How microlenders are helping SMEs boost profits

Adetunji, a market trader in Lagos, had struggled for years to secure a loan from traditional banks due to stringent collateral requirements.

“Every time I approach a bank, they ask for documents I can’t provide,” she recalls. With the help of a microfinance lender, Mariam accessed a small loan of N300,000, which allowed her to stock more goods and increase her daily sales by 40 percent.

Hauwa Bello, a food vendor in Mile 12 market, was skeptical about borrowing until she joined a women’s cooperative supported by a micro-lending firm.

“I started with a N50,000 loan, and within a year, I had grown my business significantly,” she said. Her daily income doubled, allowing her to send her children to better schools.

On the other hand, Aminu Yusuf, a maize farmer in Kano, struggled to purchase fertilizers and irrigation equipment.

“Without financial support, our harvests suffered, and profits were minimal,” he shares. A microfinance institution provided him with a loan of N500,000, enabling him to increase his crop yield by 75 percent. “Now, I can support my family better and plan for the future,” he adds.

Microcredit is a common form of microfinance that involves an extremely small loan given to individuals to help them become self-employed or grow a small business.

These borrowers tend to be low-income individuals, especially from less developed countries (LDCs). Microcredit is also known as “microlending” or “microloan.”

According to the International Finance Corporation (IFC), 65 million businesses, the report notes that formal micro, small, and medium enterprises (MSMEs) in developing countries have an unmet financing need of $5.2 trillion annually.

“In the informal economy, where businesses often face bleak odds, access to credit remains crucial. 70.1 percent of these businesses say they have accessed some form of credit,” according to the Informal Economy Report 2024, compiled by Moniepoint.

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But where can SMEs source credit? “When businesses in the informal economy do get access to loans, their primary sources are from friends and family (70.7 percent). Other sources are from loan platforms (15.1 percent) and traditional banks (12.2 percent).”

The A2F 2023 report by the Enhancing Financial Innovation & Access (EFInA) disclosed that access to formal credit is still low but is increasing slowly.

“Formal credit is driven by formally employed adults borrowing mainly from commercial banks, and business owners mainly borrowing from formal non-banking financial service providers,” it said.

The survey conducted between 2020 and 2023 in Nigeria, a country with over 111 million adults, revealed that although formal credit doubled from 3 percent of adults in 2020 to 6 percent in 2023, uptake remains low and insignificant when compared to the proportion of adults who save formally (38 percent). Credit uptake remains largely driven by borrowing from friends and family and informal financial service providers.

The report added that the rapid growth of access to payment is not translating to significant improvement in access to credit, where the social impact of financial inclusion would be bigger.

“Payment grew nearly 2.5 times, from 22 percent to 52 percent between 2010 and 2023, while credit access has grown marginally by 4 percent in 13 years. (2 percent to 6 percent), despite 74 percent of the Nigerian adult population facing severe liquidity stress,” it said.

Financial inclusion improved from 68 percent in 2020 to 74 percent (2023), while formal financial inclusion grew from 57 percent in 2020 to 64 percent (2023).

This is good progress, yet it is important to note that nearly 40 percent of Nigerians are still not formally served. Formal financial inclusion is a critical bedrock because it lays the foundation for deepening and scaling access to other financial services like credit, insurance, and pensions.

Olayemi Cardoso, governor of the Central Bank of Nigeria (CBN), said financial inclusion for SMEs is essential to unlocking the sector’s full potential and contributing to economic growth.

He said SMEs are responsible for over 80 percent of employment in Nigeria, yet many struggle to access the credit needed for expansion.

Cardoso underscored the importance of financial inclusion for women and youths, who play a critical role in fostering inclusive growth. Research indicates that when women are financially empowered, they tend to reinvest in their families and communities, generating broader socio-economic benefits. Despite this, women in Nigeria face disproportionate barriers to accessing the formal financial system.

“Women are at the heart of economic development,” Cardoso added. “However, they continue to be excluded from formal financial systems, and this is something we must change.”