SMEs struggle for credit amid high interest rates

Small businesses in Nigeria face worsening access to credit as high interest rates and tight monetary policy persist. Many SMEs avoid loans amid stricter conditions, widening a funding gap and forcing reliance on costly informal finance, SAMI TUNJI writes

Small and medium-scale enterprises across Nigeria are grappling with limited access to affordable financing as rising interest rates, tight monetary conditions, and structural bottlenecks continue to constrain growth, forcing many operators to rely on costly informal credit channels.

According to the 2025 Informal Economy Report by Moniepoint, more informal businesses in Nigeria are turning away from credit due to rising interest rates and stricter lending conditions. The report showed that 51 per cent of respondents have never taken a loan and do not intend to do so, up from 30 per cent in the previous year.

“While 30 per cent of respondents reported not borrowing for their business in our previous report, that figure increased to 51 per cent in this report. 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 read.

In a recent report by Stears titled ‘MSME Lending in Nigeria, Ghana, and Kenya’, Nigeria’s MSMEs face a $236bn funding gap, with only about four per cent of the country’s 40 million MSMEs having access to formal bank loans. The MSME sector is vital, contributing over 50 per cent of the GDP and employing 70 per cent of Nigeria’s workforce. However, the lack of access to affordable credit is one of the key challenges stifling its growth.

Speaking with The PUNCH, a renowned economist and Chief Executive Officer of the Centre for the Promotion of Private Enterprise, Muda Yusuf, said the financing gap reflects deeper systemic issues in Nigeria’s credit architecture, particularly for small businesses.

“We need a special financing window for small businesses which will give them lower interest rates and longer-term funds,” Yusuf said in a telephone interview, stressing that the current structure of lending does not support enterprise growth.

Credit stifles SMEs

Under the leadership of Olayemi Cardoso, the CBN has raised the MPR six times, held it four times and cut it twice, moving it from 18.75 per cent before the February 2024 MPC meeting to 26.5 per cent in February 2026. The tightening cycle began with a 400-basis-point hike to 22.75 per cent in February 2024 and continued through March, May, July, September and November 2024, before the MPC held the rate at 27.5 per cent in February, May and July 2025. The first cut came in September 2025, when the rate was reduced to 27 per cent, followed by a hold in November 2025 and another 50-basis-point cut to 26.5 per cent in February 2026.

Nigeria’s high-interest rate environment has significantly reshaped access to credit, especially for small businesses that lack collateral and formal financial records. With the CBN maintaining a tight monetary stance in recent periods, borrowing costs have surged across the banking system, pushing lending rates for SMEs into levels many consider unsustainable.

Available data from the CBN show that prime lending rates have remained elevated, while maximum lending rates often exceed 30 per cent per annum, depending on the borrower’s risk profile. For small businesses, particularly those outside major urban centres, the reality is even harsher.

PwC’s MSME Survey 2024 showed that 27 per cent of respondents cited high interest rates as the major barrier to loans, 26 per cent blamed long procedures and 14 per cent cited insufficient collateral.

Yusuf explained that commercial banks’ risk-averse posture has further narrowed access. “If we leave them completely at the mercy of commercial banks, it will be very difficult for them to be able to get the kind of finance that can generate the kind of momentum that we expect,” he said.

He noted that most banks perceive SMEs as high-risk borrowers due to weak credit histories, lack of formal documentation, and exposure to market volatility. As a result, many businesses are excluded from formal lending channels altogether.

“Many commercial banks don’t even want to deal with them because they say they are risky,” he added.

This exclusion has created a parallel financing ecosystem dominated by microfinance institutions and informal lenders, where borrowing costs are significantly higher.

“Some of them pay as high as five per cent per month flat. Some of them pay up to seven per cent per month flat. If we multiply that by 12, you know what figures we are talking about,” Yusuf said, highlighting the unsustainable nature of such financing.

For many SMEs, these rates translate to annual borrowing costs that can exceed 60 to 80 per cent, making it nearly impossible to reinvest profits or scale operations.

Beyond cost, access itself remains a major hurdle for small businesses. According to PwC’s MSME Survey 2024, most enterprises rely heavily on informal funding channels, with “family and friends remain(ing) the dominant source of funding for most MSMEs”, accounting for 38 per cent of primary financing among surveyed firms. Formal credit, particularly from banks, plays a secondary role, with only 26 per cent of respondents accessing funding through bank loans, overdrafts, or credit lines. This shows a persistent structural gap in Nigeria’s credit system, where stringent requirements, collateral constraints, and high borrowing costs continue to limit SMEs’ ability to secure formal financing.

