Why CBN rate cuts don’t mean more SME lending

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For a small business in Nigeria, securing a bank loan has long felt like trying to step through a moving doorway. 

Commercial banks mobilise deposits, and the Central Bank of Nigeria (CBN) urges them to extend credit, yet formal lending to small businesses remains low.

According to World Bank data, micro, small, and medium-sized enterprises (MSMEs) form the backbone of the economy, accounting for the vast majority of businesses, nearly half of national GDP, and most employment. Yet fewer than one in 20 MSMEs can access formal bank credit due to entrenched structural barriers.

The credit that is available is predominantly short-term and expensive, while prohibitive collateral requirements disqualify otherwise viable enterprises.

For commercial banks, credit extension is a risk-return decision. While a bank earns interest on disbursed capital, the lending rates it charges are governed by several variables—chief among them the CBN’s Monetary Policy Rate (MPR), which sets the baseline cost of capital across the economy. 

When the CBN raises the MPR, commercial banks adjust their prime lending rates upward, making credit more costly. Conversely, rate cuts are intended to lower borrowing costs and stimulate economic activity. 

The apex bank adjusts benchmark rates primarily to regulate inflation and systemic liquidity. When price pressures surge, the CBN tightens monetary policy through rate hikes; when inflation moderates, it eases policy to encourage growth. 

This macroeconomic lever directly affects small businesses. Elevated rates raise the cost of capital and deter expansion, whereas rate cuts are theoretically designed to democratise access to credit.

On Tuesday, the CBN delivered its biggest single interest-rate cut on record, slashing the benchmark MPR by 3.5 percentage points to 23%.

However, historical data call into question whether benchmark rate cuts actually translate into increased bank lending for small businesses. 

TechCabal analysed a decade of CBN data to examine how lending to small businesses responded as the benchmark interest rate changed. 

A decade of MPR movements and SME credit allocation 

Between 2015 and 2025, commercial bank lending to SMEs expanded 1,270.19%, reaching ₦177.44 billion ($133.46 million). Despite this expansion, SME loans as a proportion of total commercial bank credit remained marginal, rising only slightly from 0.10% in 2015 to 0.38% in 2025. The total bank volume allocated to SMEs pales in comparison to the ₦47.09 trillion ($35.42 billion) extended to the broader private sector in 2025, where commercial credit remained concentrated in oil and gas, financial services, and general commerce. 

Over the decade, the CBN monetary policy stance underwent distinct operational shifts. Initial years of monetary easing were followed by pandemic-era interventions in 2020, during which the central bank slashed rates and rolled out targeted liquidity facilities. Then inflation changed the equation. As prices accelerated, the CBN began aggressively tightening monetary policy, pushing the MPR to 27.50% in 2024.

On the surface, this should have made borrowing more expensive and potentially reduced demand for loans. But the decade-long data tells a more nuanced story.

In 2015, when the MPR was 11%, banks’ loans to SMEs stood at ₦12.95 billion ($9.74 million). When the MPR rose to 14% in 2016, SME lending fell to ₦10.75 billion ($8.09 million) and remained there in 2017.

The numbers show that the MPR and SME lending moved together in some periods and in opposite directions in others.

This suggests that MPR alone does not explain how much Nigerian banks lend to small businesses. Banks make lending decisions based on more than the CBN’s benchmark rate. They consider the cost of deposits, inflation, credit risk, collateral, liquidity, regulatory requirements, and the likelihood that a borrower will repay.

They also favour more predictable businesses. Many small businesses have weak financial records, compared to those in the private sector.

Loans to the private sector only fell in 2018, before falling again in 2025. Unlike for small businesses, the MPR did not deter banks from lending to the private sector.

`;
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layer.addEventListener(‘touchmove’, handleMove, {passive: false});

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render();
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render();
updateCompareSummary();
};

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