Why Nigerian Banks Still Avoid Lending to SMEs

Nigeria’s challenge is not a lack of small and medium‑enterprise (SME) importance; it is a problem of bank allocation. The country repeatedly returns to the same public discussion because mainstream credit still fails to reach smaller businesses at the scale required by the economy.

Recapitalisation has raised the broader issue of capital allocation. This is the SME counterpart of that same test. If Nigerian banks claim that small business matters but do not develop the credit model needed to lend to it properly, then the market has only described the problem, not solved 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, extend debt financing to 250,000 MSMEs, issue up to $800 million in guarantees to catalyse lending, and lengthen the average maturity of MSME loans to roughly three years. That should make the banking industry uncomfortable.

When public schemes of that scale keep returning, the problem is no longer merely a lack of awareness. Domestic credit intermediation is still not doing enough on its own.

This argument should not be reduced to lazy slogans about banks refusing to lend. Many lenders are cautious for commercially understandable reasons. A large portion of the SME market remains hard to see clearly. Financial records are uneven, cash flows are often weakly documented, and 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 lack reliable data, sector‑specific underwriting discipline, or recovery confidence to distinguish stronger borrowers from 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, and cannot recover efficiently when a facility deteriorates, then even a decent borrower can appear too dangerous on paper.

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, defend, and 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 alone was never going to fix the SME credit gap. More capital helps only if institutions are willing and able to use it to 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 problem is not only inside the banks. The wider macro setting also makes productive credit harder to price and 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