Nigeria’s MSME Sector Under Pressure
A comprehensive policy review has exposed critical structural barriers undermining the growth and sustainability of micro, small and medium enterprises in Nigeria, despite the sector’s strategic importance to the national economy and employment generation.
The report, titled ‘Reassessment of Nigeria’s National Policy on Micro, Small and Medium Enterprises (MSMEs), 2021–2025 and Strategic Directions for 2026–2030’, identified persistent challenges including limited access to affordable finance, weak infrastructure systems, high enterprise informality, low technological adoption and elevated business mortality rates as major obstacles constraining small business performance across the country.
The study, conducted by Africari Limited and led by policy researcher Onyinye Ozurumba, found that while the Nigerian government introduced various financial interventions, entrepreneurship programmes and regulatory reforms during the 2021–2025 policy period, these initiatives had not translated into sustained enterprise growth due to entrenched structural and institutional constraints.
MSMEs constitute the backbone of Nigeria’s economy, accounting for approximately 96 percent of all businesses and contributing nearly 50 percent of the country’s gross domestic product, according to data from the Small and Medium Enterprises Development Agency of Nigeria. The sector employs over 80 percent of the Nigerian workforce, making it the largest source of employment outside subsistence agriculture. However, despite this critical economic role, the sector continues to struggle with systemic challenges that limit its capacity to scale, innovate and compete effectively.
One of the most critical issues highlighted in the report is the difficulty MSMEs face in accessing affordable and long-term financing. While several credit interventions were introduced by financial institutions and policy actors, including the Central Bank of Nigeria, many small businesses still struggle to obtain loans that support expansion and long-term investment, the report stated.
According to the review, most credit facilities available to MSMEs are short-term loans designed mainly to address liquidity challenges, rather than fund capital investments such as equipment acquisition, technology upgrades or production expansion. Consequently, many businesses use borrowed funds to manage operational expenses, including rent, inventory purchases, staff wages and rising energy costs, rather than investing in growth-oriented activities that could enhance productivity and competitiveness.
The financing challenge is compounded by high interest rates, stringent collateral requirements and limited financial literacy among small business owners. Commercial banks typically demand collateral worth 150 to 200 percent of the loan value, a requirement that effectively excludes many MSMEs that lack substantial fixed assets or landed property. Interest rates on MSME loans often range between 18 and 30 percent annually, making borrowing prohibitively expensive for businesses operating on thin profit margins.
The Central Bank of Nigeria has implemented several intervention schemes aimed at improving MSME access to finance, including the Micro, Small and Medium Enterprises Development Fund, the Targeted Credit Facility and the Anchor Borrowers Programme. However, the report indicated that these interventions have been hampered by administrative bottlenecks, limited awareness among potential beneficiaries and implementation challenges that restrict their reach and effectiveness.
Beyond financing constraints, the report pointed to weak infrastructure, particularly unreliable electricity supply, poor logistics networks and rising energy costs, as major obstacles to MSME growth in Nigeria. The infrastructure gaps significantly increase operating costs for small businesses and reduce their competitiveness, the study stated.
Nigeria’s electricity generation capacity remains severely inadequate relative to demand, with the national grid frequently generating between 3,000 and 5,000 megawatts for a population exceeding 220 million people. This chronic power deficit forces most businesses to rely on diesel or petrol generators, dramatically increasing their operational expenses. According to industry estimates, many small manufacturers spend between 30 and 40 percent of their production costs on energy alone, eroding profit margins and pricing them out of competitive markets.
The poor state of road infrastructure further complicates logistics and distribution, increasing transportation costs and delivery times for MSMEs attempting to access raw materials or reach customers across different regions. The lack of functional rail networks and limited intermodal transportation options place additional pressure on road infrastructure, contributing to vehicle maintenance costs and product damage during transit.
The study also highlighted low levels of technological adoption among Nigerian MSMEs, noting that many small enterprises still rely on manual processes and lack the digital tools needed to improve productivity and access broader markets. While global trends show increasing integration of digital technologies in business operations, including e-commerce platforms, digital payment systems, inventory management software and customer relationship management tools, Nigerian MSMEs have been slow to adopt these innovations.
Barriers to technology adoption include limited digital literacy, high costs of technology infrastructure, inadequate internet connectivity in many parts of the country and a lack of technical support services for small businesses transitioning to digital platforms. This technological lag places Nigerian MSMEs at a disadvantage compared to competitors in other emerging markets and limits their ability to participate in regional and international value chains.
The report also mentioned a high level of informality within Nigeria’s small business sector, stressing that many MSMEs operate outside the formal economy due to regulatory complexities, administrative costs and concerns over multiple taxation. Nigeria’s business registration and regulatory environment has historically been characterized by bureaucratic inefficiencies, overlapping agency mandates and inconsistent enforcement, discouraging many entrepreneurs from formalizing their operations.
According to the study, businesses that formalize their operations often face numerous tax obligations, depending on their sector and location, including value-added tax, company income tax, stamp duties, import duties and personal income tax. In addition to federal taxes, MSMEs are frequently subjected to multiple state and local government levies, including business premises registration fees, signage fees, environmental sanitation charges and various permits and licenses.
This tax multiplicity, combined with aggressive and sometimes irregular enforcement by different tiers of government, creates a hostile operating environment that encourages informality. Many small business owners perceive formalization as more burdensome than beneficial, particularly when government services and infrastructure support remain inadequate.
The report warned that these cumulative challenges contribute to high business mortality rates, with many small enterprises unable to survive beyond their early years of operation. Global data suggests that approximately 60 to 80 percent of small businesses fail within the first five years in developing economies, and Nigeria’s MSME sector appears to follow this pattern due to the hostile operating environment.
The Nigerian government’s MSME policy framework has evolved over several decades, beginning with early industrialization efforts in the 1960s and 1970s that prioritized large-scale manufacturing. The structural adjustment programme of the 1980s shifted focus toward private sector-led growth, and subsequent administrations introduced various MSME support initiatives, including the establishment of the Small and Medium Enterprises Development Agency of Nigeria in 2003.
The current National Policy on MSMEs was adopted in 2021 with a five-year implementation horizon ending in 2025. The policy outlined strategic objectives including improving access to finance, strengthening infrastructure, promoting technology adoption, reducing regulatory burdens and enhancing business development services. However, the Africari Limited review suggests that implementation gaps, resource constraints and institutional weaknesses have limited the policy’s impact.
As Nigeria approaches the formulation of its 2026–2030 MSME strategic framework, the report’s findings provide critical insights into the structural reforms required to unlock the sector’s full potential. Policy recommendations emerging from the study include the development of dedicated long-term financing instruments for MSMEs, infrastructure improvements prioritizing reliable electricity and transportation networks, simplified regulatory processes to encourage formalization, targeted digital literacy and technology adoption programmes, and rationalization of the tax system to reduce multiple taxation.
The performance of Nigeria’s MSME sector will be critical to the country’s economic diversification agenda, job creation targets and efforts to reduce poverty and inequality. With youth unemployment exceeding 40 percent and millions of young Nigerians entering the labor market annually, the small business sector represents the most viable pathway for productive employment and wealth creation outside the public sector.
The Africari Limited report is expected to inform ongoing policy discussions among government agencies, development partners, private sector stakeholders and civil society organizations working to strengthen Nigeria’s MSME ecosystem ahead of the next policy cycle.