ZAMBIA OPEN UNIVERSITY

SCHOOL OF BUSINESS STUDIES

EFFECTS OF INTEREST RATES ON LOAN REPAYMENT IN MICRO

FINANCIAL INSTITUTIONS (MFIS) IN ZAMBIA:
A CASE OF FINCA - LUSAKA BRANCHES

By

CHRISTABEL M TEMBO

Supervisor:
Leonard C. Mayaka

A draft submitted in partial fulfillment to the requirement for the award of Bachelors of
Business in Banking and Finance

2023

1
 ABSTRACT
It is now generally acknowledged that sustained long-term economic growth requires a
sophisticated and effective system of financial intermediation. To finance both private and
governmental investment and expenditures, Zambia, like any other country, needs a sound and
effective financial system. However, according to statistics from the Bank of Zambia (2017),
average annual effective interest rates for business lending MFIs have been declining while rising
for consumer lending MFIs. Numerous reasons, including high operational expenses, financial
taxes or repression, a lack of competition, and high inflation rates, have been given as the cause of
these enormous spreads.
This academic research endeavored to explore the effects of interest rates on loan repayment at
FINCA as a Micro Finance Institution in Zambia. Interest rates play a crucial role in determining
the repayment of loans in Microfinance Institutions (MFIs). FINCA provide loans to unbanked
and underbanked households and small businesses lacking access to traditional sources of finance.
High-interest rates on loans can make repayments difficult for borrowers, leading to default or late
payments. Conversely, low-interest rates may not provide adequate returns to MFIs to cover their
operational costs and service the loans. Therefore, MFIs must set interest rates that are reasonable
and affordable for borrowers while ensuring the institution's sustainability.
The study was anchored on the overall objective of assessing the effects of interest rates on loan
repayments at FINCA as a Micro Finance Institution in Zambia. To achieve this, the study was
guided by the following four objectives:
1. To investigate the factors that determines the interest rates in at FINCA as a MFI;
2. To determine the effects of changes in interest rate on the repayment of loans at FINCA as
a MFI;

• To establish whether interest rate influence the demand for credit at FINCA; and

• To investigate the measures adopted to enhance the repayment of loans at FINCA

The study established that there are various factors that determine the interest rates at FINCA
among them the regulatory frameworks or the economic environment, the risk of lending small
holder businesses, Market competition and the cost of funding from government or other investors
to mention a few. The study also revealed that interest rates have effects on loan repayment and
could be summarized as follows: first and foremost, high-interest rates increase the cost of
borrowing, reducing the borrowers' ability to repay the loans on time; it also can discourage
borrowers from taking loans from FINCA, making it challenging for FINCA to achieve their
financial sustainability. On the contrary, low-interest rates can make it easier for borrowers to
repay the loans, leading to timely repayments and reducing the likelihood of default; low-interest
rates can negatively impact the FINCA’s' ability to cover their operational costs and fund future
loans, putting the institution at risk of financial instability.

i
In addition, the study's findings revealed that MFIs in Zambia had loan management policies and
control strategies. In some ways, these control tactics work to ensure that borrowers repay their
loans. Nevertheless, these policies were not regularly reviewed. As a result, loan recovery is more
successful when MFIs have strict lending policies. Consequently, the majority of respondents
suggested that MFIs should develop credit policies and effective loan recovery strategies; and
checking a customer's credit before giving them a loan, and most importantly, making sure the
interest rates are low enough for customers to pay back, which is good for MFIs.
In conclusion, the researcher recommended that FINCA extends the repayment duration in times
of inflation as per the indication from the respondents. Adjustments in loan repayments in the time
of inflation are not necessarily done to deal with default but also to save the bank from loss of
revenue. The government should in some way discourage M F I s from arbitrarily adjusting
their rates in terms of high inflation. The Researcher also recommends Micro Finance Institutions
to conduct timely review of policies and strategies in order to ensure that they are up to date and
also encourage Micro Finance Institution to conduct training or raising awareness to the people in
order to help them understand their policies and strategies.

