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Advancing SMEs’ financial inclusion through non-interest funding option


After slipping into recession in 2016, growth in Nigeria’s gross domestic product (GDP) returned, but remained below population expansion. No sooner did the economy begin to show signs of recovery than the country confirmed the first case of coronavirus disease (COVID-19), in February.

The pandemic, which originated from China, has spread worldwide. Due to the escalating global impact of the pandemic, many economies, including Nigeria’s, have witnessed reduced activities.

More so, because the country is still dependent on oil, the instability in prices compounds the effects of the COVID-19 lockdown, amid weak purchasing power of the people.


COVID-19 forced many industrial facilities to shut down in some affected countries, and the global supply chain has been disrupted. Brent crude prices fell below $22 per barrel at some point, the lowest since 2003, exacerbated by the price war between Saudi Arabia and Russia.

Nigeria, the most populous country in Africa, is awakening to the new economic and social realities of the COVID-19 crisis. The country of over 200 million people, recorded its first case on February 28. Since then, it has recorded about 48,445 cases and 973…COVID-19 related deaths.

The CBN is expected not to lose sight of its responsibility to keep the economy going through its monetary policies interventions and offering of stimulus packages, which include a-one year extension of moratorium on principal repayment of intervention facilities, and reduction of interest rate on such loans from nine to five per cent.

There is also the creation of credit facilities for small and medium enterprises (SMEs), particularly those manufacturing pharmaceuticals as well as funding outlay of N1.1trillion for critical sectors of the economy to boost manufacturing and support import substitution activities.


The most recent is the introduction of non-interest guidelines meant to provide facilities without interests to boost critical sectors like Agriculture, MSMEs, and Information Communication Technology (ICT) and so on.

The CBN said the initiative is for Non-Interest Financial Institutions under its Agri-Business, Small and Medium Enterprise Investment Scheme (AGSMEIS), Micro, Small and Medium Enterprises Development Fund (MSMEDF), and Accelerated Agricultural Development Scheme (AADS).
According to the guidelines by the apex bank, the framework will integrate non-interest windows in all its intervention programmes aimed at supporting businesses and households that have been impacted negatively by the coronavirus.

It said under the Agri-Business, Small and Medium Enterprises Investment Scheme (AGSMEIS) for Non-Interest Financial Institutions (NIFIs), there will be creation of a Fund to be known as ‘AGSMEIS Non-Interest Fund’ to be domiciled in a dedicated account with the CBN.

The guidelines stipulated that each Non-Interest Deposit Bank full-fledged or window is to set aside five per cent of its profit after tax annually as contribution to the Fund.

The bank added that each Non-Interest Deposit Bank is also to transfer its contribution to the CBN not later than 10 working days after the Annual General Meeting (AGM) of the participating bank.

Economists at the weekend described the initiative as a critical inducement that will boost SMEs’ growth and development, and accelerate economic growth because SMEs are core in the real sector.

They said the initiative would go a long way to aid expansion and expedite industrialisation, catalyse SMEs growth, and enhance financial inclusion in Nigeria.

They noted that with an unemployment rate at about 33:3 per cent, the initiative would create more jobs, and help mitigate the socioeconomic impact of COVID-19 on SMEs and the economy.

However, they argued that enabling government policies through appropriate incentives would go a long way to promote ease of doing business, and enhance business operations of these SMEs.

For instance, a Professor of Economics, Olabisi Onabanjo University, Ago- Iwoye, Ogun State, Sheriffdeen Tella, said the business model is laudable, urging the CBN to include training and monitoring as part of the intervention package. He said: “It is a laudable project and financing model, particularly for such businesses that are often weighed down with servicing debt, and financing power supply.

“However, there is a need for training these businesses on how to keep records of production and financial transactions. Such training should be part of the package, just as monitoring of the loans for executing the projects by the CBN or an agent and timely repayment of the credit are important.”

Also speaking, the Chief Research Officer, Investdata Consulting, Ambrose Omodion, said the policy is a good step in the right direction that would boost SMEs and revitalise many businesses.

However, Omordion expressed concern over the high level of insecurity, infrastructure decay, and other impediments to business growth, noting that, “finance is not the only challenge facing these SMEs today. But lack of coordination in government policies, insecurity, multiple taxation, high cost of transportation and infrastructural problems will definitely constitute a threat to these SMEs’ growth. “

According to him, inconsistency in policy making has become a threat to the expected impact of the intervention in critical sectors, and the economy at large.

Further, he added that the focus on agriculture in the guidelines is very encouraging, as it is capable of saving Nigeria from the predicted food shortages caused by disruptions in the value chain around the world.

The eligible activities under the Scheme are businesses across the agricultural value chain, covering production, inputs supply, storage, processing, logistics and marketing as well as MSMEs.

Others are the real sectors including manufacturing, mining and petrochemicals; MSMEs in the services sector, including ICT and the creative industry as well as other activities as the CBN may determine from time to time.

According to the guidelines, financing under the Scheme will be for start-ups, business expansion or revival of ailing companies, and shall be in compliance with provisions of BOFIA (1991) as amended, and the principles underpinning operations of NIFIs.

The MSMEDF for NIFIs guidelines are aimed at channelling low return funds to the MSME sub-sector of the economy through Participating Financial Institutions (PFIs), to enhance MSMEs’ access to financial services.

Similarly, the non-interest guidelines for the AADS are aimed at engaging a minimum of 370,000 youths in agricultural production across the country between now and 2023, to reduce unemployment among the youths.

Against the backdrop of the importance of SMEs to the growth of per capital income and the economy as a whole, the funding challenges faced by the sector, especially with the seemingly prohibitive lending rate from conventional banks, the alternative and friendly funding have been on the front burner of discourse among economists and analysts alike.

Across all stages of their life cycle, SMEs require access to appropriate sources of financing for their creation, survival and growth.
Although SMEs’ access to bank finance is largely recovered after the financial crisis, market failures and structural challenges remain, including information asymmetries, high transaction costs in servicing SMEs, and lack of financial skills and knowledge among small business owners.

There is a need to broaden the range of financing instruments available to SMEs and entrepreneurs, to address diverse financing needs in varying circumstances, increase SMEs’ resilience to changing conditions in credit markets and improve their contribution to economic growth.

Alternative financing instruments offer opportunities to meet SMEs’ financing needs.However, their potential remains underdeveloped in most countries due to demand and supply-side barriers. Capital market instruments for SMEs often operate in thin, illiquid financial markets, with a low number of participants, and limited exit options for investors.


The digital transformation holds the potential to improve SMEs’ access to finance, offering unprecedented solutions to address barriers related to asymmetric information and collateral shortage.

At the same time, it requires regulatory frameworks to support novel developments, while ensuring financial stability, consumer and investor protection.

Governments have been stepping up efforts to foster a diversified financial offer for SMEs, following the two-pronged policy approach advocated by the G20/OECD

High-level principles on SME financing and strengthening SME access to credit, while also supporting the diversification of their financing sources will no doubt make the sector more competitive.


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