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Bridging Nigeria’s Credit Gap: Unlocking Opportunities for MSMEs and Investors

Nigeria’s economy is driven by its Micro, Small, and Medium Enterprises (MSMEs), which constitute about 96% of businesses and employ approximately 84% of the workforce. Despite their significance, these enterprises face a substantial credit gap, hindering their growth and contribution to the nation’s GDP.

The Credit Gap: A Persistent Challenge

Access to finance remains a critical barrier for Nigerian MSMEs. According to the World Bank, the financing gap for MSMEs in Nigeria is estimated at $158.1 billion. This shortfall limits the ability of small businesses to expand, innovate, and contribute meaningfully to economic development.

A 2024 survey by PwC revealed that 35% of MSMEs identified inadequate access to finance as their primary challenge, surpassing issues like power outages and overtaxation. Furthermore, domestic credit to the private sector was about 14.1% of Nigeria’s GDP in 2022, significantly lower than the Sub-Saharan Africa average of 35.8%.

Table 1: Total credit to the private sector and credit gap

Financial Inclusion: Progress and Gaps

Efforts to enhance financial inclusion have yielded some progress. The formal financial inclusion rate in Nigeria increased from 56% in 2020 to 64% in 2023. However, this still falls short of the Central Bank of Nigeria’s target of 95% by 2024.

Gender disparities persist in financial access. Only 47% of women accessed formal financial services in 2023, compared to 58% of men. Cultural norms, lower literacy levels, and limited access to information contribute to this gap.

Addressing the Credit Gap: Strategic Interventions

To bridge the credit gap and foster a more inclusive financial ecosystem, several strategies can be implemented:

1. Strengthening Credit Infrastructure: Enhancing credit reporting systems and collateral registries can improve lenders’ confidence and facilitate access to credit for MSMEs. Fortifying existing credit guarantee institutions to support lenders by de-risking their exposures to MSMEs. This is well informed, given the establishment of the National Credit Guarantee Company (NCGC).

2. Leveraging Alternative Data: Incorporating non-traditional data sources, such as mobile phone usage and utility payments, can help assess creditworthiness for individuals and businesses lacking formal credit histories. This can be enhanced with the adoption of Artificial Intelligence and quantum technologies.

3. Promoting Digital Financial Services: Expanding digital banking and mobile money platforms can increase financial access, especially in underserved and rural areas.

4. Supporting Fintech Innovations: Encouraging fintech solutions that offer tailored financial products can address the unique needs of MSMEs. For instance, Moniepoint, a Nigerian fintech company, raised $110 million in 2024 to scale digital payments and banking solutions across Africa. We also anticipate more venture capitalists to increase stakes in fintech with a strong niche in the digital lending space.

5. Policy and Regulatory Reforms: Implementing policies that reduce bureaucratic hurdles and provide incentives for lending to MSMEs can stimulate credit availability.

The Future Outlook: Opportunities for Stakeholders

Bridging Nigeria’s credit gap presents significant opportunities for various stakeholders:

• Investors: The unmet financing needs of MSMEs offer a vast market for investment in financial services and fintech innovations.
• Financial Institutions: Developing products tailored to the needs of MSMEs can open new revenue streams and customer segments.
• Policy Makers: Implementing supportive policies can stimulate economic growth and job creation by empowering MSMEs.
• Development Partners: Collaborating with local institutions to provide technical assistance and funding can enhance the financial ecosystem’s capacity. Development finance institutions (DFIs) from developed economies are keen on investing in emerging economies like Africa.

Conclusion

Addressing the credit gap in Nigeria is crucial for unlocking the potential of MSMEs and driving inclusive economic growth. By implementing strategic interventions and fostering collaboration among stakeholders, Nigeria can create a more robust and inclusive financial ecosystem that benefits businesses, investors, and the broader economy.