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 DECLARATION
I hereby declare that this research paper I am presenting is my own authentic work and has never
been presented to any college or university for credit or any academic reward. Though I claim that
this work is my own, I humbly acknowledge the sources, which gave me insights for this work.

NAME: CHRISTABEL M TEMBO

SIGNATURE: ______________________________________

DATE: ____________________________________________

This research paper has been submitted for an examination with the approval of my supervisor at

Zambia Open University (ZAOU).

NAME: Mr. LEONARD MAYAKA

SIGNATURE: ______________________________________

DATE: _____________________________________________

It has been accepted and approved by the University Dean of Studies of the Zambia Open

University (ZAOU).

NAME: ____________________________________________

SIGNATURE: _______________________________________

DATE: _____________________________________________

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 DEDICATION
This humble work is gratefully dedicated to my parents Mr. and Mrs. Tembo for bringing me up
to what I am today, my sisters Gloria and Sylvia Tembo, my brothers, John and Charles Tembo
for their loving support, to my lovely husband Lameck Sakala for all the encouragements and
support he continues to render in my life and to my handsome and beautiful son and daughter
Nathaniel and Natalia Sakala who make my life the happiest.

iv
 ACKNOWLEDGEMENT
Praise, Glory and honor to God for giving me the opportunity to learn and for all the countless
blessings he has bestowed upon my life. I am grateful to Mr. Leonard Mayaka my lecturer for
introducing me into the world of educational research work and encouraging me to endeavor on
this research title and, for supervising this work, I acknowledge the support of all my friends that
supported me with their time making all the grammatical corrections. I acknowledge the support
of my employers the Salesians of Don Bosco for according me the time I needed for my studies
despite my busy schedules.

I broaden my appreciation and recognition of the management and staff at FINCA who accorded
me the time I needed to do research at their institution. I will not forget to acknowledge my family
for the warm love and support during the process of my study. I acknowledge all the previous
scholars that have given me the insight to undertake this study.

Thanks very much to all who contributed towards this academic pursuit and I say God Bless you
so much and may you all continue to support such academic endeavors.

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TABLE OF CONTENTS
ABSTRACT..................................................................................................................................... i

DECLARATION ........................................................................................................................... iii

DEDICATION ............................................................................................................................... iv

ACKNOWLEDGEMENT .............................................................................................................. v

LIST OF TABLES .......................................................................................................................... x

LIST OF FIGURES ....................................................................................................................... xi

ABBREVIATIONS / ACRONYMS............................................................................................. xii

CHAPTER ONE ............................................................................................................................. 1

BACKGROUND OF THE STUDY ............................................................................................... 1

1.1 Introduction ...................................................................................................................... 1

1.2 Background ...................................................................................................................... 1

1.3 Statement of the problem ................................................................................................. 5

1.4 Objectives of the study ..................................................................................................... 5

1.4.1 General Objectives .................................................................................................... 5

1.4.2 Specific Objectives ................................................................................................... 5

1.5 Research hypothesis ......................................................................................................... 6

1.6 Scope of the study ............................................................................................................ 6

1.7 Significance of the study .................................................................................................. 6

1.8 Conceptual Framework .................................................................................................... 7

1.9 Operational definitions ..................................................................................................... 8

CHAPTER TWO ............................................................................................................................ 9

LITERATURE REVIEW ............................................................................................................... 9

2.1 Introduction ...................................................................................................................... 9

2.2 Theoretical Review .......................................................................................................... 9

vi
 2.2.1 Traditional theory Model .......................................................................................... 9

2.2.2 Keynes’ Theory of Liquidity Preference ................................................................ 10

2.2.3 The seminal credit market Model ................................................................................ 11

2.3 Empirical Review ........................................................................................................... 11

2.3.1 Factors that determine the interest rates in MFIs ......................................................... 11

2.3.2 Effects of changes in interest rates on the repayment of loans in MFIs ...................... 14

2.3.3 The influence of interest rates on the demand for credit in MFIs ................................ 15

2.3.4 Measures to enhance the repayment of loans of MFIs ................................................ 16

2.4 Research Gaps ................................................................................................................ 17

