Effects of Interest Rates on Lending by Deposit Taking Microfinance in Kenya

Abstract

The objective of the study was to determine how and the extent to which interest rates impact on microfinance lending in Kenya. It also aimed at reviewing the increasing body of theoretical and empirical studies that have endeavored to examine the range of magnitude and effects of interest rates on microfinance lending in Kenya. The study employed a hybrid of descriptive and causal research design. The target population was all the licensed thirteen microfinance banks. Secondary sources of data were employed, and data was collected on; the total loan book, interest income, total assets, total revenue, and operating income. The unit period of analysis was annual, and data was collected for the period from 2013 to 2017. The study applied correlation analysis and multiple linear regression equation with the technique of estimation being Ordinary Least Squares (OLS) so as to establish the relationship of interest rates and microfinance banks’ lending. The study found there is no significant association that exists between interest rates and microfinance lending. However, the study established that there was a positive relationship between microfinance institution’s size and their lending. Thus, the study concluded that interest rates do not influence microfinance lending. The study recommended that; the government can regulate the prevailing real interest rates without considering the effect it will have on the issuance of loans by microfinance institutions. The governments through its various arms can device methods of influencing and stimulating the stock market. Investment banks, stock brokerage firms, institutional investors, and management of the microfinance institutions can be able to determine from the findings of the study the factors that can affect their strategy of expanding their loan book.