THE CREDIT CRUNCH: A Study On Financial Literacy in Nigeria

Nigeria is an entrepreneurial economy with an estimated 37 million micro-, small-, and medium-sized companies in the country, and their contribution to economic growth and job creation is significant. There are also a large number of self-employed entrepreneurs who support themselves and their families by supplying goods and services to the economy. Many of these businesses have the potential to become bigger and more prosperous, but their growth is restricted for a variety of reasons. Access to finance has been singled out as a crucial prerequisite to the growth of these businesses.

To improve access to finance and promote inclusive economic growth, the Central Bank of Nigeria (CBN), in partnership with the International Finance Corporation (IFC), a member of the World Bank Group and the largest global development institution focused on the private sector in emerging markets, has established the National Collateral Registry and is supporting the development of a modern credit reporting system in Nigeria. This new financial infrastructure will allow for increased use of moveable and reputational collateral to make it possible for more MSMEs to access financing through the formal sector.

As part of the communication efforts for this project, a baseline survey among Micro Small and Medium enterprises (MSMEs) and financial institutions (deposit money banks and microfinance banks) was conducted. Among other things the survey probed:

  • Basic financial knowledge and practice
  • Use of credit and provision of credit
  • Knowledge and use of credit information and credit Bureaus in Nigeria
  • Knowledge and use of collateral
  • Perception of the concept of collateral registry.

1,500 respondents from Lagos, Rivers Anambra, Abuja, Kano and Bauchi states were interrogated.

The report identified collateral as the missing link between the small-scale business sector and the financial institutions that could provide the necessary capital for them to grow. Smaller firms often lack the assets/collateral required to access formal loans, such as land or fixed property, making them risky clients in the eyes of the financial sector. This means formal lending is virtually inaccessible for these small businesses and entrepreneurs, who instead rely on informal, unregulated, and unpredictable credit in order to expand their operations.

Among other things the survey revealed that:

  • Access to credit among small-scale businesses is low with only 31% of the MSMEs surveyed stating that they have accessed credit through the formal banking system.
  • The survey revealed that MSMEs and employees feel discouraged by what they perceive a “one size fits all” approach by the financial institutions towards loan applications and as a result, are more likely to borrow from informal sources like family and friends or use reinvested profits to expand their business.
  • Amongst the micro-entrepreneurs 71% use their personal savings to finance their businesses while 14% source their financing from friends and family
  • The statistics indicates that 51% of medium sized businesses had done formal lending.
  • 55% of the representatives of the financial institutions agree with respondents in the MSME and employee categories that the process of obtaining a bank loan is cumbersome due to substantial documentation process.
  • About 91% of MSMEs and employees believed that the concept of the Collateral Registry is relevant to the Nigerian economy while 69% opines that the concept can work in Nigeria.
  • There is little awareness on the credit reporting system in Nigeria