CHAPTER THREE ...................................................................................................................... 18

RESEARCH METHODOLOGY.................................................................................................. 18

3.1 Introduction .................................................................................................................... 18

3.2 Research Design ............................................................................................................. 18

3.3 Research Approach ........................................................................................................ 18

3.4 Population and Sampling ............................................................................................... 19

3.5 Sampling Techniques ..................................................................................................... 19

3.6 Sources of data ............................................................................................................... 20

Primary Data ......................................................................................................................... 20

Secondary Data ..................................................................................................................... 20

3.7 Data Analysis ................................................................................................................. 21

3.8 Limitations of the Study ................................................................................................. 21

3.9 Reliability and Validity .................................................................................................. 21

3.10 Ethical Considerations ................................................................................................ 22

CHAPTER FOUR ......................................................................................................................... 23

PRESENTATION OF FINDINGS ............................................................................................... 23

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4.1 Introduction .................................................................................................................... 23

4.2 Demographic Data.......................................................................................................... 24

4.2.1 Age of respondents ...................................................................................................... 24

4.2.2 Sex of respondents ....................................................................................................... 24

4.3 Factors that determine the interest rates at FINCA ........................................................ 25

4.3.1 Whether economic environment and Market size has an influence on interest rates .. 25

4.3.2 Extent to which economic environment and market size have an influence on interest
rates ....................................................................................................................................... 25

4.3.3 Factors that influence economic environment with regard to loan borrowing and
repayment .............................................................................................................................. 26

4.4 Determining the effects of changes in interest rate on loan repayment at FINCA ........ 27

4.4.1 Whether there is any connection between interest rate and loan repayment ............... 27

4.4.2 Whether rise and fall in interest rates affects consumer ability to repay loans............ 28

4.4.3 Reasons why rise and fall in interest may or may not affects consumers ability to
repay the loan. ....................................................................................................................... 28

4.4.4 Whether change in interest rates alters firms financing costs ...................................... 28

4.4.5 Factors that affect interest rates ................................................................................... 29

4.5 Establishing whether interest rates influence the demand for credit with FINCA......... 30

4.5.1 Level of agreement on whether interest rates influence the demand for credit with
FINCA................................................................................................................................... 30

4.5.2 Determinants of interest rates on lending money to consumers at FINCA ................. 30

4.6 Investigating the measures adopted to enhance the repayment of loans at FINCA ....... 31

4.6.1 Whether institution have policies that guide management of loans ............................ 31

4.6.2 Rate at which strategy practices are effective on loan management and repayment ... 31

4.6.3 How often are the policies /control strategies reviewed? ............................................ 32

4.6.4 Whether stringent policy on giving out loans is more effective in loan recovery ....... 32

viii
 4.6.5 Measures to put in place to improve loan repayments in Microfinance Institutions ... 33

CHAPTER FIVE .......................................................................................................................... 34

DISCUSSION AND INTERPRETATION OF FINDINGS......................................................... 34

5.0 Introduction .................................................................................................................... 34

5.1 Detailed discussion of findings ...................................................................................... 34

5.1.1 Demographic information of respondents ................................................................... 34

5.1.2 Factors that Determine interest rates at FINCA ........................................................... 34

5.1.3 Effects of changes in interest rate on loan repayment at FINCA ................................ 36

5.1.4 Interest rate and its influence the demand for credit with FINCA ............................... 36

5.1.5 Investigating the measures adopted to enhance the repayment of loans of MFIs ....... 37

CHAPTER SIX ............................................................................................................................. 38

CONCLUSION AND RECOMMENDATION ............................................................................ 38

6.1 Conclusion...................................................................................................................... 38

6.2 Recommendations .......................................................................................................... 39

6.3 Areas for Further Study .................................................................................................. 40

REFERENCES ............................................................................................................................. 41

APPENDICES .............................................................................................................................. 43

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 LIST OF TABLES

Table 1: Distribution of respondents by Age ................................................................................ 24

