Nigeria: the central bank cuts rates like never before, but small businesses may not feel it

For a small Nigerian business, getting a bank loan often feels like trying to walk through a door that keeps moving. Banks collect deposits, the Central Bank of Nigeria (CBN) encourages them to lend, and yet credit to small businesses remains weak. According to World Bank data, micro, small and medium-sized enterprises make up the vast majority of the country’s businesses, nearly half of GDP and most jobs. But fewer than one in twenty has access to formal bank credit.

At the end of September 2026, the CBN cut its policy rate by 3.5 percentage points to 23%. It is the biggest cut in its history. In theory, this should make credit cheaper and boost activity. The outlet TechCabal analysed ten years of central bank data to check whether rate cuts actually translate into more lending to small businesses. The answer is nuanced.

How a rate cut is supposed to work

The policy rate, known in Nigeria as the Monetary Policy Rate (MPR), sets the benchmark cost of money in the economy. When the central bank raises it, banks increase their lending rates, and credit becomes more expensive. When it lowers it, credit should in principle become cheaper. The CBN uses it first and foremost to fight inflation: it raises rates when prices run away, and lowers them when inflation eases.

But between the central bank’s decision and the small business applying for a loan, there are several steps. The bank reassesses the cost of its own funding, sets its lending rate, which does not mechanically follow the policy rate, then decides case by case based on the borrower’s risk, collateral, cash flow and track record. A business established for five years and an eighteen-month-old start-up will not be treated the same way, whatever the policy rate.

Ten years of data

Over 2015–2025, Nigerian monetary policy went through several phases: easing in the early years, massive intervention during the 2020 pandemic with rate cuts and targeted liquidity facilities, then aggressive tightening in the face of inflation, which took the policy rate to 27.50% in 2024.

Commercial bank loans to small businesses rose sharply in value over the decade, but from a very low base. In 2015, with a policy rate of 11%, they stood at 12 billion naira. In 2016, when the rate rose to 14%, they fell to 10 billion. But in other periods, the two curves moved in the opposite direction to what theory predicts. According to TechCabal’s analysis, the policy rate and lending to small businesses sometimes moved together and sometimes in opposite directions. The rate alone therefore does not explain how much banks lend to small businesses.

A drop in the ocean of total credit

The most striking figure concerns small businesses’ share of bank credit. Despite growth in value, loans to small businesses remain a tiny share of total credit to the private sector, from a few tenths of a percentage point to barely more than one percent depending on the year. Most of the money lent by banks goes to large companies, seen as safer, and to the state through government securities.

The analysis also notes that credit to the private sector as a whole only fell in 2018 and 2025 over the decade. Unlike credit to small businesses, it was not held back by rate rises. In other words, when banks lend less, small businesses are the first to pay the price.

Why banks hesitate

• Risk: many small businesses have no reliable financial accounts, which makes their soundness hard to assess.
• Collateral: banks often demand property as collateral, which most entrepreneurs do not own.
• The risk-free alternative: lending to the state by buying well-paid government securities is simpler and safer than lending to a small business.
• The cost of deposits and inflation: even with a lower policy rate, money remains expensive for banks when inflation is high.

The weight of government securities

One mechanism largely explains banks’ caution. When the state borrows heavily by issuing well-paid Treasury bills and bonds, banks can place their money risk-free and with a good return. Why lend to an uncertain small business, with high management costs, when a government security pays almost as much with no effort at all? Economists call this crowding out: public borrowing absorbs savings that could have financed the private sector.

Lowering the policy rate can soften this effect if it brings down yields on government securities, making lending to the private sector relatively more attractive. But that also depends on the state’s financing needs and on how inflation evolves. As long as the Treasury has to borrow heavily, banks will keep a comfortable alternative to lending to small businesses.

What could really change the game

If the policy rate is not enough, what is needed? Specialists cite several levers. More comprehensive credit bureaus, incorporating mobile payment histories, invoices and commercial transactions, would allow banks to assess businesses with no banking history. Collateral registries for movable assets, such as inventory, machinery or receivables, would broaden possible collateral beyond property. And public guarantee funds can share part of the risk with banks.

Fintechs are also playing a growing role. Digital lending platforms use merchants’ transaction data to grant them small, fast loans where banks remain absent. Their rates are often high, but they meet a need the traditional banking system does not cover. Some banks are starting to partner with these platforms, providing the funds while the fintech brings the data and distribution, a model that could lower the cost of credit for small traders.

The CBN’s historic cut is good news for the Nigerian economy, because it signals that inflation is receding and that the cost of money can fall. But for the millions of small businesses that keep the country going, it will not change much if the structural obstacles remain in place. The policy rate opens the door; it does not walk you through it. It is up to credit reforms, and lenders’ innovation, to do the rest.