By Ugo Inyama
Nigeria’s banking sector often looks strong on paper. It resembles a fleet of luxury yachts anchored beside a sinking canoe. Executives announce record profits, shareholders celebrate, and balance sheets expand. Yet beyond the boardrooms, millions of citizens and small businesses face a very different reality. Credit is scarce, charges are high, and many productive sectors struggle for finance. Banks are thriving, but the economy they are meant to support remains under strain.
This contradiction exposes a deeper weakness in Nigeria’s economic model. Finance should act as the engine room of growth, channelling savings into productive investment, helping firms expand, employ workers and raise productivity. Instead, much of the banking sector earns robust returns through low-risk assets and customer charges rather than sustained lending to the real economy.
Credit to the private sector remains low relative to GDP compared with many emerging economies. More revealing still is where bank assets are concentrated. A substantial share is tied up in treasury bills, government securities and lending to the state. These instruments often offer attractive returns with limited risk. For banks, they are safer harbours than lending to manufacturers, farmers, exporters or smaller enterprises navigating rougher waters.
Banks also derive considerable income from ordinary customers. Transfer fees, account maintenance charges, ATM costs and other transaction expenses provide dependable revenue from millions of account holders. Many households and small firms therefore experience the system in two ways: locked out at the lending gate and overcharged at the till.
In stronger economies, bank profitability is more closely linked to lending. Banks prosper when businesses invest, employ more workers and increase output. In Nigeria, profits can rise even while factories fall silent, farms remain underfunded and unemployment stays stubbornly high.
Small and medium-sized enterprises suffer most. These firms are major engines of employment and innovation, yet many cannot obtain affordable finance. They are judged too risky, asked for excessive collateral, or offered loans at rates that make expansion unrealistic. Many rely instead on personal savings or informal borrowing, which sharply limits growth.
This outcome is not simply the fault of banks. It is largely the result of incentives. High yields on government debt, persistent inflation, exchange-rate volatility and weak legal enforcement make safer assets more attractive than lending to private firms. Banks are responding rationally to the weather around them.
Government borrowing lies at the heart of the problem. When the state offers treasury bills at generous yields and absorbs available liquidity, capital is drawn away from private enterprise. Banks naturally follow the strongest current with the least risk. The issue is not a shortage of money, but where the river flows.
The wider economic consequences are serious. Without adequate finance, businesses cannot invest in machinery, hire workers, adopt new technology or expand production. Productivity remains weak, wages stagnate and consumer demand softens. Growth may appear in official figures, but it often lacks depth, resilience and broad social benefit.
Banks often defend their caution, and not without reason. Lending in Nigeria can be difficult. Many firms operate informally and keep poor financial records. Collateral systems are inefficient, while contract enforcement through the courts can be slow and uncertain. In such conditions, risk is genuinely harder to assess and price.
But stronger financial systems address these barriers through institutions. Credit bureaus help lenders assess borrowers. Guarantee schemes share risk. Insurance products reduce uncertainty. Efficient courts improve recovery prospects. Development finance institutions can support sectors commercial banks are reluctant to enter. Nigeria possesses some of these tools, but not yet at the scale required.
The result is a missing middle. Large companies can often secure funding, while microenterprises may access small informal loans. Yet many promising mid-sized firms remain trapped between the two. They are too large for microfinance, yet too uncertain for conventional bank lending.
There is also a longer-term risk for the banks themselves. Sustainable profits depend upon a growing and diversified economy. If productive businesses fail to expand today, tomorrow’s customer base weakens. What appears to be strength now may prove to be a glittering hull resting on fragile timber.
Digital banking has widened access and brought millions into the formal financial system. That is genuine progress. Yet access alone is not transformation. An account without affordable credit does not build a factory, purchase equipment or expand a farm. Payments systems are useful, but they do not replace investment capital.
Rebalancing the system requires clear reform.
First, government will have to reduce excessive reliance on domestic borrowing. Lower dependence on treasury bills would ease crowding out and release capital for private investment.
Secondly, lending infrastructure must improve. Stronger credit registries, modern collateral frameworks and faster commercial dispute resolution would make business lending more viable.
Thirdly, fee structures should be reviewed. Banks deserve profits, but charges should reflect genuine value rather than substitute for productive intermediation.
Fourthly, banks themselves need strategic adjustment. Greater expertise in agriculture, manufacturing, exports and SME finance would help them assess risk more accurately and identify worthwhile opportunities.
The urgency is plain. Nigeria has a young and rapidly growing population that needs jobs at scale. Without finance, businesses cannot create those jobs. Rising inequality and social pressure will follow.
Nigeria does not need weaker banks. It needs banks whose success is tied to productive growth. Until finance reconnects with the real economy, rising profits will continue to tower like yachts beside a leaking canoe.
*Ugo Inyama writes from African Digital Governance Centre, Manchester, Uk.
e: [email protected]
w: www.africandgc.org.
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