Only 12% of MSMEs get loans from traditional banks – report

Only 12.2 percent of over 40 million Nigerian Micro Small & Medium Enterprises (MSMEs) get loans from traditional banks, while 70 percent of MSMEs prefer to get their loans from family and friends and 15 percent use loan apps, according to recent Informal Economy Sector report.

Small business owners prefer to obtain credit from informal sources due to a lower entry barrier and the speed of obtaining credit.

“I got a loan recently from a family member because it was faster, more reliable, stress-free and not-interest bound instead of getting it from a bank,” Lisa Okafor, a lingerie business owner told BusinessDay.

The report, powered by Moniepoint, also revealed that only 11 percent of MSMEs save via traditional banks while cooperative and group contributions form the bulk of how MSMEs prefer to save for ‘responsibilities that can’t be met with immediate cash flow’.

“Cooperative and group contributions form the bulk of how these businesses choose to save. For many, this feels “closer to home” than other means. A close next option is digital banks which is 39.5percent, and least frequently, traditional banks making up 11percent. Their choice could be due to a lower entry barrier entry, and potentially higher returns,” the report stated.

Osareti Asemota, a serial entrepreneur, stated on X that most small business owners prefer informal lending because it comes at zero interest rates and is the best form of social insurance for the players in the sector.

“If you want to build a system that helps those at the bottom of the pyramid, cooperatives and informal lending are the absolute guides to behaviour and patterns. Trying to replace them is a waste of time and resources,” he said on X.

The report also said that businesses in the informal sector contribute over half of Nigeria’s GDP with 72.3 percent of players hitting monthly revenues of over N1 million.

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However, 79.4 percent of MSMEs make a monthly profit below N250 thousand with only 1 percent profiting above N2.5 million monthly, despite contributing to over 90 percent of employment in Nigeria.

“Our data shows that almost 58percent of Nigeria’s informal workforce is below 34 years old. The largest group, making up 43percent, is between 25 and 34. The second largest group of young people, 35 to 44-year-olds, represent 28.9percent of the sector in Nigeria.”

“This youthful energy offers a tremendous opportunity for socio-economic transformation through innovation, entrepreneurship, job and wealth creation,” the report said.

Finally, the report stated that only 37.1 percent of women own businesses in the informal sector, 86 percent less than 37.1 less than 62.9 percent of men who own small businesses.

“The informal economy represents a crucial avenue for women’s economic empowerment in Nigeria and across Africa despite challenges in equity,” it said.