Michael Oladejo
Nigeria does not mainly have an SME importance problem. It has a banking allocation problem. The country keeps returning to the same public conversation because mainstream credit still does not reach smaller businesses at anything close to the scale the economy requires.
Recapitalisation raised the wider question of capital allocation. This is the SME version of that same test. If Nigerian banks say small business matters but still do not build the credit model needed to lend to it properly, then the market has not solved the problem. It has only described it. The official response itself tells the story.
In December 2025, the World Bank approved a new $500 million FINCLUDE programme for Nigeria to expand finance for small businesses. According to the Bank, the programme is expected to mobilise about $1.89 billion in private capital, expand debt financing to 250,000 MSMEs, issue up to $800 million in guarantees to catalyse lending, and extend the average maturity of MSME loans to about three years. That should make the banking industry uncomfortable.
When public schemes of that scale keep returning, the problem is no longer just a lack of awareness. It is that domestic credit intermediation is still not doing enough unaided.
Banks Are Not Being Irrational
This argument should not be reduced to lazy slogans about banks refusing to lend. Many lenders are cautious for commercially understandable reasons. A large part of the SME market is still hard to see clearly. Financial records are uneven. Cash flows are often weakly documented. Collateral is frequently informal or poorly perfected.
Recovery can be slow, costly, and uncertain. In that environment, caution is not madness. It is a pricing response to weak visibility. That is why the phrase “SME risk” often hides a more precise problem. The real issue is not that every small business is inherently unbankable. The issue is that too many banks still do not have enough reliable data, enough sector-specific underwriting discipline, or enough recovery confidence to separate the stronger borrowers from the weaker ones at scale. SME risk is real.
SME blindness is often self-inflicted. This matters because risk is not only a borrower characteristic. It is also a capability question inside the bank. If a lender cannot read cash flow properly, cannot track collateral properly, cannot monitor early stress properly, and cannot recover efficiently when a facility deteriorates, then even a decent borrower can look too dangerous on paper.
The System Still Rewards Safety
Even when banks have the appetite to do more, the wider system still makes caution look rational. Government paper, better known corporates, shorter tenor facilities, and lower information cost exposures are easier to book, easier to defend, and easier to monitor than thousands of smaller credits that each need more work. In many internal capital allocation decisions, treasury comfort still beats patient SME underwriting.
The result is a market that rewards balance sheet safety more clearly than productive intermediation. A bank can talk about supporting enterprise and still find that its most convenient risk-adjusted choices sit elsewhere. That is why recapitalisation on its own was never going to fix the SME credit gap. More capital helps only if institutions are willing and able to use it in ways that widen real economy credit rather than simply reinforce defensive asset allocation.
The CBN’s own agriculture page still says less than five per cent of banks’ credit goes to the sector. That single statistic does not describe the whole SME market, but it captures the deeper pattern. If one of the country’s most employment-rich and economically strategic sectors still receives less than 5 per cent of bank credit, then the problem is not a lack of speeches about inclusion. It is a credit allocation model that still finds productive risk too easy to avoid. Nigerian banks do not only have an SME risk problem. They also have an SME visibility problem and an incentive problem.
The Macro Setting Is Also Working Against Productive Credit
The problem is not only inside the banks. The wider macro setting is also making productive credit harder to price and harder to sustain. As of 5 May 2026, the CBN’s most recent MPC decision, taken on 23 and 24 February 2026, had reduced the Monetary Policy Rate to 26.5 per cent while retaining the standing facilities corridor at +50 and -450 basis points around the MPR.
The NBS homepage, as at 5 May 2026, was still showing headline inflation at 15.38 per cent. That is lower than the worst of the previous cycle, but it is still a high inflation environment for small businesses trying to borrow and for banks trying to hold risk through volatility.
That high-rate environment shows up directly in lending conditions. The CBN’s official weekly lending-rate disclosure for 9 January 2026 showed prime and maximum lending rates across sectors already sitting in the high 20s, 30s, and in some cases above that. In that kind of market, many SMEs simply do not want the debt, and many banks do not want the marginal credit risk either. The same logic extends beyond SMEs. It also discourages some longer-tenor corporate lending where cash flows are less immediate, project risk is harder to monitor, or payback depends on a steadier macro backdrop.
