SME Loan Defaults Spike as Tight Monetary Policy Bites

Small businesses across Nigeria are beginning to buckle under the weight of the Central Bank of Nigeria’s (CBN) sustained monetary tightening, as loan defaults surged sharply in the second quarter of 2025.

The latest Credit Conditions Survey from the CBN paints a worrying picture: loan repayment performance dropped across all borrower categories, with small and medium-sized enterprises (SMEs) hit the hardest. The default index for SMEs plunged from 0.5 to -7.2, while household secured loans saw a similar drop—from 3.9 to -7.0—indicating rising financial strain on borrowers.

The spike in defaults comes as the CBN held its benchmark interest rate steady at 27.5% for the third consecutive meeting. While the move is intended to combat inflation, economists warn that businesses—especially SMEs operating with tight margins—are now struggling to cope with shrinking access to credit and rising repayment burdens.

“This is the clearest sign yet that tight monetary policy is filtering through the system,” said an analyst from the Financial Derivatives Company (FDC). “It’s squeezing liquidity and raising the risk of a slowdown, especially for smaller firms.”

With inflationary pressures still present and consumer spending weak, many small businesses are finding it difficult to stay afloat. Experts say urgent policy recalibration may be needed to prevent further erosion of the country’s entrepreneurial backbone.

“Inflation control is critical,” the FDC analyst added, “but so is economic growth. You can’t crush one to save the other.”

Capital Quality Key to $1 Trillion Economic Vision

In a related development, economists are urging Nigeria to prioritize the quality—not just the volume—of foreign capital if it hopes to achieve its ambitious $1 trillion economy target.

According to recent data, Foreign Portfolio Investment (FPI) reached $8.05 billion in Q1 2025, driven largely by favorable interest rates. However, FPI is typically short-term and prone to volatility. During the same period, ₦420 billion in capital outflows was recorded, underlining the risks associated with relying too heavily on portfolio inflows.

In contrast, Foreign Direct Investment (FDI)—which brings long-term benefits like jobs, technology transfer, and industrial capacity—stood at just $250 million in Q1, a figure economists say is far too low to drive meaningful growth.

“To build a resilient and diversified economy, Nigeria must attract more FDI,” said a policy expert from the FDC Think Tank. “That means improving infrastructure, reducing bureaucracy, and creating an investor-friendly environment.”

The message is clear: while portfolio flows can plug short-term gaps, only direct investment will build the foundation for lasting economic transformation.