Determinants of interest rates in micro finance Institutions in Kenya

Abstract

Microfinance institutions were established to assist the low income by providing credit. In their provision of credit to low earners they charge interest rate which over the years has been high. The purpose of the study was to establish the determinants of interest rates in the Microfinance Institutions in Kenya. The study used both primary and secondary data. Primary data was collected using questionnaires from 104 credit and branch managers while secondary data was collected through the use of previous documents such as the financial statements. Data was analyzed using descriptive such as frequency, percentage, standard deviation and mean score. The study established that according to respondents administrative cost, profitability, cost of funds and loan loss determined the interest rates charged by the microfinance institutions in Kenya. The study also established that there was a positive relationship between the variables. However, the analysis showed that the independent variables were not strong predictors of interest rates. This means that there are other factors which may also be determinants of interest rates. The study recommends that the management of Microfinance Institutions should embrace technology in its operation in order to lower the operation expenses, the study further recommends that government should cheap in by providing funds in form of free interest loans to Microfinance Institutions to reduce the interest charged to low income earners and that there should be a proper regulatory body to oversees the running of Microfinance Institutions.