Bank Credit, Lending Costs, and the Growth Dynamics of SMEs in Emerging Economies

SMEs are important contributors to innovation, job-creation, and diversification of a country economy especially in developing economies where the majority of productive activities comprised of SMEs. This paper examines the relationship between bank credit, the lending interest rates, and SMEs performance in Nigeria between the years 1992 and 2023. The data for the study were secondary time series data retrieved from the Central Bank of Nigeria (CBN) Statistical Bulletin for the period of 1992-2023 which ensured comprehensiveness and reliability. The analysis was conducted with the autoregressive distributed lag (ARDL) and fully modified least squares (FMOLS) methods. The study indicated that the long-run relationship between bank credit and the performance of SMEs is positive and significant, with lending interest rates having a negative and significant impact. The findings are robust as confirmed by descriptive statistics, unit root and cointegration tests, and Granger causality results demonstrate that there is a two-way causality between bank lending and SME performance. The study concluded that the long-term availability of low-cost credit is essential to boosting SMEs contribution to economic growth. Implication of the policy reflect the significance of specific credit facilities, interest relief policies, and complementary institutional reforms in encouraging financial literacy and SME formalisation. In general, the findings highlight the importance of having a consistent balance between credit growth and the cost of borrowing to finance SME activities which are facilitated by the enabling macroeconomic policies.