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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.