This is the part that often gets missed in public debate. High inflation not only hurts households, it changes credit behaviour across the system. It pushes up working-capital needs, weakens demand visibility, makes pricing harder for borrowers, raises the probability of repayment stress, and shortens the time horizon on which lenders feel comfortable making commitments. When that happens, even banks that want to lend more into the real economy start preferring credits that reprice faster, mature faster, or carry less monitoring burden.
That is why the issue is not just whether banks are charging too much. It is that the whole environment makes longer-tenor productive lending harder to underwrite with confidence. An SME borrowing at those rates has to generate extraordinary margins simply to service the debt. A mid-sized corporate with an expansion project has to believe demand, exchange rates, input costs, and execution risk will all stay manageable long enough to justify the borrowing. Many will step back. Many banks will step back with them.
Liquidity is also not absent from the system. It is being parked. With the February 2026 corridor, the Standing Deposit Facility effectively left banks able to place surplus liquidity overnight with the CBN at about 22.0 per cent and no credit risk. Dated reporting based on CBN financial data showed banks’ and merchant banks’ SDF placements at about N52.6 trillion in January 2026, N61.11 trillion in February, N128.9 trillion in March, and N92.32 trillion in April.
That does not mean all of that money could sensibly have gone to SMEs.
It does mean the system is carrying a very large liquidity preference at the same time that productive borrowers still say credit is scarce. That is an important distinction. The point is not that banks should stop managing liquidity prudently. The point is that once a system offers banks a clean overnight home for surplus funds at a high enough return and zero credit stress, the hurdle rate for moving that money into messy private-sector credits becomes even higher.
An SME loan now has to compete not only with treasury assets and internal risk limits, but also with the convenience of overnight placement.
Government financing needs reinforce the same pattern. The Debt Management Office’s April 2026 FGN bond auction offered N700 billion across the 2030, 2032, and 2035 bonds, attracted heavy demand, and cleared at marginal rates of 16.30 per cent, 16.50 per cent, and 16.59 per cent.
That is a reminder that banks and investors are operating in a market where sovereign paper still offers scale, liquidity, and relative safety. If policymakers want more private-sector intermediation, they also have to confront the incentives that keep pulling balance sheets back toward risk-free and near-risk-free assets.
This is where the government side of the story matters. The state also needs funding. It has debt-service obligations, budget pressures, and infrastructure demands. Frequent sovereign issuance is not irrational any more than bank caution is irrational. But the combined result is still a system in which a great deal of financial energy is absorbed by liquidity management and sovereign funding while smaller productive businesses remain underfunded. That is the cycle the article needs to name clearly.
Policy Keeps Returning to the Same Weak Point
The Nigerian policy system has been signalling for years that this market failure is understood. The reason the same themes keep returning is that the structural problem has not been solved. Collateral reform, guarantee schemes, intervention funds, and public risk sharing all point back to the same weakness. The mainstream credit machine still does not serve enough smaller productive borrowers confidently enough on its own, and macro conditions still reward caution.
The National Collateral Registry is one example. The CBN says the registry, launched in May 2016, was designed to let borrowers use movable assets as collateral, facilitate lending to individuals, smallholder farmers, and MSMEs, improve short-term asset liquidity, and reduce the cost of loan administration, thereby reducing interest rates.
It also says the registry should make asset diversification possible for financial institutions and create profitable lending opportunities in the MSME sector.
The Agricultural Credit Guarantee Scheme Fund points in the same direction. The CBN says the scheme guarantees 75 per cent of the net amount in default on eligible agricultural loans. The MSME Development Fund makes the same point differently. The CBN says the Fund prescribes a 50:50 ratio for on-lending to micro enterprises and SMEs by participating financial institutions. These are not random policy devices. They are repeated attempts to compensate for the same market reluctance.
When the same tools keep returning, the right conclusion is not that policymakers enjoy creating schemes. The right conclusion is that guarantees and intervention channels alone are not enough. The system also needs macro conditions, rate transmission, and allocation incentives that make productive lending less punishing than it is now.
That means policy has to operate on more than one layer at the same time. One layer is structural: better collateral use, better credit information, better recovery architecture, and better borrower formalisation. Another is prudential: banks should still be pushed to improve underwriting, monitoring, data quality, and risk recognition. But there is also a macro layer that cannot be ignored. If inflation remains high, if policy rates stay elevated, if government borrowing keeps sovereign instruments attractive, and if overnight liquidity parking remains more comfortable than private-sector risk, then guarantees alone will not solve the allocation problem.
