Effect of Interest Rates on Loan Performance in Micro Finance Institutions in Nairobi County, Kenya

Abstract

This study looked at how fluctuations in interest rates impacted the efficacy of loans given by Kenyan microfinance companies in Nairobi County. The investigation used an ex-post facto exploration plan to accomplish this goal. The study benefited from the ex-post facto research method since it demonstrated a relationship between two or more variables and was utilized to examine the degree to which they are related. Eleven microfinance institutions with Kenya's Central Bank licenses were the focus of the study. Data on interest rates and loan performance from yearly financial reports for the years 2018–2022 were gathered using a data collecting sheet. We used both descriptive and inferential statistics to analyze the gathered data. The descriptive statistics were analyzed using means, standard deviations, percentages, and frequencies. The descriptive statistics were shown using graphs, tables, and pie charts. In order to assess the theories, Pearson correlational analysis was utilized. The loan performance and interest rate change data sets' data points were concentrated around the mean, according to descriptive statistics. This occurs as a result of the standard deviations of these data sets being smaller than the mean. While the mean interest rate was 1.62 with a standard deviation of 0.675, the mean loan performance was 18.09 with a standard deviation of 16.756. The correlation study results showed that there was a negative association (r = -0.261) between interest rate and loan performance. Regression analysis revealed that 6.8% of the model contributed to the explanation of loan performance variation. The model was statistically fit to predict loan performance based on changes in interest rates, according to the results of the Anova table. Furthermore, it was shown that loan performance had a constant value of 16.487 when interest rate changes were held constant. Additionally, it was shown by the coefficient value of - 2.621 that interest rates typically had a negative impact on loan performance. This showed that loan performance will decline by -2.621 for every unit increase in interest rates. The study found that the loan performance of microfinance companies in Nairobi County was negatively impacted by changes in interest rates. The report concludes by recommending that the government, acting through the Central Bank of Kenya, implement appropriate policy measures to guarantee that interest rate adjustments are favorable enough to facilitate easy repayment by borrowers and, as a result, lower the amount of non-performing loans.