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Home Trending News

Addressing informality of small businesses will enhance their access to finance- IFC

Blessing Osazuwa by Blessing Osazuwa
January 10, 2023
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Addressing informality of small businesses will enhance their access to finance- IFC
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In a recent report titled ‘Market Bite Nigeria’, the International Finance Corporation revealed that the contribution of Micro, Small and Medium Enterprises (MSMEs) to the Nigerian economy is hindered  by a finance gap of $32.2 billion (N13 trillion).

IFC disclosed that though lending to the SME sector has grown by 42 percent to about N590 billion post-Covid, it is still not sufficient enough for MSMEs, whose major problem is access to finance.

‘’While commercial banks lend to larger firms, smaller-scale businesses generally struggle to access formal financing; there are many reasons for this, including the government’s crowding out of the private sector, a weak debt resolution and loan recovery framework, an underutilised and underdeveloped financial infrastructure,’’ the report stated.

The report added that MSMEs often lack the business and technical capacity to make successful loan applications while small-scale entrepreneurs, often operating informally and on a micro scale, are commonly perceived as being too risky for financial institutions to serve.

The report, which surveyed 980 MSMEs between July 2021 and March 2022, highlighted sectors with the highest demand for credit as agriculture, wholesale and retail trade.

According to the survey, four primary funding sources for MSMEs are microfinance banks, which are the highest source of finance providing $658 million; private equity and venture capital firms, which issued $640 million; and commercial banks contributed $340 million as well as digital financial service providers.

In addition, the report revealed that the financial constraints of MSMEs intensified following the outbreak of the COVID-19 pandemic; however numerous interventions from the government to cushion the impact of the pandemic had little impact on these businesses.

According to the IFC, addressing informality of these businesses will enhance their access to finance as well as revenue collection for the government.

“Many informal enterprises often do not have a business bank account but operate their business using a personal bank account, In addition, they do not have proper record-keeping processes in the form of financial accounts or audited financial statements; As a result, formal financial institutions typically do not serve informal MSMEs due to the know your customer requirements,’ it stated. IFC, however, stressed on the need for the government through the Corporate Affairs Commission (CAC) to ensure that the business registration process is more accessible to MSMEs, taking account of their constraints in internet access and power availability. It also urged financial institutions to help MSMEs register their businesses while opening a business account or applying for a loan, adding that the CAC can automate the opening of a bank account for MSMEs that can register their business through their platform.

About IFC

IFC, a member of the World Bank Group, advances economic development and improves the lives of people by encouraging the growth of the private sector in developing countries.

We achieve this by creating new markets, mobilizing other investors, and sharing expertise. In doing so, we create jobs and raise living standards, especially for the poor and vulnerable. Our work supports the World Bank Group’s twin goals of ending extreme poverty and boosting shared prosperity.

Tags: International Finance CorporationMSMEs
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