Introduction
In Nigeria’s bustling markets and commercial districts, millions of business owners share a common struggle: accessing tailored financing needed to scale-up their operations. A furniture maker in Benin City, Edo State, requires capital to purchase modern equipment but lacks the type of collateral acceptable to financial institutions. In Aba, Abia State, a garment producer with booming demand struggles to expand her operations due to high-interest rates on loans. In Jos, Plateau State, a vegetable farmer needs credit to invest in irrigation systems to combat dry-season challenges but is unable to meet stringent lending requirements. Meanwhile, a promising tech startup in Lagos seeks bridge funding to scale but has no credit history. These scenarios play out daily across the country where accessing finance remains one of the most significant barriers for businesses in Nigeria. Various reports from both local and international development agencies indicate that about 5-10% of Nigerians have access to adequate financing.
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This challenge is not unique to Nigeria, globally, the World Bank’s Global Findex Database (2021) shows that only 10% of adults in Africa reported borrowing from a formal financial institution, compared to 16% in East Asia and the Pacific, 8% in South Asia, and 60-80% in Western Europe and North America. The disparities are stark, underscoring the structural barriers that restrict credit flow in developing economies.
In Nigeria, a limited capacity to package projects, lack of collateral, inadequate credit history, and general risk aversion by financial institutions are key factors constraining credit access. Given the private sector’s critical role in job creation and economic development, addressing this financing gap is essential. As Nigeria aims to achieve its goal of becoming a trillion-dollar economy under President Bola Ahmed Tinubu’s Renewed Hope agenda, closing the financing gap is critical – as they say, MSMEs are the engine of growth. Or for those who believe in the good book, “money answereth all”. Credit Guarantee Instruments (CGIs) emerge as a transformative tool to unlock credit flow, deepen financial inclusion, and drive sustainable economic growth.
What are Credit Guarantee Instruments?
Credit Guarantee Instruments are mechanisms designed to reduce the risks financial institutions face when lending to businesses. A third party, such as a government agency or a specialized institution, guarantees a portion of the loan, ensuring that lenders recover part of their losses if borrowers’ default. By reducing the perceived risk, CGIs incentivize lenders to extend credit to underserved sectors, including micro, small, and medium enterprises (MSMEs).
Globally, CGIs have proven effective in closing financing gaps. Recognizing their importance, the Central Bank of Nigeria (CBN) introduced guidelines in 2022 for regulating and supervising Credit Guarantee Companies (CGCs). These guidelines aim to ensure transparency and accountability, setting the foundation for a robust credit guarantee ecosystem in Nigeria.
Lessons from Global Models
Global examples of CGIs, such as South Korea’s Credit Guarantee Fund (KODIT), Chile’s Fondo de Garantía para Pequeños Empresarios (FOGAPE), and Turkey’s Credit Guarantee Fund (KGF), demonstrate their transformative potential. These schemes have enabled small businesses to access funding, even during economic downturns. For instance, KODIT’s robust risk management framework and streamlined processes have made it a global benchmark.
However, not all CGI programs have succeeded. India’s Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) faced challenges with high default rates and operational inefficiencies. Similarly, Egypt’s Credit Guarantee Company (CGC) struggled with low bank participation due to stringent eligibility requirements and cumbersome approval processes. These experiences highlight the need for a solid framework to guide the operationalization of CGI.
Nigeria has also experimented with credit guarantee initiatives, such as the Agricultural Credit Guarantee Scheme Fund (ACGSF) and the Nigeria Incentive-Based Risk Sharing System for Agricultural Lending (NIRSAL). While these programs showed promise, they fell short of achieving their full potential due to design flaws and implementation challenges. To avoid repeating these mistakes, Nigeria must adopt a tailored approach that incorporates global best practices while addressing local needs.
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The Case for Credit Guarantees in Nigeria
A well-designed credit guarantee scheme could significantly transform Nigeria’s financial landscape by reducing lender risk and unlocking access to affordable financing for enterprises. This would encourage risk-based lending to businesses and to scale-up, boosting overall productivity and contributing to GDP growth, while also fostering job creation to lower unemployment. Furthermore, with improved access to capital, businesses could increase their investments in technology and innovation, enhancing their competitiveness in global markets. For instance, tech startups and agricultural enterprises could leverage financing to adopt advanced tools, expanding their market reach and operational efficiency.
