THE EFFECT OF INTEREST RATE ON LOAN REPAYMENT IN MICRO FINANCE BANKS IN NIGERIA
ABSTRACT
The
study sought to appraise the effect of interest rate on loan repayment in
microfinance institutions. Lapo Micro Finance Bank, a microfinance institution
in Ikot Abasi was used as a case study for the study. The research was
conducted using questionnaires and interviews. In all 100 customers and 20
employees were sampled for the research. A systematic random sampling was used
for the data collection. The findings of the research revealed that though
interest rate plays a major role in loan repayment, other factors such as loan
term and the repayment frequency also influence to a large extent the loan
repayment. Customers indicated that though lower interest rate would enhance
loan repayment, the issue of accessibility and availability of funds was
paramount. To enhance loan repayment, the researcher recommends lower interest
rate to ease loan repayment burden and loans granted should be amounts that
customers can service. Again, micro-insurance could be established to protect
the Institution and customers against any default.
CHAPTER ONE............................................................................................................ 1
GENERAL INTRODUCTION.................................................................................... 1
1.0 Background to
the Study........................................................................................... 1
1.1 Problem
Statement...................................................................................................... 3
1.2 The Objectives
of the Study....................................................................................... 3
1.3 Research
Questions..................................................................................................... 4
1.4 Significance of
the Study........................................................................................... 4
1.5 Scope of the
Study..................................................................................................... 5
1.6 Limitation of
the Study.............................................................................................. 5
1.7 Organization of
the Study.......................................................................................... 6
CHAPTER TWO........................................................................................................... 7
REVIEW OF RELEVANT
LITERATURE.............................................................. 7
2.0 Introduction................................................................................................................ 7
LIST OF TABLES
Table 1 Number
of Years in Employment ………………………………………...………...44
Table 2 Interest
Rate and Loan Repayment ……………………………………………..45
Table 3 Interest
Rate and Default Rate …………………………………………………….46
Table 4 Interest
Rate and Borrower Relationship ………………………………………...…46
Table 5 Interest
Rate Justification ………………………………………………………….48
Table 6
Effect of Other
Factors on MFI
Loan Repa
Table 7
Appropriate Policy Measure to Improve the loan Repayment …………………..51
Table 8 Age
Distribution of Respondents ………………………………………………...53
Table 9 Size of
Business ………………………………………………………………….....54
Table 10 Size of
Working Capital …………………………………………………………..55
Table 11
Justification for Interest Rate …………………………………………………..56
Table
12 Interest Rate and Loan Repayment ……………………………………………….57
Table 13 Interest
Rate, Loan default and Customer Loyalty …………………………….57
Table 14 Other
Factors Influencing Loan Repayment …………………………………….59
Table 15 Policy
Measures To Improve Loan Repayment ………………………………….59
LIST OF FIGURES
Figure 1 Gender
of Respondents ………………………………………………………..…..41
Figure 2 Age
distribution of respondents …………………………………………………..42
Figure 3
Educational Attainments …………………………………………………………..43
Figure 4
Grade/Position of respondents …………………………………………….............43
Figure 5 Effect
of other factors on MFI loan repayment ……………………………………50
|
Figure 6
|
Appropriate Policy measure that
will improve MFIs Loan Repayment …………..52
|
|
Figure 7
|
Gender of Loan Customers
………………………………………………………...53
|
|
Figure 8
|
Size of
Respondents?
Working……………………………………………Capital
|
55
|
|
Figure 9
|
The Effect of other factors on
TCP Loan Repayment ……………………............58
|
Figure 10
Appropriate Policy Measures that will Improve Loan Repayment of the
MFI……………………………………………………………………………………….60
LIST OF ABBREVIATIONS
MFI
–Microfinance Institutions
TCP –Tanoah
Capital Point
NBFI –Non Bank
Financial Institution
SHG –Self Help
Group
NGO –Non
Governmental Organization
MDG –Millennium
Development Goal
NTHC –National
Trust Holding Company
SIC –State
Insurance Corporation
ERP - Economic
Recovery Programme
IMF
–International Monetary Fund
SAP –Structural
Adjustment Programme
FINSAP
–Financial Sector Adjustment Programme
ATM –Automated
Teller Machine
SMS –Short
Message Service
RCB –Rural and
Community Bank
PNDC
–Provisional National Defense Council
FNGO –Financial
Non Governmental Organization
ROCSA –Rotating
Savings & Credit Associations
UNDP - United
Nations Development Programme
CBRDP –Community
Based Rural Development Programme
REP –Rural
Enterprise Project
MASLOC
–Microfinance and Small Loans Scheme ARB –Association of Rural Banks
CHAPTER ONE
GENERAL INTRODUCTION
1.0 Background
to the Study
A
Microfinance Institution?s)mainobjectiveistoprovide poor(MFIandlow income
households with an affordable source of financial services. Interest charged on
loans is the main source of income for these institutions, and because they
incur huge costs, the rates are correspondingly high. Four key factors
determine these rates: the cost of funds, the MFI's operating expenses, loan
losses, and profits needed to expand their capital base and fund expected
future growth (Ghatak, 1999).
Many
policy makers question why microfinance interest rates remain high even when
some MFIs receive concessional funds to finance lending. Although some
microlenders receive loan funds at concessional rates, they must cost these
funds at market rates when they make decisions about interest rates to ensure
the sustainability of the institution's operations. Donors provide concessional
funds for a particular usage only for a limited period, as do some governments.
However, concessional funds cannot be considered a permanent source of funds
for MFIs, and provision must be made through interest rates to sustain the
lenders' operations (Ghatak, 1999).
Inflation
adds to the cost of microfinance funds by eroding microlenders' equity. Thus,
higher inflation rates contribute to higher nominal microcredit interest rates
through their effect on the real value of equity. Microlenders have two kinds
of operating costs: personnel and administrative. Because microlending is still
a labor-intensive operation, personnel costs are high. Administrative costs
consist mainly of rent, utility charges, transport, office supplies,
1
and
depreciation of fixed assets. Making and recovering small loans is costly on a
per unit basis. Often loan recovery is executed by staffs who visit clients,
increasing costs in time taken and transportation used. Poor physical
infrastructure-inadequate road networks, transportation, and telecommunication
systems-in many countries in which microlenders operate also increases
administrative costs and adds significantly to the cost of microfinance
operations. Inadequate law and order also contribute to high administrative
costs as microcredit operations often involve cash transactions and the
physical movement of cash (Pitt, and Khandker, 1998).
In
many countries, the majority of microcredit is provided by a few leading
institutions, and competition among them is mostly on non-price terms. This
might not be the case in Nigeria where Microfinance Institutions (MFIs) spring
up every day. Today in Nigeria the MFIs compete with traditional Banks in the
cities as well as have dominance in the rural areas. Large-scale commercial
banks with access to low-cost funds, low operating costs, extensive branch
networks, and vast human and other resources to provide financial services
efficiently are presently not significantly involved in microcredit. The lack
of participation of such conventional financial institutions in the microcredit
market also limits potential competition. Although it is widely recognized that
microfinance alone will not end poverty, it is a vital step in that direction.
Microfinance institutions, also known as MFIs, offer financial services to
underserved, impoverished communities.