EFFECT OF INTEREST RATE ON LOAN REPAYMENT

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EFFECT OF INTEREST RATE ON LOAN REPAYMENT
EFFECT OF INTEREST RATE ON LOAN REPAYMENT

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.

 

 

Table of Contents

 

 DECLARATION ................................................................................................................

i

 DEDICATION ..................................................................................................................

iii

 ACKNOWLEDGEMENT ..............................................................................................

iiiv

 ABSTRACT ......................................................................................................................

iv

 TABLE OF CONTENT .....................................................................................................

v

 LIST OF TABLES ............................................................................................................

xi

 LIST OF FIGURES .........................................................................................................

xii

 LIST OF ABBREVIATIONS .........................................................................................

xiii

 

 

 

 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

 

vi


 

 2.1 Microfinance/Microcredit: An Overview................................................................... 7

 

 2.2 Overview of the Financial Sector in Ghana.............................................................. 10

 

 2.2.1 Evolution of the Microfinance Sub-Sector in Ghana............................................ 14

 

 2.2.2 Structure and Key Stakeholders of Microfinance in Ghana.................................. 15

 

 2.3 The Structure of the Microfinance Sector................................................................ 17

 

 2.3.1 What are microcredits and how do they work?..................................................... 17

 

 2.3.2 Why are monthly rates in the range of 5 to 7% justifiable?................................... 18

 

 2.3.3 Why clients are willing and able to pay these rates............................................... 18

 

 2.3.4 Why microfinance should be used only for certain types of clients...................... 19

 

 2.4 Loan Default Risk-An Issue in Microfinance/Microcredit....................................... 20

 

 2.5 Microfinance Interest Rate as a Function of Transaction Cost................................ 25

 

 2.6 Determinants of Interest Rates in Microfinance....................................................... 29

 

 2.6.1 Cost of Funds........................................................................................................ 29

 

 2.6.2 Operating Expense................................................................................................. 29

 

 2.6.3 Contingency Reserves (Provision for Bad Debt).................................................. 29

 

 2.6.4 Tax expenses.......................................................................................................... 30

 

 2.6.5 Profits.................................................................................................................... 30

 

 2.6.6 Credit Rating of Client.......................................................................................... 30

 

 2.6.7 Inflation Levels...................................................................................................... 30

 

 2.6.8 Policy Rate............................................................................................................. 30

 

 2.7 Causes of Defaults in Microfinance......................................................................... 31

 

 2.7.1 Lender Side -Weaknesses in Funds Administration.............................................. 31

 

 2.7.2 Borrower Side - Moral Hazard Problem................................................................ 32

 


 

 CHAPTER THREE..................................................................................................... 34

 

METHODOLOGY........................................................................................................ 34

 

3.0      Introduction.......................................................................................................... 34

 

 3.1 Research Methodology............................................................................................. 34

 

 3.1.1 Research Design.................................................................................................... 34

 

 3.1.2 Data sources........................................................................................................... 35

 

3.1.3 Population............................................................................................................... 35

 

 3.1.4 Sample Selection.................................................................................................... 35

 

 3.1.5 Data Collection Instrument................................................................................... 36

 

 3.1.6 Data Editing and Analysis..................................................................................... 37

 

 3.1.7 Limitations to Data Collection.............................................................................. 37

 

 3.2 Profile of Study Area- Tanoah Capital Point Limited.............................................. 38

 

 3.2.1   The   company?s........................................ Vision                                                38

 

 3.2.2 Mission................................................................................................................... 38

 

 3.3 Key Operational Areas............................................................................................. 38

 

 3.4 Institutional Governance, Management Operations and Organisational Structure.. 39

 

 3.4.1 Directors and Management.................................................................................... 39

 

 3.4.2 Organizational Structure........................................................................................ 40

 

 

 

 CHAPTER FOUR........................................................................................................ 41

 

 PRESENTATION AND ANALYSIS OF DATA..................................................... 41

 

 4.0 Introduction.............................................................................................................. 41

 

 4.1 Demographic Background of Respondents (Staff).................................................. 41

 


 4.1.1 Gender of Respondents......................................................................................... 42

 

 4.1.2 Age Distribution of Respondents.......................................................................... 42

 

 4.1.3 Educational Attainment of Respondents.............................................................. 43

 

 4.1.4 Grade/Position of Respondents............................................................................. 44

 

 4.1.5 Number of Years Respondents Have Worked for TCP........................................ 44

 

 4.2 Effect of Interest...................................................................................................... 45

 

 4.2.1 Interest Rate and Loan repayment........................................................................ 45

 

 4.2.2 Interest Rate and Default Rate.............................................................................. 46

 

 4.2.3 Interest Rate and Borrower Relationship.............................................................. 47

 

 4.2.4 Interest Rate Justification...................................................................................... 48

 

 4.3 The Effect of Other Factors on Loan Repayment.................................................... 49

 

 4.4 Policy Measures to Improve Loan Repayment......................................................... 51

 

 4.5 Demographic Background of Respondents (Loan customers)................................. 53

 

 4.5.1 Loan Customers Gender........................................................................................ 53

 

 4.5.2 Age Distribution.................................................................................................... 54

 

4.5.3                                 Size   of   Respondents?...............................................................................Business54

 

4.5.4                                 Size   of   Respondents?...................................................................Working 55Capital

 

 4.6 The Effect of TCP Interest Rate on Repayment of Loan........................................ 56

 

 4.6.1 Low Interest Rate and the Ease of Loan Repayment........................................... 56

 

 4.6.2 Interest Rate and Loan Repayment....................................................................... 56

 

 4.11 Interest Rate and Loan Repayment........................................................................ 57

 

 4.6.3 Interest Rate and Loan Default............................................................................. 57

 

 4.12 Interest Rate, Loan default and Customer Loyalty................................................ 57

 

 4.7 To Determine the Effects of Other Factors on TCP Loan Repayment.................... 57


 

 4.8 Appropriate Policy Measure To Improve the Repayment of the MFI loans............ 59

 

 CHAPTER FIVE......................................................................................................... 62

 

 SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS... 62

 

5.0      Introduction.......................................................................................................... 62

 

5.1  Summary of Findings............................................................................................... 62

 

5.1.2  Findings on Appraising The Effect of MFI Interest Rate on Repayment Of Loans62

 

5.1.3  Findings on the Effect of Other Factors on TCP Loan Repayment...................... 63

 

 5.1.4  Findings on Measures Put in Place to Enhance Repayment of the MFI Loans... 63

 

 5.2 Conclusion................................................................................................................ 63

 

 5.3 Recommendations.................................................................................................... 65

 

REFERENCES............................................................................................................... 67

 

 APPENDIX 1................................................................................................................. 70

 

 APPENDIX 2................................................................................................................. 74

 

 

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

 

EFFECT OF INTEREST RATE ON LOAN REPAYMENT

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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... accounting project topics

EFFECT OF INTEREST RATE ON LOAN REPAYMENT

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