Small and medium enterprises (SMEs) play an integral role in the economic success of a country. However SME sector has not been able to realize its true potential due to policy bias and lack of attention from the government. The following study establishes a relation between changes in Monetary policy and its effect on loan availability to SMEs in Pakistan. Johansen cointegration technique is used to establish a long term cointegrating relationship between the variables, whereas Vector Error Correction Model (VECM) was employed to ascertain the error correction term. The results of the study establishes a positive relationship between Monetary policy and loan to SMEs in Pakistan. Existence of Balance sheet branch of Credit channel of Monetary policy transmission is also established by including government borrowing and loans to large enterprises as variables in our models. In the light of this study policy makers can shift their policies to ensure that SME sector in Pakistan has adequate access to credit and consequently contribute to the national GDP. Supervisor:- Dr. Farzana Naheed Khan