, said poor bookkeeping and weak accounting practices remain key barriers to SME financing.

He explained that many small businesses lack audited accounts, proper financial statements, and structured records required by banks to assess creditworthiness.

“Many commercial banks don’t even want to deal with them because they consider them risky,” Yusuf said.

He added that the absence of reliable financial records makes it difficult for lenders to evaluate cash flow, profitability, and repayment capacity.

The financing challenge has been worsened by Nigeria’s prolonged high-interest-rate environment. Under the leadership of Olayemi Cardoso, the Central Bank of Nigeria has raised the Monetary Policy Rate (MPR) multiple times, from 18.75 per cent in early 2024 to 26.5 per cent by February 2026, in efforts to curb inflation and stabilise the economy.

At its 305th Monetary Policy Committee meeting held on May 20, 2026, the apex bank retained the benchmark rate at 26.5 per cent.

The tight monetary policy stance has significantly increased lending rates across the banking sector, with many SME loans now attracting interest rates above 30 per cent annually.

A 2024 MSME Survey by PwC Nigeria found that 27 per cent of respondents identified high interest rates as the biggest barrier to accessing credit, while 26 per cent cited lengthy loan processes and 14 per cent pointed to inadequate collateral.

Financial analysts say banks, operating in a risk-averse environment, are increasingly reluctant to lend to businesses without transparent financial records and strong governance structures.

As a result, many SMEs rely heavily on informal funding sources, including family members, cooperative societies, and microfinance institutions.

PwC data showed that family and friends account for 38 per cent of MSME funding sources, while only 26 per cent of businesses access loans or overdrafts from banks.

Yusuf warned that dependence on informal financing often exposes small businesses to extremely high borrowing costs.

“Some of them pay as high as five per cent per month flat. Some pay up to seven per cent per month flat,” he said.

For many operators, such rates translate to annual borrowing costs exceeding 60 per cent, making business expansion and investment difficult.

An SME operator in Agege, Musiliu Akinloye, said asset-based financing could improve access to credit and support business growth.

He noted that structured financing tied to equipment acquisition allows businesses to expand more sustainably.

“Banks should not just give cash; instead, they should finance the purchase of business assets directly and allow borrowers to pay over time,” he said.

Stakeholders have called for improved accounting literacy among MSME operators, stronger financial education programmes, credit guarantee schemes, and concessionary funding windows to bridge the widening financing gap.

Yusuf stressed that SME financing should be treated as a national development priority rather than a purely commercial venture.

“If we really want development and job creation, we cannot run away from creating a special financing window for SMEs,” he said.

Also speaking, National President of the Association of Small Business Owners of Nigeria (ASBON), Dr. Femi Egbesola, said banks often avoid MSMEs due to weak credit profiles and perceived risks.

He called for alternative credit assessment models and broader access to financing for small businesses, which he described as critical to economic growth.

Egbesola also urged MSMEs to maintain proper financial records, separate personal and business accounts, and leverage digital platforms to build credible credit histories.

Former Chairman of the National Association of Small Scale Industrialists (NASSI), S.T. Kuti George, also advised SMEs to formalise their operations by registering with the Corporate Affairs Commission (CAC), keeping proper records, paying taxes, and adopting corporate governance practices such as audits and structured withdrawals.