The relationship between interest rates charged by micro finance institutions and the performance of micro and small enterprises in Nairobi

Abstract

This study establishes the relationship between interest rates charged by MFls to MSEs and performance of the MSEs in Kenya. The hypothesis of the study was that interest rates charged by MFls reduced the profit of the MSEs. All the MSEs studied were found to use credit from the MFls to finance their operations. These operations were mainly the working capital expenditure. The analysis of the data revealed that higher amounts of credit granted was charged higher levels of interest rates but enabled them to meet more of their planned operations. This resulted in higher profitability to the MSEs. The study concluded that a positive relationship existed between the interest rates charged by MFls and the profits of the MSEs mainly because of the amount of credit associated with these high interest rates. Thus the. MFls should consider increasing the amount of loan that they grant to the MSEs as this enabled them meet their working capital requirements hence improving their performance. The study concluded that interest rates charged by MFls do not lower the profits of MSEs. This shows that the shift from subsidized to unsubsidized credit has no effect on the performance of the MSEs and hence will continue making profits even in the increased interest rates regime.