How Nigeria Can Fix Its Development Finance

In August 2021, the IMF issued $650 billion in Special Drawing Rights (SDRs) to support global recovery from COVID-19. But the allocation revealed a critical flaw: it was based on economic size, not actual need. As a result, low-income countries received just 3% of the SDRs and middle-income countries 30%, despite bearing the heaviest burden of the pandemic. Nigeria received $3.35 billion, while the UK, with a smaller population and stronger fiscal buffers, received nearly $19 billion. Rather than using its allocation for economic reform or recovery, Nigeria deployed most of its SDRs to defend the naira and finance budget shortfalls. Some were held in reserves; others simply plugged immediate gaps. Shortly after, the country issued a $6.5 billion Eurobond. This isn’t a one-off flaw, it reflects a deeper disconnect. Global financial tools like SDRs are structured for stability, not development. For Nigeria, they often serve to patch short-term needs instead of driving long-term change. Unless the global financial architecture shifts and Nigeria reforms how it mobilizes and deploys finance, these cycles will continue.

Nigeria’s Core Development Finance Problem

While countries like Brazil and India have built development finance institutions (DFIs) that play a pivotal role in national growth, Nigeria’s experience has been more limited. The country faces enormous infrastructure and industrialization needs, yet its development finance ecosystem remains weak, undercapitalized, and fragmented. Institutions like the Bank of Industry (BoI) and the Development Bank of Nigeria (DBN) are central to this system, but their capacity is limited. The BoI’s total assets are estimated at $ 6.2 billion, tiny compared to Brazil’s BNDES, which manages over $250 billion. DBN was created to support small and medium-sized enterprises, yet less than a tenth of Nigeria’s forty million SMEs have access to formal credit. The barriers are steep: high interest rates, excessive collateral requirements, and limited credit histories. Development lending in Nigeria accounts for less than one percent of GDP. That’s significantly lower than the levels seen in India or Brazil. Because of this gap, critical infrastructure from energy to transport to agro-processing continues to depend on foreign donors and investors. More than half of Nigeria’s education and health projects are donor-funded, which not only complicates long-term planning but also distorts national priorities. Even when development finance is available, execution remains a hurdle. Bureaucratic bottlenecks, weak project pipelines, and poor inter-agency coordination mean that less than fifteen percent of allocated funds are deployed. This erodes investor confidence and makes co-investment with the private sector harder to secure. At its core, Nigeria’s development finance problem is structural: a system overly reliant on external inputs, fragmented in design, and constrained in impact. Fixing it will require more than technical adjustments.

Policy Gaps and Institutional Challenges

Beyond capital shortfalls, Nigeria’s development finance system is hobbled by policy misalignments and institutional weaknesses. These issues are less visible than fiscal deficits but just as damaging. One major challenge is a disconnect between fiscal and monetary authorities. As the Ministry of Finance pushes for public investment, the Central Bank often tightens monetary policy to control inflation. High interest rates and restricted liquidity make it harder for credit to reach productive sectors. These contradictory signals weaken debt management efforts and undermine confidence in Nigeria’s economic direction. Another missed opportunity lies in Nigeria’s slow adoption of innovative financial instruments. Tools like green bonds and diaspora bonds could open new funding channels, tap into global climate finance, and link Nigeria’s large diaspora with domestic development goals. But uptake remains minimal, largely due to regulatory bottlenecks and underdeveloped investment frameworks. There is also no unified national strategy guiding how development and climate finance are integrated. Different ministries and agencies operate in silos, often implementing overlapping projects with little coordination. This fragmentation wastes resources and limits the country’s ability to access international funds earmarked for climate resilience and sustainable infrastructure. Regulatory uncertainty adds another layer of complexity. Institutions like the Securities and Exchange Commission (SEC) and the Nigerian Investment Promotion Commission (NIPC) often have overlapping mandates. The result is a lack of transparency, limited monitoring, and minimal accountability. Without structural reform, better coordination, streamlined regulations, and more robust accountability, Nigeria’s development finance system will remain unfit for purpose.

What Reform Could Look Like

Fixing Nigeria’s development finance architecture isn’t just about securing more funding, it’s about changing the way the entire system works. A good starting point is the capitalization of domestic Development Finance Institutions (DFIs). Institutions like the Bank of Industry and the Development Bank of Nigeria are structurally constrained by limited capital and narrow mandates. Strengthening their balance sheets and empowering them to attract co-investment through mechanisms like syndicated lending and callable capital could significantly expand their impact, particularly in infrastructure and climate-aligned sectors. However, reform cannot rely solely on DFIs. Nigeria must develop a sovereign development fund that blends Special Drawing Rights (SDRs), diaspora remittances, and pension assets into a single strategic vehicle. Managed transparently, this fund could channel long-term capital into youth-led enterprises, renewable energy, and public infrastructure. The framework already exists in institutions like the Nigerian Sovereign Investment Authority but to be effective, it must be expanded with clear governance structures and investment priorities. Policy coherence is equally essential. Disjointed fiscal and monetary policies, such as tight liquidity controls amid expansionary spending, undermine development goals. What’s needed is coordinated policymaking that supports stable exchange rates, tailored interest rates for strategic sectors, and predictable credit conditions. These are critical levers for unlocking private capital. Finally, transparency and accountability must anchor any reform. Results-based frameworks and independent oversight drawing from global standards like the EU Taxonomy are vital to ensure that development finance achieves real impact rather than being lost in inefficiency or misallocation. Together, these reforms offer more than technical fixes. They reflect a deliberate effort to replace fragmented, externally dependent systems with a coherent, Nigeria-led model for sustainable development finance. The challenge is complex, but so too is the opportunity, if political will and multilateral cooperation can be aligned.

Conclusion

Nigeria’s current development finance system isn’t just underperforming, it’s misaligned with the scale and urgency of the country’s challenges. With youth unemployment rising, infrastructure gaps expanding, and climate risks deepening, business as usual is no longer an option. Reform is not just necessary’s long overdue. The country needs a unified national strategy that capitalizes on DFIs, leverages new financial instruments like SDRs and diaspora bonds, and aligns fiscal and monetary policy with development goals. Done right, development finance can fuel job creation, close infrastructure gaps, and unlock youth-led innovation. The tools already exist. The opportunity is real. What’s missing is the will to act. With bold, locally driven reform, Nigeria can shift from dependence to resilience, building a future where development finance finally works for its people.