Yusuf argued that the current framework prioritises monetary stability over development financing, limiting the ability of small businesses to access concessionary funds. “Given our level of development, we need to create a window of concessionary financing for small businesses and for the real sector of the economy,” he said.

He added that without deliberate intervention, SMEs would continue to struggle, undermining job creation and economic growth.

Entrepreneurs adopt alternatives

For many business owners, survival depends on navigating a difficult financing landscape through unconventional means, often combining formal and informal support systems.

One such entrepreneur is Ahamd Tijjani, popularly known as Ustaz, who operates a printing business supplying nylon materials to sachet water producers in Gusau, Zamfara State.

Starting out was a challenge due to limited capital. “At the beginning, I did not have sufficient capital to fully establish the business,” he told The PUNCH.

Unlike many SMEs that rely on high-interest loans, Tijjani was able to access support from Jaiz Bank Plc, which provided him with an initial facility of N500,000.

However, what distinguishes his experience is not just access to credit but the structure of the financing.

“What makes Jaiz Bank unique is that they do not just give cash; instead, they finance the purchase of business assets directly and allow you to pay over time,” he said.

This asset-based financing model allowed him to acquire essential equipment without diverting funds to other uses, ensuring that the financing directly contributed to business expansion.

“Through this support, I was able to expand from one machine to three machines, with two additional machines financed by the bank,” he added.

Despite this support, Tijjani’s experience also reflects broader challenges faced by SMEs. He noted that staying competitive requires continuous investment in technology, which remains difficult under current financing conditions.

“One of the major challenges I face is keeping up with innovation and new printing technologies. Some of my competitors are more advanced,” he said.

His immediate goal is to upgrade to a modern three-colour printing machine to improve efficiency and product quality, but accessing the required financing remains a hurdle.

Tijjani believes that financial institutions can do more to support SMEs by adopting models that ensure funds are used productively.

“Financial institutions should emulate Jaiz Bank’s model of supporting businesses through asset-based financing rather than direct cash disbursement,” he said.

According to him, such an approach reduces the risk of fund mismanagement while promoting sustainable business growth.

His experience shows a key point raised by Yusuf: that SMEs require financing structures tailored to their realities, rather than traditional commercial lending models that prioritise short-term returns.

The road ahead

Experts argue that addressing the SME financing gap requires a combination of policy reforms, institutional strengthening, and innovative financial products.

The Director of Natella Business Academy, Dr Joseph Edem, recently said small businesses remain heavily pressured by high interest rates and economic reform but can still thrive by rethinking their approach to value and partnerships.

Yusuf emphasised the need to rethink Nigeria’s approach to SME financing, particularly by integrating development finance into the broader financial system.

“We should look at this from a development perspective, not from a purely commercial perspective,” he said.

He called for the establishment of concessionary financing windows that provide lower interest rates and longer repayment periods, enabling SMEs to invest in growth rather than focusing solely on survival.

Such interventions, he noted, would likely require a more active role for development finance institutions, which are better positioned to provide long-term funding at affordable rates.

“That will require that perhaps our development finance institutions should be able to do more,” he said.

Another critical area is risk management. Yusuf highlighted the need for frameworks that reduce the perceived risk of lending to SMEs, thereby encouraging more banks to participate.

“We need to find a de-risking framework to de-risk that sector. I think that will also go a long way,” he said.

Potential solutions include credit guarantee schemes, improved credit information systems, and policies that incentivise banks to lend to SMEs.

Recent interventions by the CBN and other agencies have attempted to address some of these challenges, including targeted lending programmes and support for micro, small, and medium enterprises. However, the scale of the problem remains significant.

Nigeria’s SME sector, which accounts for a substantial share of employment and economic activity, continues to operate below its potential due to financing constraints.

Analysts warn that without improved access to affordable credit, the country’s ambitions for higher economic growth and industrialisation may be difficult to achieve.

Yusuf linked SME financing directly to broader economic outcomes, including job creation and GDP growth. “If we really want development, if we want jobs to be created, we cannot run away from creating a special window,” he said.

For entrepreneurs like Tijjani, the path forward lies in a combination of resilience and access to the right kind of support. While his business has grown steadily due to strong demand for sachet water packaging, future expansion will depend on his ability to secure financing for modern equipment.