Study of the Effect of Interest Rate on Commercial Bank Lending to Small and Medium Enterprises in Lagos State

Commercial bank lending rates significantly influence the cost of capital for small and medium enterprises, and examining this relationship in Lagos State, Nigeria's commercial hub, provides evidence for monetary policy and SME finance reform. This study examined the effect of commercial bank interest rates on lending volumes to SMEs in Lagos Island, Ikeja, and Alimosho Local Government Areas, Lagos State. Secondary data on SME lending volumes and lending rates were obtained from the Central Bank of Nigeria and the Lagos State Ministry of Commerce. Primary survey data were collected from 150 SME owners. OLS regression and an error correction model were applied. Results showed that a one percentage point increase in lending rates was associated with a 2.3 percent decrease in SME loan uptake in the short run. SMEs cited high interest rates (above 25 percent) as the primary constraint on bank credit access in 74 percent of responses. Collateral requirements and documentation burdens were secondary barriers. Microfinance bank lending was preferred by 48 percent of respondents due to lower collateral requirements despite higher effective rates. The study concludes that the high interest rate environment in Nigeria severely constrains SME access to commercial bank finance in Lagos. Recommendations include the CBN establishing an SME lending rate cap, expanding the MSME Development Fund, incentivising bank participation in risk-sharing guarantee schemes, and digitising SME credit scoring to reduce information asymmetries.

Keywords: interest rate, SME lending, commercial banks, Lagos State, monetary policy