Nigeria’s liquidity trap and why money isn’t reaching businesses

The Guardian Nigeria newspaper of today reported “T-Bills see over 400% demand spike as manufacturers face credit squeeze” The Guardian Nigeria further found that the financial sector continues to crowd the real sector. Additionally, Small and Medium Enterprises (SMEs) are paying 5% monthly (or, 80% annually) as interest rates on their loans. Above suggests Nigeria […]

The Guardian Nigeria newspaper of today reported “T-Bills see over 400% demand spike as manufacturers face credit squeeze”

The Guardian Nigeria further found that the financial sector continues to crowd the real sector.

Additionally, Small and Medium Enterprises (SMEs) are paying 5% monthly (or, 80% annually) as interest rates on their loans.

Above suggests Nigeria faces a troubling paradox: banks are flush with cash, yet manufacturers, agriculture and small businesses are starving for credit.

The recent Treasury Bill auction laid bare this disconnect when investors bid N4.4 trillion for securities worth only N800 billion—a staggering 400% oversubscription that reveals where Nigerian capital is actually flowing.

 

The problem

While financial markets boom, the real economy struggles.

Banks now earn 40% of their interest income from government securities rather than lending to businesses.

Credit to private companies fell 3% last year even as government borrowing jumped 26%.

Meanwhile, small business owners pay up to 5% monthly interest—80% annually when compounded—from microfinance lenders because banks won’t touch them.

The manufacturing sector reveals the actual damage as the Purchasing Managers’ Index (PMI) dropped from 112 to 105.8 points in January, while the broader private sector contracted for the first time in a year.

These aren’t just statistics—they represent job losses, shuttered factories, and stunted economic growth.

Dr. Muda Yusuf of the Centre for the Promotion of Private Enterprise calls it market failure.

“Banks find it more convenient to invest in government bonds offering 16% with zero risk,” he explains, “rather than lend to manufacturers who desperately need single-digit rates to survive.”

 

What’s driving this?

The root causes are structural. Pension funds controlling over N25 trillion park their assets almost exclusively in low-risk government securities.

Commercial banks follow suit, avoiding the perceived risks of lending to businesses with thin profit margins.

Even households increasingly choose Treasury bills over supporting productive enterprises. The government’s massive borrowing appetite doesn’t help.

Plans to borrow N24 trillion this year will only intensify competition for funds, further squeezing out private businesses.

Meanwhile, development finance institutions like the Bank of Industry often approve loans they never disburse, raising questions about their effectiveness.

 

The way forward

Experts propose a three-phase solution.  Immediately, regulators should penalize banks that hoard government securities while starving the real sector.

Mandatory lending quotas—requiring perhaps 20% of portfolios to go to manufacturing, agriculture, and SMEs—could redirect capital where it’s needed.

Enhanced credit guarantees would reduce banks’ perceived risks when lending to small businesses.

Within 1-3 years, the government must reduce its own borrowing through better revenue collection and spending discipline.

Development finance institutions need massive recapitalization with strict performance requirements—no more phantom loan approvals.

Pension regulations should gradually require alternative investments beyond government paper, perhaps 15-20% into infrastructure bonds or manufacturing-focused private equity.

Long-term success requires deeper reforms: developing corporate bond markets to give businesses alternatives to bank loans, fixing power and transport infrastructure that makes manufacturing uncompetitive, and potentially creating specialized industrial banks focused on specific sectors rather than expecting commercial banks to transform overnight.

Samaila Mohammed, a  former member of the House of Representatives, resides in Abuja.

 

 

The Stakes

Some analysts warn of a brewing asset bubble as excess cash inflates financial markets beyond fundamental values.

Others note that manufacturing competitiveness requires more than just credit—businesses also need reliable power, efficient ports, and streamlined regulations.

But the core message is clear: liquidity alone doesn’t create prosperity.  Nigeria has money—it’s just trapped in the wrong places.

Samaila Mohammed, a  former member of the House of Representatives, resides in Abuja.

 

 

 

Without bold intervention, the economy risks prolonged stagnation despite monetary abundance, where stock markets soar while factory workers lose jobs.

 

 

 

The solution requires coordination between monetary authorities, fiscal planners, and regulators working toward the same goal: channeling Nigeria’s abundant capital toward productive use.

 

 

 

Success stories from other emerging markets—from Chile’s infrastructure financing to India’s priority sector lending—show that targeted intervention works when implemented with political will and careful execution.

 

 

 

The question isn’t whether Nigeria has the resources to grow its real economy.  The question is whether policymakers will act decisively to redirect those resources before the window closes.