Monetary policy

The monetary policy of a state determines the cost of borrowing and the rate of credit growth. Credit availability is a factor in the expansion (or not) of MSMEs. The way interest rates change over time also affects the viability of businesses that have taken on significant amounts of debt, including the overall borrowing costs. 

Ensuring that inflation remains low and stable allows households and MSMEs businesses to plan and keeps borrowing costs low.  Monetary policy should be set so that the objective it wants to achieve is clearly and transparently developed in response to the dynamics of the domestic and global economic developments for the growth of MSMEs in a particular country.

Policy intervention should note105 that high-interest rates can lead to unsustainable debt burdens of MSMEs, leading to their collapse quickly. This also discourages prospective small-scale investors from borrowing. Hence, there is the need for monetary authorities to implement policies that keep interest rates on loans granted to the MSMEs sector at a manageable level to encourage borrowers to undertake profitable ventures for both startups and business expansion. 

Further, educating potential entrepreneurs on the potential costs of starting an MSME is essential. In this context, the OECD’s Financial Education for Micro, small and Medium-sized Enterprises in Asia describes and provides guidance on policy and practice relating to the financial education of MSMEs and potential entrepreneurs in Asia.

Resources

105 Damu. 2017. Report on the State of Development of Small and Medium Entrepreneurship in Kazakhstan and its Regions. Almaty: Damu “Entrepreneurship Development Fund” JSC.