The role of financial Institutions in boosting access to finance for MSMEs in Nigeria

11 months ago

Ogechi Obasi

Micro, Small and Medium Enterprises (MSMEs) are crucial to the Nigerian economy, contributing to job creation and economic growth. According to a report by the International Finance Corporation (IFC), over 40 million MSMEs in Nigeria contribute to 84% of employment and 48% of the country's GDP. However, these businesses face significant challenges accessing finance, with only 5% of MSMEs able to obtain credit from formal financial institutions. This lack of access to finance is a major impediment to the growth and development of MSMEs in Nigeria, with many struggling to obtain the necessary funding to start or grow their businesses.

The financial services industry is a key driver of economic growth and development, because it provides the essential financial infrastructure necessary for economic activity. The availability of financial services and products helps to promote investment, entrepreneurship, and innovation, which in turn leads to job creation, increased economic output, and higher standards of living.  An increase in accessing finance helps businesses grow and improve their financial output, but where access to credit is difficult, such as high collateral value request from banks, short repayment periods and high interest rates, many businesses will eventually fail.

Despite the efforts of financial institutions, including commercial banks, microfinance banks, and development finance institutions, in providing access to finance for MSMEs in Nigeria, there are significant challenges to be addressed, including inadequate credit information and collateral requirements, high-interest rates, and insufficient financial infrastructure. To address these challenges, financial institutions are adopting innovative strategies to provide access to finance for MSMEs in Nigeria. For instance, the Central Bank of Nigeria's (CBN) Anchor Borrowers' Programme (ABP) has provided over N554.61 billion in funding to over 3.4 million smallholder farmers across Nigeria. The programme provides a low-interest rate loan to farmers and links them to input suppliers and off-takers, thereby reducing the risk of default. Similarly, the Nigerian Incentive-Based Risk Sharing System for Agricultural Lending (NIRSAL) provides credit guarantees to financial institutions, reducing the risk of default and encouraging them to lend to MSMEs in the agricultural sector.

Commercial banks, also provide short and long-term loans to businesses, depending on their financial needs. These loans are typically backed by collateral, such as property, equipment, or accounts receivable. However, for small and medium-sized enterprises (SMEs) that lack collateral, obtaining loans from commercial banks can be challenging.

Microfinance banks, on the other hand, provide small loans to micro-enterprises and low-income individuals. These loans are often used to finance working capital and small-scale investments, such as the purchase of raw materials and equipment. Microfinance institutions also provide financial education and training to borrowers to help them manage their finances effectively. According to the Central Bank of Nigeria, there are over 900 licensed microfinance banks in Nigeria, with a total loan portfolio of N480 billion as of December 2020.

Financial institutions in Nigeria are also leveraging technology to enhance access to finance. Fintech companies are emerging as disruptors in the financial sector, offering digital banking solutions and innovative products to consumers and businesses. Some of these fintechs include: Smartsaver, PiggyVest, Cowriewise, Carbon, Kuda, Eyowo etc. With the use of mobile devices and the internet, fintech companies can offer financial services to remote areas, where traditional banks are not present.

Despite the efforts of financial institutions in Nigeria to enhance access to finance, there are still several challenges that need to be addressed. These challenges include high-interest rates, inadequate credit information, and inadequate financial infrastructure. To overcome these challenges, financial institutions must collaborate with the government, regulators, and other stakeholders to create a more conducive environment for businesses to access finance.

The NASSBER Financial Services Thematic Area is focused on a broad range of institutions and establishments that provide financial products and services to individuals, businesses, and governments. The work of the thematic area is also heavily placed on laws in the financial services industry that can make access to finance easier for MSMEs and other businesses in Nigeria.

In summary, financial institutions are crucial in improving access to finance for MSMEs in Nigeria, and despite significant challenges, they have been adopting innovative strategies to provide funding for businesses. Collaborative efforts between financial institutions and other stakeholders are required to unlock the full potential of MSMEs in Nigeria and support economic growth. Likewise, the government, legislators and financial regulators, must collaborate to create a better environment for MSMEs to access finance, including enhancing credit infrastructure, lowering interest rates, and establishing targeted funding programs for MSMEs.

 

Ogechi is an analyst with NASSBER. Reach her on ogechi.obasi@nesgroup.org

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