Table 2: Percentage distribution of factors that influence economic environment with regard to
loan borrowing and repayment ..................................................................................................... 26
Table 3: Whether there is connection between interest and loan repayments ...................... 27
Table 4: Whether change in interest rates alters firms financing costs......................................... 28
Table 5: Determinants of Interest Rates at FINCA as a MFI ....................................................... 30
Table 6: Percentage distribution of how often policies and control strategies are reviewed ........ 32

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 LIST OF FIGURES
Figure 1: Distribution of respondents by Sex ............................................................................... 24

Figure 2: Whether economic environment and market size have an influence on interest rates .. 25

Figure 3: Extent to which economic environment and market size have an influence on interest

rates ............................................................................................................................................... 25

Figure 4: Weather rise and fall of IR affects consumer ability to repay loans ............................. 28

Figure 5: Extent to which interest rates influence the demand for credit ..................................... 30

Figure 6: Percentage Distribution by rating of effectiveness of strategies on loan management

and repayment ............................................................................................................................... 31

Figure 7: Whether stringent policy is more effective in loan recovery ........................................ 32

Figure 8: Measures to put in place to improve loan repayment at FINCA ................................... 33

xi
 ABBREVIATIONS / ACRONYMS

BoZ Bank of Zambia

CBs Commercial Bank

CP I Consumer Price Index

CRB Credit Reference Bureau

DBZ Development Bank of Zambia (DBZ)

EIB Export and Import Bank

FLI Financial Lending Institutions

INFL Inflation

IRS Interest Rates

LM Lima Bank

LUSE Lusaka Stock Exchange

MFIs Micro Financial Institution

PIA Pensions and Insurance Authority

SEC Securities and Exchange Commission

SME Small and Medium Enterprise

SPSS Statistical Package for Social Science

xii
 CHAPTER ONE
BACKGROUND OF THE STUDY

1.1 Introduction
This Chapter will broaden our understanding on the effects that interest rates have on loan

repayment in micro-finance institutions in general and FINCA in particular. In this perspective we

are going to present the information about FINCA and its associated activities. This Knowledge

will help us develop a deeper understanding on how micro-finance institutions are able to operate.

The statistics from the Bank of Zambia (2017) indicate that the average annual effective interest

rates in Micro Finance Institutions (MFIs) have been going down while that of Consumer lending

MFIs has been going up. These high blowouts have frequently been attributed to such factors as

high operating costs, financial taxation or repression, lack of competition, and high inflation rates.

Banks and Financial Institutions (MFIs), in their role as financial intermediaries, are said to face

substantial uncertainty which can add to broader challenges. This uncertainty is due to the

unspecified timing of loan demand and the supply of deposits. Uncertainty can be aggravated by

macroeconomic instability, owing to the limited contractual redress available to banks in the event

of default (Chiumya, 2004).

1.2 Background
In order to strengthen local economies and expand the global market, developing countries are

using the microfinance concept. Almost 50% of those without bank accounts state that their main

excuse is a lack of funds. There are 2 billion people in the globe without a bank account or the

technology necessary to reach a financial institution. Small business loans are provided by

microfinance organizations to people who would not otherwise be able to use standard banking

services. An estimated 500 million individuals worldwide have received microfinance services,

1
many are women from rural regions, accounting for 84 percent of microfinance borrowers1. The

phenomenon is also quite true about Zambia. While micro-finance is mostly accessed by those in

rural areas, the poor people are also leading in access to micro-finance.

The change in government in 1991 brought about radical economic reform in Zambia, from state

control to an economy led by private sector development. The reforms included decentralization,

privatization and liberalization of the financial sector. Liberalization initially led to the

proliferation of financial institutions in the financial sector. However, it also led to a number of

bank failures, resulting in the closure of nine commercial banks since 1995. Access to financial

services by the majority of Zambian’s was further constrained by the closure of unprofitable rural

branches by commercial banks, the raising of minimum account balances and the introduction of

bank charges, as well as the closure of a number of Government owned financial institutions

specifically set up to address the needs of low-income households and the rural poor. These

developments have resulted in a financial system that focuses on meeting the needs of the corporate

sector and working-class elite.

