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Nigeria’s banking sector has emerged from a period of major reform with stronger capital buffers, cleaner balance sheets and greater financial stability.
However, beneath that apparent strength lies a stubborn contradiction that the businesses that could drive the country’s next phase of growth remain among the least served by formal credit.
Apparently, there has been questions amongst industry stakeholders like is the banking industry doing enough to channel capital into the businesses that can drive growth and create jobs?
According to the World Bank, fewer than one in 20 Nigerian MSMEs have access to bank credit, with collateral requirements, short loan tenors and the cost of borrowing among the barriers facing viable businesses.
For many smaller businesses, the answer remains no. Despite the increase in banks’ capital and the growing strength of the financial system, access to formal credit remains limited, particularly for micro, small and medium-sized enterprises (MSMEs) that lack the collateral, scale or financial history traditionally required by banks.
According to the World Bank, this in turn create a critical gap in an economy where millions of young Nigerians enter the labour market each year and where the government cannot, on its own, finance the investment needed to generate sufficient jobs.
Hence, the private sector must carry a larger share of the growth burden, but businesses cannot expand, invest or hire at scale without access to finance.
The challenge, therefore, is no longer simply about whether banks have enough money to lend. It is about how they assess risk, structure loans and partner with other financial institutions to reach businesses that conventional credit models often exclude.
For many smaller companies, the problem starts with their position in the market.
They are too large for traditional microfinance but often too small, informal or insufficiently collateralised to attract the attention of conventional commercial banking. They may have customers, regular cash flows and a viable business model, but lack the audited accounts, fixed assets or long credit history that banks typically require.
This has created what financial-sector experts describe as the “missing middle”.
The World Bank has previously identified this as a structural weakness in Nigeria’s financial system. Its research found that smaller businesses struggle to access formal finance even as commercial banks continue to lend to larger companies. An earlier World Bank/IFC assessment estimated unmet MSME credit demand in Nigeria at about N13 trillion.
Hence, the consequence is that many businesses finance expansion from retained earnings, supplier credit, family funds or expensive informal borrowing. Some simply do not expand at all.
For an economy attempting to generate millions of additional jobs, that is a significant constraint.
More recently, domestic credit to the private sector was only about 13 per cent of GDP, while credit is particularly thin in sectors where employment potential is high. MSMEs account for roughly one per cent of credit and agriculture about six per cent, according to the bank
The implication is straightforward: capital is flowing through the economy, but not necessarily to the businesses capable of generating the broadest employment gains.
That is the productive-intermediation challenge facing the banking sector.
Stability cannot be the endgame
There is little doubt that stability was necessary.
Nigeria’s banking sector could not have played a larger role in financing growth without first strengthening its capital base and restoring confidence in the resilience of financial institutions. The recapitalisation exercise has given banks a stronger foundation from which to lend.
But a stronger balance sheet is only useful if it translates into productive economic activity.
For years, banks in Nigeria have faced a difficult operating environment. High inflation, exchange-rate volatility, elevated interest rates, uncertainty over borrowers’ cash flows and weaknesses in credit infrastructure have all made lending to smaller businesses difficult to price.
Banks, understandably, have responded by protecting their balance sheets.
Yet that response can create its own problem. If banks become increasingly comfortable with government securities and other relatively low-risk assets while productive businesses remain credit constrained, the financial system can become stable without becoming sufficiently developmental.
That is not an argument for reckless lending. Rather, it is an argument for better lending.
Banks need to become better at identifying viable businesses, assessing cash flows and using data to distinguish between a genuinely risky borrower and one that is simply too small to fit an old-fashioned credit model.
Collateral to cash flow
One of the biggest changes required is a shift in how smaller businesses are assessed.
Traditional bank lending has often relied heavily on collateral. For a large corporate borrower, that may be workable. But a growing manufacturer, logistics company, agricultural processor or technology-enabled business may have a viable stream of income without owning sufficient fixed assets to secure a conventional loan.
The answer cannot be to simply reject such businesses. Instead, banks can make greater use of transaction histories, digital payments, tax records, supplier and customer relationships, credit bureau information and other alternative data to build a clearer picture of a company’s ability to repay.
This is where technology can change the economics of SME lending.The World Bank’s newly approved $500 million FINCLUDE project is designed partly around this challenge.
The programme, to be implemented through the Development Bank of Nigeria (DBN), includes credit guarantees, technical assistance and modernised loan appraisal systems, including AI-enabled digital tools. The World Bank expects the programme to help mobilise about $1.89 billion in private capital and expand debt financing to 250,000 MSMEs.
Such interventions are important because the objective should not be for development finance institutions (DFIs) to permanently replace commercial banks.
The goal should be to make previously difficult markets more investable and allow commercial capital to follow.
Partnerships
There is also a strong case for partnerships. This is because the risk characteristics of smaller businesses do not necessarily make them unfinanceable. They make them difficult to finance under conventional structures.
That distinction matters. DFIs can provide partial guarantees, longer-term funding or subordinated capital. Insurance companies and pension funds can potentially participate in longer-tenor investment structures while Fintech companies can provide transaction data and alternative credit information.
Banks, meanwhile, can bring their balance sheets, risk-management systems and distribution networks. This creates a more diversified approach to risk.
