Only 4% of Nigerian MSMEs Secure Bank Loans Amid $236bn Funding Gap – Report

Only 4% of Nigeria’s estimated 40 million Micro, Small and Medium Enterprises (MSMEs) currently have access to formal bank loans, highlighting the deepening financing crisis confronting small businesses amid rising interest rates, weak financial documentation, and increasingly stringent lending conditions.

Industry stakeholders and financial experts have blamed the situation on poor accounting practices among SMEs, high borrowing costs, and rigid collateral requirements imposed by commercial banks, warning that many businesses risk being pushed further out of the formal financial ecosystem.

A report by Stears, titled “MSME Lending in Nigeria, Ghana and Kenya”, estimated that Nigeria’s MSMEs face a funding gap of about $236 billion despite their critical contribution to the economy.

The report noted that although SMEs contribute more than 50 per cent of Nigeria’s Gross Domestic Product (GDP) and account for nearly 70 per cent of employment, access to formal financing remains severely limited.

Similarly, the 2025 Informal Economy Report by Moniepoint revealed that more small businesses are increasingly avoiding loans due to tighter lending conditions and higher 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, compared to 30 per cent recorded 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 systems remain major factors discouraging banks from lending to SMEs.

According to him, many small businesses lack audited accounts, credible financial statements, and proper bookkeeping structures needed for banks to assess their repayment capacity.

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

He explained that the absence of reliable financial records makes it difficult for lenders to evaluate business performance, cash flow stability, and overall creditworthiness.

“Small businesses need proper accounting systems because banks want evidence of turnover, profitability, and repayment ability before approving loans,” he added.

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 increased the Monetary Policy Rate (MPR) several times, from 18.75 per cent in early 2024 to 26.5 per cent by February 2026, to tame inflation and stabilise the economy.

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

The tighter monetary policy has pushed lending rates significantly higher across the banking sector, with many SME loans now attracting annual interest rates above 30 per cent.

According to the 2024 MSME Survey by PwC Nigeria, 27 per cent of respondents identified high interest rates as the biggest obstacle to obtaining loans, 26 per cent cited lengthy loan processing procedures, and 14 per cent cited insufficient collateral.

Financial analysts said banks operating in a risk-averse environment are increasingly unwilling to lend to businesses without transparent financial records and structured corporate governance systems.

As a result, many SMEs now rely heavily on informal funding sources such as family members, cooperatives, and microfinance institutions.

PwC’s survey showed that family and friends accounted for 38 per cent of primary funding sources for MSMEs, while only 26 per cent of respondents obtained loans or overdrafts from banks.

Yusuf warned that dependence on informal financing often exposes SMEs to more expensive borrowing conditions.

“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 businesses, such rates translate to annual borrowing costs exceeding 60 per cent, making expansion and investment difficult.

An SME operator based in Agege, Musiliu Akinloye, said structured financing helped him expand his operations by acquiring additional tools and equipment.

Akinloye, who benefited from bank-backed asset financing, said lenders should focus more on financing tied directly to productive assets rather than relying solely on cash-based lending.

“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.

He, however, admitted that many SMEs still struggle to meet formal banking requirements needed to access financing for modern equipment.

Stakeholders said improving accounting literacy among SME operators could significantly boost access to credit by helping businesses maintain accurate financial records, prepare proper statements, and build stronger relationships with lenders.

They also stressed the need for targeted financial education programmes, concessionary financing windows, and credit guarantee schemes to support small businesses.

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

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

Also speaking, the National President of the Association of Small Business Owners of Nigeria (ASBON), Dr Femi Egbesola, said commercial banks largely avoid SMEs due to poor credit ratings and perceived business risks.

Egbesola called for alternative risk-assessment models and wider access to financing to support the sector, which drives a large share of economic activity in Nigeria.

He advised MSMEs to maintain proper transaction records, separate business finances from personal spending, and utilise digital banking platforms to build reliable financial histories.

He also urged banks to broaden the criteria used in assessing borrowers’ creditworthiness.

In the same vein, former Chairman of the National Association of Small Scale Industrialists (NASSI), S.T. Kuti George, urged SMEs and business vendors to formalise their operations through registration with the Corporate Affairs Commission.

According to him, business owners must keep proper records of all financial transactions and separate personal expenses from business dealings to ensure transparency and accountability.

George also advised SMEs to audit their accounts regularly, pay taxes and statutory dues, hold board meetings, join business associations, and limit personal withdrawals by setting fixed salaries for themselves.