The World Bank Should Not Need to Carry This Much of the Load
The FINCLUDE programme makes that point even more sharply. A system that is already allocating capital well should not need a new external framework to mobilise nearly $1.89 billion in private capital, support 250,000 MSMEs, and provide up to $800 million in guarantees just to move lending to where it should already be going.
That is not an argument against the programme. It is an argument about what the programme reveals. Nigeria is still relying on public architecture, development finance, and risk-sharing structures to perform part of the intermediation function that a stronger domestic credit culture should already be performing more confidently.
The average maturity target in the World Bank programme is also revealing. If the policy has to work to extend MSME loan maturity to about three years, then the market is still too comfortable with short horizons. That may protect banks from some immediate uncertainty, but it also limits the ability of credible small businesses to invest in equipment, working capital resilience, productivity, and expansion.
This is where the conversation should become more uncomfortable. Banks often describe SMEs as too risky. But part of the reason many SMEs still look too risky is that the banking system has underinvested for too long in the data, underwriting tools, sector knowledge, workflow discipline, and recovery infrastructure needed to see good smaller borrowers more clearly.
What Boards, Management, Policymakers Should No Longer Avoid
The next step is not reckless lending. It is better lending. Nigerian bank boards and executive teams should now be asking harder questions than many of them have been willing to ask. Policymakers should be doing the same.
Do we actually understand SME cash flow well enough to underwrite it with conviction? Are our sector scorecards and monitoring tools strong enough to separate better borrowers from weaker ones early? Can we perfect and monitor collateral properly? Can we detect deterioration fast enough to act before a credit turns into a recovery story? If the answer is still no, then the problem is no longer just market risk. It is a management choice.
That means better borrower data capture, cleaner financial records, and deeper use of transactional evidence, stronger sector scorecards, better collateral perfection and monitoring, faster early warning triggers, and more serious post-disbursement credit management. It also means joining the strategy to the infrastructure. A bank cannot claim to want productive SME exposure while still running critical underwriting and monitoring processes on fragmented source systems, spreadsheet-heavy review cycles, and weak recovery intelligence.
Boards should also be asking different allocation questions. How much of the balance sheet is repeatedly going back into the same easy assets? Which sectors can the bank genuinely underwrite rather than merely talk about? Where is the bank pricing for uncertainty, and where is it simply avoiding the work of understanding risk? Which business lines are earning comfortable returns because they are efficient, and which are earning them because the bank keeps selecting the least demanding exposures? Those are strategy questions, not only credit questions. This is also where technology should stop being discussed as branding. Better credit visibility now depends on better tools. Banks should invest in data infrastructure, reporting architecture, workflow discipline, and the governed use of AI where it improves cash-flow analysis, document review, exception handling, portfolio monitoring, and recovery prioritisation. The point is not to automate judgment away. It is to make better judgments and provide better evidence.
From a practitioner perspective, this is where risk, finance, and reporting disciplines have to meet. At BST, we have seen repeatedly that stronger IFRS 9 discipline, cleaner data lineage, and better regulatory reporting do not only satisfy supervisors. They also improve how management sees deterioration, prices risk, and allocates capital. The bank that can see earlier usually lends better.
Policymakers also have their own set of hard questions. How does the country bring inflation down sustainably enough for productive credit to breathe again? How does it manage public financing needs without pulling too much capital toward sovereign comfort? How does it preserve monetary discipline while still creating conditions in which more banks can profitably support SMEs and longer-tenor business credit? That is not an argument for careless easing. It is an argument for recognising that the SME lending gap is also a macro-allocation problem.
The harder question for the next phase is therefore simple. Will Nigerian banks finally build the underwriting, monitoring, recovery, and data capability needed to lend to SMEs with more confidence and more discipline, or will they continue outsourcing that burden to policy schemes, guarantees, and development finance? And will policymakers keep running a system in which inflation, high rates, sovereign funding pressure, and risk-free liquidity parking continue to compete successfully against productive lending? If the answer on either side is yes, the speeches will continue, and the gap will remain.
· Oladejo is Chief Executive Officer of BST Consulting Limited. He advises financial institutions on risk, finance, prudential reporting, IFRS 9, Basel, and regulatory transformation.