This study examined bank credit to small and medium scale enterprises (SMEs) and its effect on small-scale enterprises in Nigeria within the period of 1986 to 2020.  The Study made use of secondary data obtained from Central Bank of Nigeria Statistical bulletin for the tests and analysis. After testing for the properties of the variables, it wasfound  that the variables were integrated at order (1)  and  there existed some level of causality but no long run relationship exist among the variables of the model This prompted the study to apply vector autoregressive model to estimate the parameters of the model. Results found that bank credit to SMEs had significantly increased output of SMEs in Nigeria. Hence, bank lending had a positive and significant effect on small and medium scale enterprises in Nigeria However, vector autoregressive response of SMEs to shocks in bank loans to SMEs also indicated positive sign in the first three months after which it then experienced a steady decline in the rest of the period up to the final period. Introducing one standard deviation shocks to discomfort index, SMEs output reacted negatively as seen in the figure; SMEs output slid to negative and started rising again towards the 10^th period. Introducing “own shock” to commercial bank loans to SMEs (CBLSME), the response was sharply negative as it slides to negative point in the second period and remained negative to the final period. This reveals policy inconsistency by banks towards SMEs. Based on the findings of the research it was recommended that measures should be taken to create a pool of long-term funds to enable long term lending to SMEs by commercial banks in Nigeria. In addition, measures should be taken to reduce interest rates for SMEs, ease loan documentation process and requirements, create additional inducement to boost lending to SMEs that ensures consistency in lending and as at when needed and augment monitoring of funds disbursed under the CBN intervention schemes.

Keywords: Commercial Bank, Loans, Small and Medium Scale Enterprises, Growth

JEL Codes: E51, L32, P42