Tony Elumelu, chairman of UBA Group, has provided a detailed explanation of why entrepreneurs frequently encounter stringent conditions when seeking loans from commercial banks, arguing that regulatory tightening — rather than unwillingness by lenders — sits at the core of the problem.
Speaking at the 49th Governing Council meeting of the International Fund for Agricultural Development (IFAD) in Rome, Elumelu said commercial banks operate within strict prudential frameworks that limit the amount and type of risk they can assume, particularly in lending to small and medium-sized enterprises (SMEs).
“The issue of finance, I wear a commercial bank hat. There’s a limit to what they can do in providing the kind of risk capital that SMEs or entrepreneurs need,” he said.
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His remarks come amid evolving credit dynamics in Nigeria’s banking sector, where lenders are cautiously expanding credit even as repayment risks rise and borrowing costs remain elevated.
The regulatory capital constraint
Commercial banks are bound by capital adequacy requirements set by regulators. These rules require banks to hold sufficient capital against risk-weighted assets, including loans. When banks extend credit to borrowers considered high risk — such as early-stage SMEs without collateral or stable cash flows — the regulatory capital charge increases.
“If you don’t do that, there’s a charge on the bank’s capital, but people don’t understand this. So oftentimes they blame financial institutions, but the regulatory environment is tightening; it will not allow banks to provide the kind of money,” Elumelu said.
In practical terms, unsecured lending or loans backed by weak collateral raise the risk weighting on a bank’s balance sheet. That forces the institution to set aside more capital, reducing its ability to lend elsewhere and potentially affecting shareholder returns.
In an environment where regulators are focused on financial system stability, particularly after years of economic volatility, banks are under pressure to maintain healthy capital buffers and keep non-performing loan ratios under control.
Interest rate and rising defaults shape lending behavior
Recent data from the Central Bank of Nigeria (CBN) reinforces the cautious stance. In its Q4 2025 Credit Conditions Survey, the CBN reported improved credit availability across major segments, but also noted rising defaults among households and businesses.
Defaults increased across secured, unsecured, and corporate loans during the quarter. That trend naturally leads banks to tighten risk assessment processes, demand stronger collateral, and price loans more conservatively.
For corporate borrowers, conditions were mixed. Loan spreads narrowed for small businesses, large private non-financial corporations (PNFCs), and other financial corporations, suggesting improved pricing in those segments. However, medium-sized PNFCs faced widening spreads, reflecting tighter credit terms.
This divergence highlights a key dynamic: while credit may be expanding in aggregate, access and pricing vary significantly depending on perceived risk.
High lending rates remain a major constraint. Commercial loan rates currently range between 29 percent and 36 percent. At such levels, debt servicing can consume a large portion of operating cash flow, particularly for SMEs in sectors already grappling with foreign exchange volatility, energy costs, and inflationary pressures.
According to CBN data from early 2025, 75 percent of businesses identified high interest rates as their most pressing operational challenge.
For banks, elevated rates reflect both monetary policy tightening and embedded credit risk. For entrepreneurs, they represent a barrier to expansion, investment, and hiring.
The policy dilemma is clear: interest rates are kept high to manage inflation and protect the currency, yet that same policy stance raises the cost of capital for the private sector.
Why SMEs face structural disadvantages
SMEs typically lack the audited financial statements, long credit histories, and asset bases that larger corporations can offer. Many operate in semi-formal structures, making risk assessment more complex.
From a banking standpoint, this raises due diligence costs and default probabilities. When combined with regulatory capital charges, the result is conservative underwriting standards.
Elumelu acknowledged this structural limitation.
“There’s a limit to what they can do,” he said, underscoring that commercial banks are not designed to provide early-stage venture-style capital.
Elumelu also questioned whether development finance institutions (DFIs) are effectively filling the financing gap.
“You go to some development financial institution, they will ask for an arm and a leg. Then you start wondering, how would these young entrepreneurs provide this collateral?” he said.
DFIs were created to support sectors and businesses underserved by commercial banks. However, procedural bottlenecks, documentation requirements, and collateral demands often mirror the constraints found in traditional banking.
This leaves many entrepreneurs navigating a financing ecosystem where neither commercial lenders nor public development institutions fully absorb the risk inherent in start-up ventures.
The Tony Elumelu Foundation as an alternative capital
Elumelu cited these challenges as the motivation behind establishing the Tony Elumelu Foundation (TEF), which provides $5,000 in non-refundable seed capital to selected entrepreneurs.
Unlike bank loans, these grants do not require collateral or repayment. They are designed to provide risk capital at the earliest stage of business development — precisely the type of funding that regulated banks cannot extend without capital implications.
The model separates philanthropic risk-taking from commercial banking operations, acknowledging that different types of capital serve different functions in an entrepreneurial ecosystem.
Elumelu’s comments also intersect with broader economic conditions. Nigeria’s banking sector is navigating rising capital requirements, tighter global financial conditions, and domestic macroeconomic adjustments.
While the CBN survey shows improved credit availability, the rise in defaults signals lingering stress within the economy. Banks must balance credit growth with asset quality preservation.
The trade-off has been delicate for policymakers. Overly loose regulation risks financial instability. Excessively tight regulation may suppress entrepreneurial growth and job creation.
Elumelu framed the issue as one requiring government action beyond the banking sector.
“So I take to advocacy, I pray to government, create the enabling environment, support the young entrepreneurs. And indeed, in some ways, it’s working,” he said.
An enabling environment includes stable macroeconomic policy, reliable infrastructure, predictable taxation, and legal reforms that reduce business risk. Lower systemic risk would, in turn, reduce credit risk and capital charges for banks.
The broader economic implications
SMEs account for a significant share of employment and economic activity in Nigeria. Constrained access to affordable credit, therefore, has implications beyond individual businesses — it affects growth, innovation, and poverty reduction.
The situation reflects a structural challenge rather than a simple funding shortage. Regulatory prudence, rising defaults, and high interest rates converge to limit banks’ appetite for risk capital.
Elumelu’s remarks highlight a core tension in emerging markets: safeguarding financial stability while expanding access to capital for businesses that drive inclusive growth.
Until that balance is recalibrated through policy reform, innovative financing models, or targeted public-private partnerships, entrepreneurs are likely to continue facing stringent lending conditions, even as aggregate credit data shows gradual improvement.