SMEs Shun Bank Loans Over 40% Lending Rate – Operators

Small businesses in Nigeria are increasingly operating outside the formal banking system, as interest rates of between 32 and 40 per cent, heavy collateral demands and strict lending conditions put bank loans beyond the reach of many operators.

Operators and industry groups said the credit squeeze, combined with weak consumer purchasing power and rising input costs, is hurting production and investment. Unsold finished goods in the manufacturing sector have now reached N2.14 trillion.

The Lagos chairman of the National Association of Small-Scale Industrialists (NASSI), Gertrude Akhimien, said many small businesses were effectively surviving outside the banking system due to high interest rates and strict lending requirements.

According to her, the problem goes beyond the cost of borrowing, as a significant number of SMEs are unable to access bank financing in the first place.

“SMEs are not really accessing finance from banks; they are surviving outside the banking system,” she said.

Akhimien argued that the Cash Reserve Ratio (CRR) and Standing Deposit Facility (SDF) arrangements had contributed to tight liquidity conditions, making it difficult for businesses to obtain the financing required to sustain and expand their operations.

She maintained that banks needed stronger incentives to channel credit towards productive sectors rather than prioritising relatively attractive returns from depositing idle funds with the Central Bank of Nigeria (CBN).

“Until we have a carve-out that rewards banks for lending to the productive sector, expansion will remain financially burdensome,” she said.

The NASSI chairman urged the CBN to consider a lower CRR for banks that commit a specified proportion of their lending portfolios to manufacturing, agriculture and SMEs.

She recalled that the apex bank’s Loan-to-Deposit Ratio (LDR) policy introduced in 2019 and 2020 had helped encourage lending to the private sector, arguing that a similar targeted approach could improve credit availability for small businesses.

“CBN needs to consider a lower CRR for banks that lend a certain proportion to manufacturing, agriculture and SMEs. We did it with LDR policy in 2019/2020; it worked,” she said.

She also called for a review of the SDF framework, arguing that banks should not be encouraged to prioritise placing excess liquidity with the apex bank over financing businesses.

“SDF rate should not be so attractive. There must be a cap on how much a bank can park at SDF. Otherwise, you are paying banks not to lend,” she added.

The National President of the Association of Small Business Owners of Nigeria (ASBON), Dr. Femi Egbesola, said access to affordable financing had become increasingly difficult for small businesses, with prevailing rates and stringent requirements making bank loans almost inaccessible to many operators.

He explained that even when SMEs approach financial institutions for loans, the conditions attached often make it difficult for them to qualify.

According to him, interest rates ranging from 32 to 40 per cent, coupled with stringent collateral requirements and other conditions, have made borrowing increasingly unattractive and, in some cases, practically impossible for small businesses.

“Sometimes in the past, it was easy for you to get funding and financing. It is like passing through a camel’s eyes now,” he said.

Egbesola noted that access to affordable finance remained essential for SMEs seeking to expand their operations, acquire equipment, increase production and employ more workers.

“When SMEs are able to get easy access to affordable finance, it helps them to grow,” he said.

He added that the lending conditions imposed by banks had become increasingly difficult for small business owners to meet, citing high interest rates, collateral requirements, and other stringent loan terms as major obstacles. Businesses that previously found it relatively easier to access financing, he said, now face a much more difficult process.

The concerns of small businesses are shared by manufacturers. The Manufacturers Association of Nigeria (MAN) has warned that restrictive monetary conditions, particularly the CBN’s decision to retain the CRR for Deposit Money Banks at 45 per cent, are further constraining credit to the productive sector.

MAN Director-General, Segun Ajayi-Kadir, argued that the high CRR, alongside the SDF arrangement, was discouraging commercial banks from extending credit to manufacturing businesses.

“The CRR of an unfriendly 45 per cent and adjustment of the SDF to pay commercial banks to park their idle funds at the apex bank effectively incentivises banks to avoid lending to the manufacturing sector,” he said.

He disclosed that commercial bank lending rates averaged 32.1 per cent for very short-term loans, describing the prevailing cost of credit as a major impediment to industrial competitiveness and business expansion.

“Commercial bank lending rates averaged 32.1 per cent for very short-term loans. This limits access to finance, increases borrowing and production costs, and makes operational expansion financially burdensome,” he said.

Ajayi-Kadir warned that expensive financing, rising input costs and weakening consumer purchasing power were placing additional pressure on manufacturers, contributing to the accumulation of unsold finished products valued at N2.14 trillion.

He said the growing stock of unsold goods had heightened concerns about the sustainability of manufacturing operations, particularly among SMEs struggling to secure financing to maintain production and meet their obligations. Many businesses, he added, were being forced to reconsider expansion plans, reduce production, and increasingly depend on internally generated revenue.

The MAN director-general called for access to affordable, long-term financing at single-digit interest rates, particularly for SMEs and businesses in strategic sectors of the economy.

He also advocated development financing for manufacturing SMEs across their production and investment cycles, at an interest rate of five per cent, supported by loan tenors and repayment structures that reflect these cycles.

He urged the Federal Government to expand access to concessionary financing and called for a gradual review of the CRR, subject to prevailing macroeconomic conditions, to improve banks’ capacity to support productive enterprises.

On intervention funds, Akhimien called for stronger financing through the Bank of Industry (BOI) and Development Bank of Nigeria (DBN), noting that both institutions should be better capitalised to provide wholesale funding to commercial banks at single-digit interest rates.

She said such arrangements should be backed by clear performance targets to ensure that intervention funds reach the SMEs they are meant to support.

However, the NASSI chairman also identified weaknesses in some small businesses that contributed to their inability to secure bank loans.

According to her, poor bookkeeping, inadequate financial documentation and the absence of formal business records often undermine loan applications, even when businesses have viable products and expansion prospects.

“The main reason for bank rejection after high rates is poor bookkeeping. Banks need a 12-month bank statement and audited cash flow,” she said.

She therefore advised MSME operators to formalise their businesses, maintain proper financial records and ensure that their accounts accurately reflect their operations.

Akhimien also encouraged small business owners to join trade associations and cooperative groups, explaining that collective arrangements could improve their chances of securing financing and accessing intervention funds.

“Cluster lending through cooperatives and trade associations (MAN, NASSI) gives better negotiating power than individual walk-in,” she said.

She further advised business owners to explore equity financing and strategic partnerships instead of relying exclusively on expensive bank loans.

“Bring in partners rather than taking a 32 per cent loan for a three-year machine,” she counselled.

Egbesola also argued that the benefits of monetary policy adjustments would remain limited if commercial banks failed to translate reductions in the Monetary Policy Rate (MPR) into lower borrowing costs for SMEs.

He maintained that while reductions in the benchmark rate could be welcome, what mattered more to small businesses was whether such adjustments would translate into cheaper, more accessible credit.

He observed that banks were often quick to increase lending rates when the cost of funds rose but were not equally prompt in reducing them when monetary conditions improved.

He consequently called for deliberate measures by the CBN and other relevant authorities to ensure that monetary policy decisions produced tangible benefits for businesses in the real economy.

For manufacturers and small business owners alike, the challenge is increasingly a combination of weak demand, expensive financing and limited access to working capital.

With N2.14 trillion worth of finished products reportedly unsold, industry stakeholders warn that unless purchasing power improves and affordable credit becomes more accessible, manufacturers may face further pressure on production, investment and employment.

They argue that closing the financing gap is critical not only to the survival of individual businesses but also to efforts to strengthen domestic production, create jobs, improve industrial competitiveness and stimulate economic growth.