AN EXAMINATION OF CBN MONETARY POLICIES AND ITS IMPACT ON THE PERFORMANCE OF SMALL AND MEDIUM ENTERPRISES IN NIGERIA.

CHAPTER ONE

INTRODUCTION

Background of the Study

Since its inception, one of the Central Bank of Nigeria's traditional responsibilities has been to regulate the money supply in the economy. This position is concerned with the implementation of monetary policy instruments. The objective of monetary policy is to restore stability to the volatility of economic activities. Monetary policy is a tool utilised in economic management to stimulate and direct the expansion and progress of an economy. Consequently, Onwuteaka, Okoye, and Molokwu (2019) have noted that monetary policy governs the regulation of the money supply, inflationary rate, credit supply, credit interest rate, external obligations, and price index. According to Onwuteaka et al. (2019), monetary policy is a critical component of macroeconomic management that facilitates stability and growth in the economy. Hence, the apex bank utilises monetary policy instruments to regulate money supply and stability the lending rate (Ufoeze, Odimgbe, Ezeabalisi, & Alajekwu, 2018). Consequently, the accessibility of financing for small and medium enterprises (SMEs) may be impacted. Establishing a stable economy aims to provide a foundation for small and medium-sized enterprises (SMEs) to flourish and contribute significantly to the overall expansion of the economy (Wakdok, 2018).The global significance of Small and Medium Enterprises (SMEs) cannot be emphasised enough. Information and Communication Technology (ICT), manufacturing, agriculture, and financial services are just a few of the industries that are traversed by SMEs.They support a substantial number of individuals' livelihoods and offer employment opportunities to those who are desperately unemployed. Even more so, small and medium-sized enterprises (SMEs) play a crucial role in advancing technological and innovative processes, which stimulates economic development and growth. This has persistently piqued the interest of governments worldwide, prompting them to implement policies and measures aimed at encouraging diverse stakeholders to adopt the notion of investing in small and medium-sized enterprises (SMEs).The results of a study conducted by the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) in 2015 revealed that developing nations characterised by a significant proportion of SME employment experience superior economic growth in comparison to less developed nations. In fact, it is hypothesised that a thriving MSMEs sector is one of the most defining characteristics of an expanding and prosperous economy. Consequently, small and medium-sized enterprises (SMEs) contribute significantly to a nation's economic growth by generating employment opportunities for the expanding rural and urban labour forces and fostering innovation and sustainability throughout the economy.Furthermore, a considerable portion of the population depends on SMEs, either directly or indirectly. The majority of current large corporations in Nigeria and the world originated as small and medium-sized enterprises (SMEs).Kashyap and Stein (2021) posit that the real sector is influenced by monetary policies via the assets reflected in the balance sheets of financial institutions. In other words, the banking industry is entrusted with the responsibility of credit creation alongside money creation. Nto, Mbanasor, and Osuala (2019) assert that the central bank employs monetary policy variables to exert stringent regulation over the money supply in the economy, including the interest rates applicable to credit borrowers, including small and medium-sized enterprises (SMEs). Additionally, the exchange rate impacts the cost at which small and medium-sized enterprises (SMEs) procure critical supplies, including raw materials, from foreign nations to support their innovative and productive operations. The CBN's policy objective is to maintain a stable exchange rate so that SMEs can undertake more investments.

Statement Of The Problem

According to Nto et al. (2019), despite the CBN's special interventions to encourage banks to extend credit to small and medium-sized enterprises (SMEs), the opposite appears to be true, as evidenced by CBN (2010) reports indicating that the proportion of total credit extended to SMEs decreased from 48.8% in 1992 to 9.0%, 8.6%, and 2.7% in 2000, 2002, and 2005, respectively. Diverse monetary policy theories, including those of the classical school of thought, Keynesians, and the credit channel, assert that the private sector of the economy is influenced by monetary policy variables.Thus, it is critical to determine the degree to which monetary variables influence the financing of small and medium-sized enterprises (SMEs) in Nigeria. There is a scarcity of empirical literature on this topic, with the majority of research in Nigeria concentrating on the effects of commercial bank credit on small and medium-sized enterprises (Uremadu, Ani&Odili, 2020; Ayuba&Zubairu, 2018; and Uzonwanne, 2023).

 This study therefore, employs the monetary  policy  strategies  (money  supply,  interest  rate,  inflation  rate  and  exchange  rate)  used  by the  CBN  in driving its monetary policy and how they impact on SMEs performace in Nigeria.

1.3 Objective Of The Study

The general aim of this study is to examine the CBN monetary policies and its impact on the performance of small and medium enterprises in Nigeria. To achieve this, the study will specifically:

Ascertain the effect of interest rate policy the performance of small and medium enterprises in Nigeria. 

Ascertain the effect of exchange rate policy on the performance of small and medium enterprises in Nigeria. 

Ascertain the effect of inflation policy on the performance of small and medium enterprises in Nigeria. 

1.4 Research Question

The following questions will guild this study;

What is the effect of interest rate policy on the performance of small and medium enterprises in Nigeria?

What is the effect of exchange rate policy on the performance of small and medium enterprises in  Nigeria?

What is the effect of inflation policy on the performance of small and medium enterprises in Nigeria?

1.5 Research Hypothesis

H01: There is no significant effect of interest rate (INR) on the performance of small and medium enterprises in Nigeria

H02: There is no significant effect of exchange rate (EXR) on the performance of small and medium enterprise in Nigeria

H03: There is no significant effect of inflation (INFL) on the performance of small and medium enterprise in Nigeria.

1.6 Significance Of The Study

The study may be beneficial to small and medium enterprises as it may help them understand the importance of monetary policies in financing their business. This is because contributors of the study may offer information into issues related to the CBN monetary policies on performance of small and medium enterprises.  The study will add to existing knowledge and also of great use to students and scholars interested in carrying out similar research.

1.7 Scope Of The Study

The general focus of this study boarders on CBN monetary policies and its impact on the performance of small and medium enterprises in Nigeria. Hence, the study will delimited to selected SMEs in Bauchi State Nigeria.

1.8. Limitations Of The Study

In the course of carrying out this study, the researcher experienced some constraints, which included time constraints, financial constraints, language barriers, and the attitude of the respondents.

In addition, there was the element of researcher bias. Here, the researcher possessed some biases that may have been reflected in the way the data was collected, the type of people interviewed or sampled, and how the data gathered was interpreted thereafter. The potential for all this to influence the findings and conclusions could not be downplayed. 

More so, the findings of this study are limited to the sample population in the study area, hence they may not be suitable for use in comparison to other schools, local governments, states, and other countries in the world.

1.9 Definition Of Terms

Small and Medium Scale Enterprises: Small and medium-sized enterprises (SMEs) are businesses whose personnel numbers fall below certain limits.