The effect of interest rates on profitability of deposit taking micro-finance institutions in Kenya

Abstract

Microfinance is high on the public policy agenda. It has achieved tremendous success in improving the households of the poor, through the provision of financial services. Such initiatives are largely sponsored by a variety of organizations including World Bank, United nation, national governments and many charitable organizations (NGO’s). Their aim is to help the poor cope with the risk and take advantage of small income communities. The purpose of this study was to establish the effect of interest rates on profitability of Deposit taking Microfinance institutions registered by Central bank. The research design adopted in this research was descriptive survey. The study sought to determine the effect of interest rates on profitability of Deposit taking Microfinance institutions. The target population in this study was all 9 Microfinance institutions registered by Central Bank of Kenya. Data was collected from central bank’s supervisory report and Micrifinanza Report. The data collected was analyzed using SPSS (Statistical Package for Social Scientists). Regression analysis was used to analyze the data and find out whether there existed a relationship between interest rate and the profitability of Deposit taking Microfinance institutions in Kenya. The study found that interest rate affect ROE in Microfinance institutions as it increases the cost of loans charged on the borrowers, regulation on interest rates have far reaching effects on ROE. The study recommends there is need for Central Bank to regulate interest rates as this would help to safeguard borrowers from exploitation by microfinance institutions.