Nigeria’s small and medium enterprises (SMEs) could achieve growth rates more than double their current pace with equity financing, a new report by the World Bank Group shows. But deep finance and knowledge gaps keep the capital locked away from the over 40 million enterprises that hold its economy up.
A new analysis from the International Finance Corporation (IFC), a member of the World Bank Group on the role of capital markets for financing firms in low income economies indicates that SMEs in peer nations that use equity financing see growth rates above 13 percent, more than twice the rate of those relying solely on bonds or traditional loans.
Cesaire Meh, manager for macro and market risk at the IFC, who presented the report in Lagos this week, attributed this to equity’s ability to fund higher-risk high-potential firms with more flexible capital.
“The landscape of capital market users is changing,” Meh said. “New issuers are younger, smaller, and are driving capital markets financing. They are also the most productive.”
The data suggests that capital-market financing for firms in low and middle-income countries grew $4 trillion since 1990, with expansion strongest in Africa’s lower-income economies.
Meh said the fast-growing nature is particularly prominent in the region because fast-growing, high-risk firms tend to benefit more from flexible capital than from debt.
The data presents something exciting for a country where SMEs form the backbone of the economy, but they face a financing gap estimated by the World Bank at 30 percent of GDP.
Reality is often disappointing; outcomes have proven.
No growth for the Growth Board
The Nigerian Stock Exchange (NGX) Growth Board, modelled after London’s small-company segment, was designed to lower listing thresholds and create an easier path for businesses to raise funds, but only seven companies have listed so far, not nearly as envisaged upon inception in 2020.
“Corporates that are closer to the capital market are more responsible. They pay their loans better, they hire more people they pay more taxes. Is the Growth Board working? The answer is no,” admitted Temi Popoola, CEO of NGX Group.
For him, no matter how relaxed the rules are, capital markets still operate on credit and transparency, meaning many small firms require access to private credit, crowdfunding and other measures that will expand their pool of domestic investors rather than relying solely on equity or traditional bank loans.
Nigeria’s difficulties often stem from its own internal decisions. The country’s double-digit inflation, exchange-rate swings, and retained high interest rates have pushed firms towards short-term borrowing, while the share of credit to the private sector remains well below levels seen in peer economies.
“If you really are serious about engaging everyone in the growth of the economy, your MSME market is critical,” Dahlia Khalifa, director, Central Africa and Nigeria at IFC told BusinessDay in an interview. “That means we need to focus in Nigeria on how to deepen and broaden the capital markets in Nigeria and make sure that MSMEs have a way to engage and access it.”
Macrostability is crucial, the firm said, disclosing that about 50 percent of the growth in capital market financing in low and middle-income countries is itself a result of a stable and growing GDP.
In the first quarter of the year, after a rebasing that took 11 years, Nigeria’s economy grew 3.13 percent. But it still sits at fourth among the strongest economies on the continent.
“We know now that things are on a better path but in terms of financial sector development, probably the thing that’s kind of stood out is probably credit to the private sector of the share of GDP being fairly low,” said Colin Bermigham, principal Economist at the IFC.
Nigeria’s credit-to-GDP ratio currently stands at 12.9 percent of GDP as of 2024, which is lower than the average for Sub-Saharan Africa at 20 percent and lower-middle-income countries globally at 34 percent.
“Missing middle”
Institutional investors like banks and pension funds, who control large pools of capital, are often constrained by mandates that favour low-risk assets like government bonds.
Experts say commercial banks in Nigeria “tend to service the bigger SMEs,” while microfinance institutions service smaller-sized ones. This system traps over 38 million micro businesses, microfinance and capital markets scrambling for cash in “the missing middle” where collateral expectations remain high, tenors short, and the market critically underserved.
The banks say they are cautious. “The funds belong to the depositors and we don’t want to play with them. The safety of the fund is important,” a CBN representative said, defending the fiduciary responsibility that limits riskier investments in SMEs.
As of September 2025, Nigeria’s pension assets reached over N26 trillion. The fund, managed by licensed Pension Fund Administrators (PFAs) and overseen by the National Pension Commission (PenCom), primarily invests in government securities. But IFC thinks a reform is necessary.
“Pension funds sit on top of a lot of capital. And often they want to put this money into something that is very low risk, because they don’t want to risk anyone’s pension. We need to think of how we can offer pension funds as a different kind of financial paper that can be used to help MSMEs,” Khalifa told BusinessDay.
“Reform will lead to local investment and incentive for domestic issuance,” Meh also said.
“Knowledge gap”
SMEs are also liable. Representatives noted that many are privately funded and lack the visibility, structured governance, or sometimes the awareness to navigate formal capital markets.
“There’s a trust deficit,” noted Chinyere Almona, director general of the Lagos Chamber of Commerce and Industry, affirming “natural apprehension to ownership dilution” claims by the experts.
“They don’t trust you have their interest at heart. They don’t trust that if they have an idea that you’re willing to finance it without holding on to tangible things,” she said.
Equity, she added, is patient capital, but Nigerian investors and entrepreneurs alike often struggle with the patience required for ventures that may “fail, start, fail, start” before stabilising.
Some regulators argue that the problem is not a lack of available capital. Credit bureaus, collateral registries, and fintech frameworks are already in place. What has failed is awareness and connectivity.
“We are not short of capital, what we are short of is knowledge,” said Agama Emomotimi who runs the Securities and Exchange Commission (SEC). “It’s not about giving them money. When you give them money, they don’t know what to do with it.”
This “knowledge problem” extends to a lack of awareness about alternative financing options and an inability to meet the corporate governance standards that attract investors.
“Governance means that they have structures. They have a managing director. They have a CFO. They have a board that meets,” Khalifa said. “Companies that have better governance are able to access more financing, both debt and equity, and are able to grow better.”
A capital redistribution, the experts agree, requires developing new instruments and creating avenues for securitisation, minibonds and supply chain finance.
“The hotel we’re in is a business. But in order for this to be successful, other suppliers support the hotel. From the linens to food to everything you’re looking at in a hotel is supported by MSMEs,” said Khalifa.
“So if you were to provide MSMEs financing for their receivables from a hotel or from a factory which they’re supplying, if they know that at the end of a month they’re going to get a million naira, let’s say, and you fund them today with 70 percent of that, and then they get their financing again at the end of the month, that’s called supply chain financing. You’re giving them in advance the money they would be receiving from their buyer. And that helps them build their businesses.”
Before you leave, check out: Nigeria’s trade output slips as inflation saps spending power
