Why credit matters for private-sector growth and tax base expansion

By KINGSLEY IKEH

Nigeria’s tax reform agenda is colliding with weak household demand and constrained credit markets. Without affordable consumer and MSME lending, fiscal reforms risk slowing private-sector growth and narrowing the tax base.

Nigeria’s renewed tax reform drive is unfolding in a credit-starved economy characterised by high inflation, weakened household purchasing power, and declining credit to consumers and micro, small, and medium-sized enterprises, MSMEs. While financial inclusion has improved in terms of account ownership, access to the forms of credit that sustain consumption, production, and employment remains shallow, expensive, and uneven. Bank lending remains concentrated in large corporates and government-related activities, limiting its impact on broad-based economic growth. In this context, fiscal reforms risk suppressing demand and private-sector activity unless accompanied by deliberate policies to expand affordable consumer and small-business credit.

This structural imbalance matters because tax policy does not operate in a vacuum. In an economy where households and small businesses lack access to affordable credit buffers, fiscal adjustments—whether through higher taxes, base broadening, or stricter enforcement—can translate quickly into reduced spending, lower business turnover, and delayed investment. Rather than expanding the tax base, such conditions risk shrinking it by weakening the very private-sector activity on which sustainable taxation depends.

Consumer credit plays a critical stabilising role in modern economies by enabling households to smooth consumption amid income volatility. In Nigeria, however, effective lending rates—often around 30per cent or higher, even under intervention programmes such as CrediCorp at 24 per cent—significantly limit the ability of credit to support sustained spending. At such costs, borrowing functions largely as a short-term coping mechanism rather than a tool for predictable consumption. As a result, household spending remains highly sensitive to price shocks and tax changes, creating volatility for businesses across retail, manufacturing, transport, hospitality, and digital services.

The consequences for the private sector are direct and far-reaching. Businesses rely on stable and predictable consumer demand to plan inventory, manage cash flows, and commit to new investment. Where consumption is volatile and credit-constrained, firms respond defensively: cutting costs, delaying expansion, and limiting hiring. This demand uncertainty weakens profitability, slows capital formation, and constrains employment growth, even in sectors with strong underlying market potential.

Expanding access to affordable consumer credit can fundamentally alter this trajectory. When households can finance essential and semi-durable expenditures—such as appliances, education, healthcare, and productive tools—at reasonable rates, consumption becomes more stable and predictable. Predictable demand improves business revenues, supports investment planning, and strengthens balance sheets. Over time, this stability encourages firms to expand operations and employment, reinforcing a virtuous cycle of growth.

Equally important is access to affordable credit for MSMEs, which account for the bulk of employment and domestic value creation but receive a disproportionately small share of formal bank credit. Improved credit availability for small businesses would boost production, raise productivity, and enhance profitability. As MSMEs grow and formalise, the fiscal benefits become clear: higher company income tax receipts, increased value-added tax collections from expanded activity, and stronger Pay-As-You-Earn, PAYE, revenues from rising employment. In this sense, MSME credit is not a fiscal cost but a medium-term investment in revenue mobilisation.

Tax reform interacts directly with these credit dynamics. When households and MSMEs face higher tax obligations without access to affordable finance, spending and production contract sharply. Businesses respond by downsizing, postponing investment, or remaining informal, ultimately narrowing the tax base. By contrast, when fiscal reforms are aligned with expanded access to affordable consumer and MSME credit, economic agents are better positioned to absorb tax changes without disruptive cutbacks. This supports business turnover, improves compliance incentives, and strengthens revenue mobilisation over time.

For Nigeria’s tax reform agenda to deliver durable and inclusive outcomes, it must therefore be accompanied by deliberate credit access reforms. These should include targeted credit subsidy windows for priority consumer and MSME loans to reduce effective borrowing costs; risk-sharing and guarantee schemes that lower lender exposure; and policies that promote competition in consumer and small-business lending, particularly through fintechs and non-bank institutions operating within a robust regulatory framework. Stronger credit sensitisation, financial education, and improved transparency are also essential to encourage responsible borrowing and protect consumers.

Treating consumer and MSME credit as complementary policy levers—rather than peripheral interventions—offers Nigeria a more balanced pathway to private-sector growth, employment expansion, and sustainable tax base expansion. In a consumption- and production-constrained economy, tax efficiency cannot be achieved through fiscal measures alone. A coordinated strategy that expands affordable credit, stabilises demand, and supports enterprise growth provides a more credible route to inclusive growth and long-term fiscal sustainability.

•Dr Okezie Ikeh, FCA, a banker and financial policy advocate, wrote from Lagos

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