Influence of Monetary Policy Variables on Loan Supply to Small and Medium Scale Enterprises in Nigeria

Abstract

The study examined the influence of monetary policy variables on banks’ credit supply to small and medium scale enterprises (SMEs) in Nigeria. Time series data which were collected on quarterly basis were elicited from the Central Bank of Nigeria (CBN) Statistical bulletin and financial statements for five commercial banks. The data covered a period of 1995-2010 and were analyzed using Fully Modified Least Squares (FMOLS). Considering the time series properties of the variables, unit root test was done with Philips Perron test to establish stationarity prior to actual analysis. The result of the FMOLS indicated that policies on interest rate and liquidity ratio were negatively and positively significant at 1 percent probability level respectively. Based on the results, it was recommended that government through CBN should strengthen existing policies on the adjustment of interest rates and liquidity ratio so as to increase and stabilize credit supply to SMEs.