EFFECT OF INFLATION AND INTEREST RATE ON PROFITABILITY OF SMALL AND MEDIUM ENTERPRISES IN KATSINA METROPOLIS

Abstract

Small and medium enterprises (SMEs) are central to employment creation, income generation, market supply. In Katsina Metropolis, persistent inflation and changing interest rates have increased uncertainty in input prices, reduced the predictability of operating costs, and complicated access to affordable finance, thereby creating a significant challenge for SMEs seeking to maintain satisfactory profitability. This study examined the effect of inflation, interest rates, on the profitability of SMEs in Katsina Metropolis, Nigeria. A cross-sectional survey design was adopted, and primary data were collected from SME owners and managers through a structured questionnaire comprising multi-item measures of inflation, interest rates, and SME profitability. From a target population of 13,718 registered SMEs, a minimum sample of 400 SMEs was determined using the Taro Yamane formula at a 5% margin of error. Of the 400 questionnaires administered, 384 complete and usable responses were obtained, representing a 96% valid response rate. The data were analysed using Partial Least Squares Structural Equation Modelling (PLS-SEM). The findings indicate that inflation had a positive and statistically significant association with reported SME profitability, while interest rate also demonstrated a positive and statistically significant association. Both null hypotheses were therefore rejected, and the two predictors jointly explained 26.6% of the variance in SME profitability. Interest rate recorded the slightly stronger association. Nevertheless, the positive coefficients should be interpreted as perception-based associations rather than evidence that higher inflation or interest rates causally improve objective profitability. The study concludes that SME outcomes reflect enterprises’ adaptation to changing economic conditions, including pricing adjustments and financial responses. It recommends that government and monetary authorities reduce macroeconomic volatility, improve the predictability of prices and credit conditions, and support appropriately priced SME finance. Financial institutions should offer transparent and flexible repayment structures, while SME owners should strengthen cash-flow monitoring, diversify suppliers, implement systematic pricing practices, and develop scenario-based financing plans. Future research should employ longitudinal designs, audited financial indicators, and broader geographical and sectoral samples