Small businesses in Nigeria are increasingly operating outside the formal banking system because interest rates of 32 to 40 per cent, heavy collateral demands and strict conditions put bank loans out of reach, operators say. Gertrude Akhimien, Lagos chairman of the National Association of Small Scale Industrialists, said many small firms are surviving outside the banking system. The complaint has been building for months, and Leadership reports it again today.
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The cost of money
The Manufacturers Association of Nigeria has said commercial bank lending rates averaged 32.1 per cent for very short-term loans. MAN Director-General Segun Ajayi-Kadir said that limits access to finance, raises production costs and makes expansion financially burdensome. He said manufacturers need long-term, patient capital at single-digit rates, and proposed development financing for manufacturing SMEs at five per cent.
Even after a reduction in the benchmark rate, operators argue, loans stay expensive because banks are not under pressure to lend.
Why operators blame the reserve rules
The Central Bank has kept the Cash Reserve Ratio for banks at 45 per cent. In simple terms, for every N100 a bank takes in, N45 must sit with the Central Bank, which leaves less to lend. Akhimien and Ajayi-Kadir also criticised the Standing Deposit Facility, which pays banks to park excess funds with the Central Bank. In Akhimien’s words, the setup amounts to paying banks not to lend.
She proposed a lower reserve ratio for banks that lend set shares of their portfolio to manufacturing, agriculture and SMEs, as the Loan to Deposit Ratio policy did in 2019 and 2020. She also wants a cap on how much a bank can park in the facility. Ajayi-Kadir asked for a gradual review of the reserve ratio, subject to macroeconomic conditions.
Funding the middle
Akhimien called for stronger capitalisation of the Bank of Industry and the Development Bank of Nigeria, so they can wholesale funds to commercial banks at single-digit rates with clear targets for lending to SMEs. MAN said unsold finished goods worth N2.14 trillion are sitting in manufacturers’ warehouses, a sign of weak demand and heavy costs. Earlier this year, a Leadership report put the share of Nigerian MSMEs with bank loans at about four per cent.
What small firms can control
Operators were also frank about weaknesses on the borrower side. Akhimien said the main reason for rejection after high rates is poor bookkeeping. Banks want a 12 month bank statement and audited cash flow. She advised businesses to join trade associations and cooperatives, which can negotiate better terms through cluster lending, and to consider equity partners instead of taking a loan at about 32 per cent for a machine that takes three years to pay off.
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What it means
High rates are only half the problem, because a firm with no records cannot qualify at any price. That points to two fixes that must move together: cheaper long-term money from development banks and policy changes that push commercial banks to lend, and better record keeping on the owner’s side.
For small business owners, the practical steps are to open and use a business account, keep 12 months of statements, and ask about guarantee-backed and development bank facilities, which price lower than ordinary bank loans. Until reserve rules change, commercial credit will stay costly, and many will keep relying on family, cooperatives and informal lenders, who can charge more.
