Small businesses in Nigeria are increasingly turning away from formal bank financing as interest rates of between 32 and 40 per cent, stringent collateral requirements, and tough lending conditions make loans unaffordable for many operators.
The situation, industry stakeholders warn, is worsening production and investment challenges, particularly as manufacturers grapple with rising input costs and weak consumer purchasing power, leaving finished goods worth N2.14 trillion unsold.
Lagos Chairman of the National Association of Small-Scale Industrialists (NASSI), Gertrude Akhimien, said many small businesses were surviving outside the banking system because of the high cost of borrowing and restrictive loan conditions.
She noted that beyond expensive interest rates, several small and medium-sized enterprises (SMEs) were unable to secure bank financing in the first place.
Akhimien attributed the credit squeeze partly to the Central Bank of Nigeria’s (CBN) Cash Reserve Ratio (CRR) and Standing Deposit Facility (SDF) arrangements, which she said had contributed to tight liquidity conditions.
She urged the apex bank to introduce incentives that would encourage commercial banks to direct more funds towards productive sectors rather than prioritising returns from depositing excess liquidity with the CBN.
The NASSI chairman proposed a lower CRR for banks that allocate a specified proportion of their lending portfolios to manufacturing, agriculture and SMEs.
She also called for a review of the SDF framework, including a possible cap on the amount banks can deposit with the apex bank, to discourage excessive preference for risk-free returns over business lending.
Akhimien recalled that the CBN’s Loan-to-Deposit Ratio policy introduced in 2019 and 2020 had helped stimulate private-sector lending, arguing that a similar targeted intervention could improve access to credit.
Similarly, National President of the Association of Small Business Owners of Nigeria (ASBON), Dr Femi Egbesola, said prevailing lending rates and stringent requirements had made bank loans increasingly inaccessible to small businesses.
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He identified interest rates of between 32 and 40 per cent, alongside heavy collateral demands, as major obstacles preventing SMEs from obtaining funds to expand operations, acquire equipment and increase production.
Egbesola stressed that affordable financing was essential for business growth, job creation and improved productivity, warning that the existing lending conditions were discouraging investment.
The Manufacturers Association of Nigeria (MAN) has also raised concerns over the impact of restrictive monetary conditions on industrial financing.
MAN Director-General, Segun Ajayi-Kadir, criticised the CBN’s 45 per cent CRR for Deposit Money Banks, arguing that the policy, alongside the SDF arrangement, was discouraging commercial banks from lending to manufacturers.
He disclosed that commercial bank lending rates averaged 32.1 per cent for very short-term loans, describing the cost of credit as a major constraint on industrial competitiveness and business expansion.
Ajayi-Kadir said expensive financing, rising production costs and declining consumer purchasing power had contributed to the accumulation of unsold manufactured goods valued at N2.14 trillion.
He warned that the situation was putting pressure on manufacturers, particularly SMEs, forcing some businesses to reconsider expansion plans, reduce production and depend increasingly on internally generated revenue.
MAN called for affordable, long-term financing at single-digit interest rates, particularly for SMEs and businesses operating in strategic sectors.
The association also advocated development financing at five per cent interest for manufacturing SMEs, with loan tenors and repayment arrangements structured around their production and investment cycles.
It urged the Federal Government to expand concessionary financing and consider a gradual review of the CRR, subject to prevailing economic conditions, to improve credit availability for productive businesses.
Akhimien also called for stronger intervention financing through the Bank of Industry (BOI) and Development Bank of Nigeria (DBN), urging both institutions to be better capitalised to provide wholesale funds to commercial banks at single-digit interest rates.
She said such intervention programmes should have clear performance targets to ensure that funds reach their intended SME beneficiaries.
However, the NASSI chairman acknowledged that internal weaknesses within some small businesses also contributed to their inability to secure loans.
She identified poor bookkeeping, inadequate financial documentation and the absence of formal business records as major reasons banks reject loan applications.
Akhimien therefore urged SME operators to formalise their businesses, maintain proper financial records and ensure their accounts accurately reflect their operations.
She also encouraged business owners to join trade associations and cooperatives, noting that collective lending arrangements could strengthen their bargaining power and improve access to intervention funds.
Additionally, she advised entrepreneurs to explore equity financing and strategic partnerships rather than relying exclusively on expensive bank loans.
Egbesola, meanwhile, argued that reductions in the Monetary Policy Rate (MPR) would have limited benefits for small businesses unless commercial banks translated such adjustments into lower lending rates.
He observed that banks were often quick to increase borrowing costs when their cost of funds rose but were slower to reduce rates when monetary conditions improved.
He called on the CBN and other relevant authorities to introduce measures that would ensure monetary policy decisions translate into affordable and accessible credit for businesses.
Industry stakeholders maintain that the combination of expensive financing, weak consumer demand and limited working capital threatens the survival of small businesses and the wider manufacturing sector.
They warned that without improved purchasing power and affordable credit, manufacturers could face further production cuts, reduced investment and job losses, undermining efforts to strengthen domestic production and economic growth.
