FINANCIAL INTERMEDIATION, AND THE GROWTH OF SMALL AND MEDIUM-SIZED ENTERPRISES: EMPIRICAL EVIDENCE FROM NIGERIA

Abstract

Small and medium size enterprises (SMEs) have become part and parcel of economic growth and structural change as seen in the developing economies like Nigeria. They play important roles in employment and income generation, innovation, and reduction of poverty, thus being the engines of inclusive development. This paper will examine the dynamic nexus between the macroeconomic variables and the development of SMEs in Nigeria using annual data and cutting-edge econometric methodology. The analysis using fully modified least squares (FMOLS) estimation and robustness checks demonstrates that money supply, inflation, interest rates, and exchange rates have a high long-run impact on the growth of SMEs. Although money supply shows the most positive impact, credit availability also plays a moderating role where the effects of macroeconomic stability are concerned and are critical. The results also establish that there is cointegration between SME performance as well as macroeconomic fundamentals, which indicates the persistence of the relationships. The accuracy of the model is tested by the post-estimation diagnostics, which reflects that the model is reliable to draw policy insights. The paper concludes that the performance of the SME in Nigeria is not entirely based on macroeconomic policies but on the effectiveness of the financial intermediation and access to credit. The paper advises integration of monetary and structural policies to help in making the SMEs drivers of inclusive growth and sustainable development