The World Bank has long advocated properly designed partial credit guarantees, longer-term funding and private-capital mobilisation as ways of improving MSME access to finance in Nigeria.
The opportunity is therefore not simply to ask banks to “lend more”. It is to build an ecosystem in which banks can lend differently.
Economics of lending
The argument for better SME lending also comes at a time when the economics of Nigerian banking could be changing.
For much of the recent high-interest-rate environment, banks have benefited from relatively attractive yields on government securities and wide interest margins. But as macroeconomic conditions improve and monetary policy eventually becomes less restrictive, some of those returns could narrow.
This in turn will place greater pressure on banks to find productive uses for their balance sheets.
Private-sector lending should consequently become more central to the industry’s growth strategy.
There is already evidence that alternatives to traditional bank lending are emerging across Africa. Moody’s recently noted the rapid expansion of private credit on the continent, with assets under management rising to $5.6 billion by the end of 2025 from $1.8 billion in 2020.
The growth reflects persistent financing gaps and the limited ability or willingness of banks to provide long-term financing, particularly to infrastructure projects and small and medium-sized companies.
For Nigerian banks, that trend should be viewed as both a warning and an opportunity. If banks cannot develop better ways of serving smaller businesses, other forms of finance will increasingly fill the gap.
Experts react
The World Bank’s position is that the issue is not simply the availability of capital but the ability of the financial system to move that capital towards productive sectors.
According to the World Bank, Nigeria’s MSMEs are responsible for a large share of employment and economic activity, yet access to finance remains severely constrained.
Its research has also highlighted the need for banks to improve their capacity to assess and manage MSME credit risk rather than simply treating smaller businesses as miniature versions of large corporates.
In a welcome address delivered at the Chartered Institute of Bankers of Nigeria (CIBN)’s 19th Banking and Finance Conference themed; Building a resilient economy in an era of disruptions: Strategic imperatives for banks and the financial services industry in Abuja recently, its President, Dr Dele Alabi, while applauding the reforms set by President Bola Tinubu, said that the next phase of reforms must focus on transmission, moving stability from national balance sheets to business balance sheets, household budgets and individual balance sheets.
According to Alabi, Nigeria has about 39.6 million MSMEs accounting for approximately 97 per cent of business in the country, 88 per cent of employment and 46 per cent of GDP.
By this fact, he said that MSMEs remain critical for any economy and the country needs to focus on MSMEs if it wants to grow the economy.
Alabi noted that although MSMEs remain constrained by operating costs, limited access to market, poor governance, low productivity, slow digital adoption, these can be tackled by the government via the provision of shared infrastructure, business advisory services, capacity building, tech support, market linkages and easier access to finance (provided by banks).
“In this way, the gains of recent reforms can transform third aggregate indicators to stronger businesses, better jobs, higher incomes and more resilient communities”, Alabi concluded.
In a keynote address, the World Bank Country Director for Nigeria, Mathew Verghis, represented by the bank’s Senior Private Sector Specialist, Bertine Kamphuis, said currently MSMEs in Nigeria remain largely shut out of formal bank financing even as the country’s banking system grows stronger and macroeconomic stability improves.
The question is allocation,” he said. “Balance sheets are strong. The issue is where the money is going.”
Beyond firms, Verghis pointed to Nigeria’s massive infrastructure financing need as another area where credit must flow. Citing government analysis, he said about $100 billion a year is required to close the infrastructure gap, with energy and transport alone capable of absorbing almost 60 per cent of that requirement.
He added that Nigeria needs to turn this latent demand into a bankable pipeline that can pull in private capital. That, according to him, means better project preparation, stronger corporate governance, and investment-grade structures that pension funds, insurers and other institutional investors can underwrite.
Banks can no longer rely solely on government securities for yields. You have to start redirecting that capital towards job-creating growth”, Verghis said.
To bridge the financing gap, he urged DFIs and sovereign wealth funds to deploy blended-finance instruments at scale.
These include partial credit guarantees, first-loss positions and risk-sharing facilities that can protect senior commercial lenders and mobilise pension and insurance capital into productive sectors.
Ultimately, the question facing Nigeria’s banking industry is not whether banks should abandon prudent risk management.
They should not nor should banks be expected to turn every small business into a borrower.
The more important question is whether the industry can develop more sophisticated ways of identifying and pricing productive risk.
That means moving beyond a binary model in which businesses either meet conventional collateral and documentation requirements or are rejected.
It means developing specialised SME teams, supply-chain finance, cash-flow-based lending, partial guarantees, credit-enhancement structures and partnerships with fintechs and development finance institutions.
It also means recognising that some of tomorrow’s strongest companies will not necessarily look like yesterday’s strongest borrowers.
Conclusion
Nigeria’s economic transformation will ultimately depend on whether capital reaches businesses that can increase production, invest in equipment, enter new markets and employ more people.
The country’s banking reforms have created a stronger financial foundation. The next phase must determine what that foundation is used for.
For banks, stability was the first test. Productive intermediation is the next one.
The real measure of success will be whether stronger balance sheets translate into stronger businesses and whether those businesses translate into the jobs Nigeria urgently needs.