Nevertheless, out of all principal roles of the banks, lending is the most important role in which

banks provide working capital to commerce and industry. The importance of credit is not only

because of its social obligation to cater the credit needs of different sections of the community but

also because lending is the most profitable activity, as the interest rates realized on business loans

have always been well above those realized on investments. Credit being the principal source of

income for financial institutions and usually represents one of the principal assets of the banks,

1
bnpparibas, https://group.bnpparibas/en/news/microfinance-barometer-2017-global-trends-
sector
2
thus its proper management becomes all the more necessary. The extension of credit on sound

basis is therefore very essential to the growth and prosperity of a financial institution (William &

Trochiim, 2006).

It is now widely recognized that a developed and efficient system of financial intermediation is an

important precondition for successful long-term economic growth. In Zambia, the Small and

Medium Enterprise (SME) Sector has continued to play an important role in the economy just like

many other African countries. SMEs make up around 97% of all businesses and contribute 70%

of Zambia’s GDP. It is agreed that most SMEs heavily depend upon bank loans and generally

experience a financing gap, even in developed countries (Uppal, 2014).

Consequently, Zambia like every nation needs a stable and efficient financial system in order to

finance both private and public investment and expenditures. The financial sector in Zambia

comprises of banks and non-bank financial institutions (NBFIs) and are regulated and supervised

by three agencies. The largest regulatory body is the Bank of Zambia (BoZ) which supervises

commercial banks and non-bank financial institutions which are licensed by the BoZ. The other

two are the Pensions and Insurance Authority (PIA) which supervises Insurance companies and

the Securities and Exchange Commission (SEC) which regulates the Capital Market which

consists of the Lusaka Stock Exchange (LUSE), Brokers, Dealers and Investment Banks

(NationalAssemby, 2022).

The financial services industry's liberation was anticipated to increase the private sector's access

to loans at reasonable and competitive rates. This goal was not actually met, which hindered the

expansion of the productive sectors. In Zambia's banking and lending sector, interest rates continue

to be of great significance. Zambia now has two different MFI types: consumer and business

lending. Whereas consumer lending MFIs lend to individuals, enterprise lending MFIs lend to
3
institutions like SMEs. Several microfinance organizations have been charged with abusing

consumers and charging exorbitant interest rates.

For FINCA, average effective Annual Interest rates stands at 70%. These high spreads have

frequently been attributed to such factors as high operating costs, financial taxation or repression,

lack of competition, and high inflation rates moreover factors such as differences in the frequency

of compounding interest, differences in the effective loan periods and differences in the average

principal amounts outstanding during the effective loan periods also affect the same (BoZ, 2021).

Banks and Financial Institutions (MFIs), in their role as financial intermediaries, face substantial

uncertainty which can add to spreads. This uncertainty is due to the indeterminate timing of loan

demand and the supply of deposits. It is important to note according to some authors that

uncertainty can be aggravated by macroeconomic instability, owing to the limited contractual

redress available to banks in the event of default.

Owing to the study of Banda, due to the instability that is seen in interest rates, access to loans and

credit facilities has been, is and may still be a major problem for a larger portion of the Zambians

(Banda, 2010). The problem is quite significant among the poorer Zambians and those in rural

areas where the majority of people do not have access to formal banking services as they lack

collateral securities. It is important to note that this also affects the management of loan and credit

service in the bank which further has a bearing on the operations of these financial institutions as

a whole. This is so because lending plays a pivotal role in the realization of their profits.

To this extent, it is worth undertaking a study on the effects of interest rates on Loan repayment in

microfinance institutions. Our Focus though was based on a single micro-finance institution while

considering the wider scope.

4
1.3 Statement of the problem
The financial sector in Zambia was tightly regulated until the 1990s economic liberalization. The

financial system remained underdeveloped and suppressed under this regime of administrative

regulations. Interest rate regulations have been gone since 1992, when Zambia underwent financial

reforms. Since then, Zambia has seen a steady expansion in the number of financial institutions,

which has intensified rivalry for loanable funds between commercial banks and the private

financial sector.

