The impact of high-interest loans on Small and Medium Enterprises (SMEs) in Nigeria cannot be overstated, as highlighted by the National Institute of Credit Administration (NICA).

With the SME sector serving as a vital driver of the Nigerian economy, the burden of exorbitant interest rates poses a severe threat to the survival and growth of these businesses.

NICA’s CEO, Prof Chris Onalo, has issued a pressing call to action, emphasizing the urgent need for financial institutions to provide more accessible and business-friendly loans.

This call for reform is due to the significant disadvantage faced by Nigerian SMEs. This is compared to their counterparts in more developed economies, where low-interest loans fuel business innovation and expansion.

Onalo envisions a thriving SME sector supported by single-digit interest rate loans and flexible repayment terms. He believes this will catalyze entrepreneurial activity and bolster the nation’s economic fabric.

NICA’s message remains both timely and urgent despite recent monetary policy shifts. This includes the Central Bank of Nigeria’s sharp increase in the economic policy rate to 22.75%, the highest ever.

As the economy grapples with tightening financial conditions, the institute’s call for reform aims to safeguard the vitality of the SME sector and ensure the sustained growth and prosperity of the broader economic landscape.

The recent fluctuations in the value of the Nigerian naira, trading at N1, 605 to a dollar, have further compounded the challenges faced by SMEs in Nigeria.

The currency’s depreciation, surpassing the budget’s pegged rate of N800 to a dollar, has created additional financial strain on businesses. This is despite them already grappling with the burden of exorbitant interest rates.

However, amidst these economic uncertainties, there have been recent efforts by the Central Bank of Nigeria (CBN) to stabilize the currency and mitigate inflationary pressures.

In February 2024, the CBN implemented measures such as raising interest rates by 400 basis points. It also adopted a more flexible exchange rate policy aimed at defending the naira.

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By pivoting towards inflation targeting rather than strict control of the money supply, the central bank sought to create a more conducive environment for economic stability and sustainable growth.

SMEs play a crucial role in Nigeria’s economic growth and development, contributing approximately 48% of the country’s GDP, according to the National Bureau of Statistics.

They are prevalent in almost every sector of the economy, producing goods and services for domestic consumption and export.

Furthermore, SMEs significantly contribute to job creation, poverty reduction, and increased government revenue. However, despite their importance, SMEs face numerous challenges that hinder their full integration into Nigeria’s trade landscape.

These include limited access to finance, inadequate infrastructure, high input costs, and a challenging business environment.

Despite their resilience and contribution to the economy, SMEs continue to face significant hurdles, particularly concerning access to affordable financing.

High-interest loans exacerbate the financial strain on SMEs, limiting their capacity to invest in growth opportunities, expand operations, and create employment opportunities.