Cash Reserve Ratio and Credit to Micro-, Small and Medium-Sized Enterprises in Developing Economies. Analysis of Transmission Channels Using Nigerian Data

Abstract

This study examines the channels of transmission through which cash reserve ratio impacts on credit to micro-, small and medium-sized enterprises (MSMEs). A vector error correction model was used to capture the objective. Quarterly data ranging from 2001 to 2017 were also utilized in the analysis. The study found that cash reserve ratio indirectly impacts credit to MSMEs through liquidity ratio and lending interest rate as its channels of transmission. It is worthy to note that, as liquidity ratio has a positive significant impact on credit to MSMEs, lending interest rate has a negative but significant impact on credit to MSMEs. To boost economic productivity in developing economies, the study therefore recommends that the monetary authorities reduce the cash reserve ratio in order to increase commercial banks’ liquidity. As the commercial banks’ liquidity rises, they should also reduce their lending interest rate to increase access to credit by MSMEs. Again, the government should appropriate and monitor the judicious disbursement of interest-free loans/credit to MSMEs through banks, especially development banks.

Keywords

• cash reserve ratio
• credit
• channels of transmission
• small and medium-sized enterprises
• micro-