A lack of adequate collateral is preventing many of Nigeria’s small businesses from accessing the capital needed to grow, according to a new report The Credit Crunch, published by International Finance Corporation (IFC) and the Central Bank of Nigeria (CBN).

Nigeria is an entrepreneurial economy with an estimated 37 million micro, small and medium-sized companies, whose contribution to economic growth and job creation is significant.

However, less than a third of the country’s MSMEs have successfully obtained a loan from a financial institution, according to the report. Instead, most use personal savings or reinvested profits as a source of business financing.

The smaller the business, the less likely it is to have applied for, and received, a loan from a bank or microfinance institution.

Many of these businesses have the potential to become bigger and more prosperous, but their growth is restricted for a variety of reasons – chief among them, access to finance.

The Central Bank of Nigeria recently established the National Collateral Registry to improve access to finance and is supporting the development of a modern credit reporting system in Nigeria with support from the World Bank Group.

Increased use of moveable and reputational collateral will allow more MSMEs to access financing through the formal sector.

“There is a great need to deepen access to finance for Nigeria’s small-scale business sector,” said Ceyla Pazarbasioglu, Senior Director of the World Bank Group’s Finance and Markets Global Practice.

“The new collateral registry and credit reporting systems can help meet this need, and provide the opportunity for many small-scale businesses and entrepreneurs to grow through formal and more affordable financing.”

Nigeria is among the 25 priority countries that are part of the World Bank Group’s Universal Financial Access 2020 initiatives, whose goal is to extend access to financial services to all adults by 2020.  In 2014, 66% of adults in Nigeria (55 million adults) didn’t have access to a transaction account, according to the World Bank’s Global Findex data.

While it is clear that access to finance in Nigeria remains a challenge, there is a strong optimism that the business environment will improve in the next five years. MSMEs believe financial institutions, with time, will become more willing to lend to smaller-scale businesses, the report found.

The report is based on research to understand the awareness, perceptions and behaviors of MSMEs with regard to access to finance and financial services, commissioned by the Central Bank of Nigeria and IFC.