The Relationship Between Interest Rate and Financial Perfomance of Microfinance Institutions in Nairobi County

Abstract

This research investigates the relationship between interest rates and financial performance of Microfinance Institutions in Kenya. These high interest rates charged by MFIs has attracted a lot of concern from all over the world and hence the need for this study. The literature review provides the reader with an explanation of the theoretical rationale of the problem being studied as well as what research has already been done and how the findings relate to the problem at hand. Secondary data was collected from the published reports to aid in this research work. Regression analysis was used in this in this study because it is widely used for prediction and forecasting. The study derived the lending interest rate from the T bill rate. The study targeted 43 MFIs but due to incompleteness on data available or some scenarios where the MFIs have only existed for less than half the study period, the data used in this study was for 24 MFIs giving a response rate of 55.81%. Three independent variables including interest rates, Inflation and 91-Day Treasury bill rate were taken into account. From the analysis, the study concludes that interest rates positively influence the performance of MFIs. As interest rates increase, the ability of many low income earners in society to apply for loans decrease. However, the case may not be the same for MFIs as they rely heavily on relationship banking. Because of the high level of relationship banking, they end up attracting more loan applicants and hence the increase in financial performance as interest rates increase.