A Credit Guarantee Instrument could also significantly advance financial inclusion and encourage formalization. Many Nigerian business owners currently rely on informal financing or personal savings, leaving them vulnerable to economic shocks. A formalized credit guarantee scheme would create a more inclusive financial ecosystem, ensuring that businesses of all sizes can access the funding they need to grow.
As Nigeria seeks to diversify its economy away from fossil fuel dependence, CGIs can channel resources into non-oil sectors such as agriculture, manufacturing, technology, and services. These sectors have immense potential to drive economic diversification, create employment opportunities, and reduce poverty. The knock-on effects of such growth—job creation, income generation, and poverty alleviation—could be transformative for the Nigerian economy.
While development finance institutions (DFIs) such as the Bank of Industry and the Development Bank of Nigeria have made strides in supporting businesses, their reach remains limited by the need to optimize risk management. A CGI could complement these efforts by mobilizing private sector participation in commercial lending. Partnering with banks and financial institutions, the instrument could facilitate innovative lending products at lower interest rates and with reduced collateral requirements. This would expand the credit pool and encourage long-term investments in economic growth.
As part of its recognition of the critical nature of CGIs in fulfilling its mandate, the Bank of Industry in December 2024 signed a $50 million dollars Loan Portfolio Guarantee Agreement with the African Guarantee Fund (AGF) to provide funding for MSMEs and women owned businesses in line with BOI’s six thematic areas.
Building a Path Forward
To implement an effective CGI program in Nigeria, a coordinated public-private partnership is essential. The following steps should guide the design and implementation.
Tailored Design: The CGI program must address the specific needs of all Nigerian businesses. This includes limited collateral and high-interest rates while ensuring accessibility for MSMES. It must be designed to maximize accessibility for businesses without compromising lending standards.
Effective Risk Management: A robust risk management framework is critical. This includes thorough credit assessments, continuous monitoring of loans, and prioritizing borrowers with viable business models.
Stakeholder Collaboration: Success depends on collaboration among the government, financial institutions, and development partners. Banks must be incentivized to participate, while development partners can provide technical expertise and funding support.
Transparency and Accountability: Clear guidelines, accountability measures, and robust oversight mechanisms are vital to prevent misuse and build trust among financial institutions and beneficiaries.Awareness and Capacity Building: Businesses must be informed about the scheme and supported in meeting credit requirements. Capacity-building initiatives, such as training programs on financial management and business planning, can empower entrepreneurs to leverage credit guarantees effectively.
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Conclusion: A Call to Action
As Nigeria works toward becoming a trillion-dollar economy, establishing a National Credit Guarantee Company (CGC) is a strategic imperative. By reducing credit risks for financial institutions, such an initiative would make financing more accessible and inclusive for businesses across all sectors. This, in turn, would empower Nigerian entrepreneurs, accelerate economic diversification, and foster sustainable growth.
Stakeholders, including the government, banks, DFIs, and development partners—must collaborate to bring this vision to life. A well-designed CGI program could unlock the full potential of Nigeria’s enterprises, laying the foundation for a resilient and inclusive economy. The time to act is now. It is refreshing to see that the President Bola Ahmed Tinubu-led government is making CGIs more accessible to Nigerian enterprises in line with the pledge in his 2025 new year speech to kick off the National Credit Guarantee Company (NCGC) before the end of second quarter.
One popular Nigerian song that has been ruling the airwaves for some weeks titled “Joy is Coming” by Fido is the new slogan of Nigerian MSMEs, because once the NCGC kicks off, it will serve as a big uncle who will guarantee lenders based on pre agreed terms that part of their exposure to businesses is covered and they will repay if default occurs which will in turn make more funding available to businesses to transform Nigeria’s industrial sector.
Dr Olusi is the Managing director/CEO of Banking of Industry
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