Effects of monetary policy mechanisms on investment decisions of MSMEs in Lusaka, Zambia

Abstract

This study examined the effects of monetary policy on the investment decisions of micro, small, and medium-sized enterprises (MSMEs) in Lusaka. The theoretical foundation of this study was based on the interest-rate (Keynesian) channel, Credit Channel Theory, and Financial Accelerator Theory. A mixed-methods approach was employed, combining quantitative analysis with qualitative insights from business owners. The target population was 48,078 SMES operating in Lusaka, and the study utilized a sample of 100 participants. Data for quantitative analysis were collected from 100 MSMEs across various sectors. A total of 25 participants were interviewed for qualitative analysis. The regression results showed that the policy interest rate has a significant negative effect on MSME investment (β = −0.45, p = 0.001), suggesting that higher borrowing costs discourage capital investment. In contrast, access to bank loans (β = 0.41, p < 0.001), liquidity provision (β = 0.32, p = 0.024), and firm financial position (β = 0.29, p = 0.001) positively influence investment decisions. Sectoral analysis further revealed that interest rate increases affect sectors differently. Manufacturing firms appeared more sensitive, with 90% (27 out of 30) reporting negative effects from rising interest rates, followed by the retail sector (80%) and the services sector (64%), reflecting differences in capital intensity and reliance on external financing. Qualitative insights highlight challenges, including limited access to affordable credit, low awareness of monetary policy changes, and institutional barriers to financial support. Based on these findings, the study recommends that policymakers should implement monetary policies that are MSME-sensitive, promote alternative financing mechanisms, improve financial literacy, and enhance coordination between monetary and fiscal policies to improve MSME access to finance and support sustainable investment growth.