A new report highlights the critical challenges faced by Micro, Small, and Medium Enterprises (MSMEs) in Nigeria in accessing formal financial services, despite their significant contribution to the nation’s economy.

Olu Akanmu, former President and Co-CEO of OPay-Nigeria, outlines these barriers and provides insights into possible solutions in a comprehensive report titled “Breaking Barriers in Access to Finance for MSMEs in Nigeria.”

According to the report, Nigeria is home to approximately 40 million MSMEs, most of which operate in the informal sector. These businesses contribute 50% of the nation’s GDP and generate 88% of employment. However, formal financial inclusion remains low, particularly among MSMEs, which hampers their growth and the broader economic impact they could have.

Akanmu identifies several challenges that need to be addressed to improve access to finance for MSMEs:

The gap between digital identity and ownership of financial accounts is a significant barrier. While the National Identity Number (NIN) has seen substantial growth, with over 107 million Nigerians registered as of April 2024, there remains a 40 million person gap between digital identity and formal financial account ownership. Akanmu stresses the need for stronger ecosystem collaboration to bridge this gap and bring more Nigerians into the formal financial system.

Nearly half of adult Nigerians do not have a transactional account to receive or make digital payments, a situation that became evident during the 2023 cashless policy exercise. Akanmu suggests that more accessible and affordable digital payment solutions, such as QR payments and mobile phone-based POS systems, could help millions of MSMEs transition to digital transactions.

The reliability of digital payment systems is crucial for MSMEs. Akanmu notes that failed transactions erode trust in digital payments, driving small businesses back to cash. Improving the reliability of payment infrastructure is essential for maintaining confidence in digital financial services.

Despite the growth in digital payments, access to credit has seen only marginal improvement. Akanmu calls for more refined open banking regulations and flexible options for payment companies to offer credit services, which could increase the supply of affordable credit for MSMEs.

Affordable smartphones and internet access are key to increasing digital payment usage among MSMEs. However, high data costs and expensive USSD pricing present barriers. Akanmu suggests regulatory intervention to lower these costs and make digital payments more accessible to low-income demographics.

The report highlights the need for smarter AI and machine learning models for alternative credit scoring, which could lower interest rates and improve credit access for MSMEs. Akanmu points out that current digital lending platforms may be overpricing risk, which limits the reach of their services.

Akanmu advocates for the inclusion of fintechs in the credit bureau system and the Central Bank of Nigeria’s Global Standing Instruction (GSI) system. This would improve credit risk management and increase confidence in lending to MSMEs.

A coordinated national digital public infrastructure program, integrating identity, payments, and lending, is essential for inclusive access to finance for MSMEs. Akanmu cites the Indian and Brazilian models as examples that Nigeria could emulate to achieve this goal.