Assessing the Effects of Interest Rates Adjustments As a Monetary Measure on SMEs Cost Of Operation and Funding: A Case Study of SMEs in Lusaka Central District

The purpose of this study was to assess the effects of interest rate adjustments as a monetary policy measure on the cost of operation and access to funding for Small and Medium Enterprises (SMEs) in Lusaka Central District. SMEs are critical to Zambia’s economic development, contributing significantly to employment, innovation, and national output. However, fluctuations in interest rates pose a major challenge to their sustainability, particularly in environments where credit access is already constrained. The study employed a mixed-methods design involving 45 SMEs, selected through stratified random sampling. The findings revealed that interest rate adjustments significantly affect SMEs’ access to funding, with 62.2% of respondents citing interest rates as a major hindrance to when they are hiked “too high,” making borrowing costly and unattractive. Their operating capital is exposed to erosion due to interest payments that cut on their retained earnings. The resilience of the business is undermined when the capital acquired through borrowing is used in business. However, if well executed, debt-based capital can boost the small businesses. Working capital was reported m=by many to have been adversely affected, as 73.3% of businesses sourced more than half of their operational funds from credit, leading to cash flow instability, delayed supplier payments, and reduced operational efficiency. Additionally, interest rate increases reduced profitability, with chi-square results confirming a statistically significant relationship between profit changes and interest rate adjustments (χ² = 12.48, p < 0.05). The study concludes that high interest rates increase the cost of borrowing, reduce liquidity, distort cash flow management, and negatively impact SME growth. The study recommends that interest rate moderation, SMEs focused credit facilities, collateral-free loan products, and capacity-building programs be executed at all levels. Policymakers and financial institutions should adopt more inclusive lending frameworks to support SME sustainability and promote economic development. While the findings may appear to be generic and almost expected, the issues established herein the study can be a basis for both strategy on the part of SMEs and policy formulation on the side of regulators and policy makers.