Technological advancement has led to the adoption of artificial intelligence (AI) across different sectors of countries; hence, the role of AI cannot be undermined. In Nigeria, many small and medium enterprises use artificial intelligence for digital marketing solutions, cybersecurity, content creation, data analytics, task automation, and fraud detection, among others. However, there is uncertainty surrounding policy implementation or partnership on the adoption of AI to improve the business performance of SMEs by the government in Nigeria. The study considered the challenges of SMEs with the use of AI in Nigeria, especially how policy can promote its adoption and regulate its exploitation. The study employed a descriptive research design, which is the systematic review of secondary data from literature, journals, and reports on artificial intelligence in Nigeria. The data was thematically analyzed under the usage of AI by SMEs and the challenges associated with the utilization of artificial intelligence by small and medium enterprises, as well as sustainable policy on artificial intelligence to enhance SME performance. The study concluded that the implementation of policy will help to address the challenges in AI use, such as ethical issues, data access rights, as well as the perception of the general public about artificial intelligence, as well as maximize the benefits of artificial intelligence for SMEs in Nigeria.