Why CBN rate cuts don’t mean more SME lending
For a small business in Nigeria, securing a bank loan has long felt like trying to step through a moving doorway. Commercial banks mobilise deposits, and the Central Bank of Nigeria (CBN) urges them to extend credit, yet formal lending to small businesses remains low.
In Nigeria, securing a bank loan for small businesses feels like navigating a moving doorway due to low formal lending despite commercial banks extending credit as per the Central Bank of Nigeria's (CBN) guidance. Micro, small, and medium-sized enterprises (MSMEs) make up most businesses, contribute significantly to GDP, and employ many people.
Yet, fewer than one in 20 MSMEs can access formal bank credit because of structural barriers, expensive short-term credit, and high collateral requirements. Credit availability and its cost depend on several factors, with the CBN's Monetary Policy Rate (MPR) being a key determinant. When the CBN raises the MPR, borrowing costs increase, making it more expensive for businesses to borrow.
Conversely, rate cuts are meant to lower borrowing costs and stimulate economic activity. However, the CBN's recent record single interest-rate cut by 3.5 percentage points to 23% does not guarantee more lending for small businesses. A decade's worth of CBN data reveals that while rate cuts can lower the cost of money, the actual impact on SMEs' access to credit depends on the banks' assessment of the borrower's risk, collateral, and cash flow.
An established retailer with a five-year operation history and lower perceived credit risk is more likely to secure credit compared to a young business with only 18 months of operation, which poses higher uncertainty and risk to lenders.
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