Alliance for Economic Research and Ethics (AERE), a non-governmental organization, has called for an overhaul of the credit system in Nigeria in order to enable it to serve as an engine of growth for the Nigerian economy.

In a report titled “The Credit Paradox: How Nigeria’s Broken Capital Allocation Architecture is Strangling its Growth Engine” released recently, AERE called for a redrawing of the extant architecture, reset of priorities through reforms of the major lending institutions in the country.

Based on the report which focused exclusively on the Micro, Small and Medium Enterprises (MSMEs) in the country and their contemporary travails in accessing adequate capital to catalyse their businesses, AERE called on lending institutions such as Bank of Industry (BoI), Bank of Agriculture (BoA), Nigerian Export-Import Bank (NEXIM), and commercial banks in the country to restructure their lending profile, and lower lending rates for the MSMEs to enable them grow their businesses.

AERE also called for the recapitalisation of NEXIM, BoI, and BoA, urging the Federal Government to regard fiscal discipline as a credit policy. It equally urged the Central Bank of Nigeria (CBN) to rethink and restructure its current policy suites towards the MSME sector, enforce the policies on the lending institutions, including the commercial banks.

AERE also called on the MSME sector itself to meet the “system” halfway through “open verifiable bank accounts, file tax returns, maintain audited records, and register assets”, stating that building banking relationships before credit is needed, maintaining that “a transaction history is the cheapest collateral available”, them to “leverage government contracts and purchase orders as credit assets, assign them, discount them and collateralise them”.

AERE noted with concern that in Nigeria, “fewer than one in twenty MSMEs in Africa’s largest economy have access to formal bank credit” in a “nation where micro, small and medium enterprises account for 96% of all businesses, 48% of GDP, and 84% of private sector employment”, stating that “this is not a market imperfection” but “a structural catastrophe”.

While welcoming the World Bank’s approval of USD500 million in late 2025 to Fostering Inclusive Finance for MSMEs in Nigeria (FINCLUDE) designed to mobilise USD1.89 trillion in private capital and debt financing to 250,000 enterprises including at least 150,000 women-led businesses and 100,000 agribusinesses, AERE condemned the cavalier situation where the country’s requirement is a complete misalignment.

“When an economy the size of Nigeria requires a multilateral institution to guarantee USD500 million in credit to mobilise domestic capital for its own small businesses, the problem is not risk. The problem is (lack) of vision (poor) governance and the systematic misalignment of financial incentives”, AERE said.

The organisation noted that the country’s macroeconomic environment, for the better part of two years, constructed a perfectly rational case for commercial bank inertia, stating that while the CBN’s Monetary Policy Rate which stood at 26.50% as at February 2026, the real cost of capital remains punishing.

“When a bank can earn a near-riskless return by doing nothing, the incentive to underwrite a Lagos market trader or a Kano agro-processor evaporates entirely.

“This is not banker greed. This is banker arithmetic. And until policymakers change the arithmetic, the speeches about financial inclusion will remain precisely speeches”.

“Nigeria’s domestic credit to the private sector stands at approximately 17.6% of GDP, a figure that places Africa’s largest economy in the company of the world’s most financially underdeveloped nations. South Africa’s comparable ratio exceeds 70%. Kenya’s exceeds 30%. For an economy that aspires to the top twenty globally by 2050, this is not a gap. It is a chasm”

AERE further noted the compounding effects of the federal and other sub-national huge appetite for domestic borrowing.

“When sovereign instruments (such as) Treasury Bills and FGN Bonds clear at yield of 16-22%, they do not merely compete with SME lending, they obliterates it.

“The State, in borrowing aggressively from the domestic market, is effectively pricing the private sector out of the credit queue.

“Fiscal consolidation is not austerity, it is the creation of space for productive capital”.

The organisation criticises a situation where Nigeria operates a network of Development Finance Institutions (DFIs) whose combined total assets is slightly above N8 trillion, where financial requirement for MSMEs alone is estimated at over N130 trillion, noting that this “is not a funding gap. It is a funding abyss.”

It noted the worrisome demand side of the credit market which it claims is dysfunctional.

“Too many Nigerian MSMEs operate in the informal economy without audited accounts, without registered assets, without verifiable cash flows. The borrower cannot prove creditworthiness because the system has never incetivised normalisation. Informality is not a cultural preference; it is a rational response to a regulatory environment that makes normalisation costly and offers few tangible benefits in return.

“The solution is not to blame the borrower. It is to redesign the incentive structure so that formalisation becomes the path of least resistance, not the path of greatest friction”.

The AERE report discloses that the World Bank’s FINCLUDE programme will mobilise and extend credit to 250,000 MSMEs whereas Nigeria has over 39 million MSMEs.

“The mathematics of external intervention, however generously structured, cannot close a gap of that magnitude.

“Nigeria’s 39 million MSMEs are not waiting for another speech. They are waiting for a loan”, AERE pointed out.

The solution, therefore, “must be domestic, structural, and permanent.  It requires a Federal Government that borrows less and fixes inflation’s structural drivers; a CBN that can stop rewarding liquidity parking over productive lending; a BOI that returns to its single-digit mandate without equivocation; a BOA that is rescued from insolvency and rebuilt as a credible agricultural financier; a NEXIM that is capitalised to match Nigeria’s export ambitions; commercial banks that build the underwriting infrastructure to see MSMEs clearly; and enterprises that formalise and meet the system halfway,” AERE concluded.

Credit: nextmoneyng.com