The Relationship Between Interest Rates and Investment Decisions of Small Enterprises in Enugu Urban

Interest rate dynamics exert a profound influence on the investment decisions of small enterprises, particularly in environments where bank credit constitutes the primary external financing channel for business expansion. This study examines the relationship between interest rates and investment decisions among small enterprises in Enugu urban area from 2021 to 2024. The study is theoretically anchored on the Keynesian Investment Theory, which posits that investment is inversely related to the cost of capital, as captured by the prevailing interest rate, with lower rates stimulating higher levels of business investment. A cross-sectional survey design was adopted, targeting small enterprise owners who had engaged with formal lending institutions in Enugu urban. From an estimated population of 11,000 small businesses, a sample of 375 respondents was selected using stratified random sampling. Structured questionnaires and lending rate data from the Central Bank of Nigeria constituted the instruments. Multiple regression analysis was applied to model the effect of interest rate levels on investment volume, expansion plans, and capital formation decisions. Findings confirm a significant negative relationship between interest rates and investment decisions, with each percentage point increase in lending rates associated with a measurable reduction in planned capital expenditure among surveyed enterprises. Interest rates exceeding 25 percent annually were identified as virtually prohibitive for investment by micro enterprises. The study concludes that the high-interest rate environment in Nigeria is a major deterrent to small enterprise investment in Enugu. It is recommended that the CBN introduce development finance windows with concessionary rates specifically for small enterprises.

Keywords: Interest rates, investment decisions, small enterprises, Keynesian theory, Enugu