After the banking sector was deregulated, Zambia has made significant progress, but interest rate

spreads (IRS) are still quite high. Due to this, customers' ability to borrow money and repay loans

has decreased, which has increased the number of people who default on their loans. According to

Banda, high interest rates are typically seen as a significant barrier to the growth and development

of financial intermediation because they deter potential savers with low returns on deposits and

restrict financing for potential borrowers, which reduces the number of viable investment

opportunities and, consequently, the economy's capacity to grow (Banda, 2010). So, the goal of

this study is to evaluate how interest rates affect loan repayment in macro financial institutions.

1.4 Objectives of the study

1.4.1 General Objectives
To assess the effects of interest rates on loan repayment on FINCA as a Micro Financial

Institution (MFI)

1.4.2 Specific Objectives

1. To investigate the factors that determines the interest rates at FINCA as MFI;

2. To determine the effects of changes in interest rate on the repayment of loans at FINCA,

3. To establish whether interest rate influence the demand for credit with FINCA, and

5
 4. To investigate the measures adopted to enhance the repayment of loans at FINCA

1.5 Research hypothesis

1. H0 High interest rates do not affect loan repayment at FINCA

H1 High interest rates affects loan repayment at FINCA

2. H0 Interest rates does not influence the demand for credit at FINCA

H1 Interest rates influence the demand for credit at FINCA

1.6 Scope of the study

For the sake of quality assurance and for ease accessibility, this research was conducted within the

confines of Lusaka and on a singularly selected micro finance institution, FINCA. This site has

been chosen because it was cheaper and easier to research from the selected location because the

researcher resides in Lusaka.

1.7 Significance of the study

MFIs generate revenue primarily through providing loans to businesses and people and collecting

interest on those loans. As a result, MFIs' income would decrease as the number of loans that

default increases. A higher interest rate would also make people and businesses less likely to take

out loans and would increase the number of loan defaults.

Because loan and credit management in MFIs has an impact on their financial performance, this

study offers information to policymakers to help them develop suitable rules and potential

remedies. The study helped the management of MFIs by giving them access to a broad body of

knowledge that would enable them to make better decisions and come up with plans for reducing

6
 the losses brought on by loan default by setting interest rates that was profitable for both their

institutions and their clients. As it adds to the body of knowledge and give them actual studies to

utilize in their research, the study was beneficial to other academics and researchers in this subject.

Above all, it suggests topics that might interest academics and need more research.

1.8 Conceptual Framework

Cost of Funds (interest

rates to lender, admin
costs to service)

Risk associated with

Determinants or Defaulting on
Lending small business High Interest Rates
Causal Agents loan
holders,
repayment

Regulatory Environment
(Economic Environment) &
Level of competition

From the conceptual framework above, it can be deduced that factors such as regulatory
environment or the economic environment, the Risk of lending SMEs and the cost of funds from
the investors determine the rise and fall of interest rates. As a result of high interest rates, the
likelihood of defaulting by customers is quite high.

7
1.9 Operational definitions

Interest rate: This is the money that is charged by a bank upon any one who gets a loan.

Repayment: This is the act of taking back the money one has browed from a financial institution

Loan: This is the amount of money someone brows from a financial institution

Loan default: is failure to honour an obligation that is due.

8
 CHAPTER TWO
LITERATURE REVIEW
2.1 Introduction
This chapter was very important due to the fact that it dealt with the review of the related literature

to this study. In this chapter the researcher presented literature from people who have shared

similar views as regard to the effects that interest rates may have on the loan repayment in micro

finance banks. The researcher tried to identify out the educational gaps that were left by the

previous researchers and thus not duplicate the work done before.

In this rough economy as evidenced in many parts of Africa, Zambia inclusive, Non-Performing

Loans (NPLs) continues to be the talk of the day as some customers are not able to pay their debts

as a result of various variables. In this regard, theoretical and empirical literatures were both

examined on loan repayment so as to make derivations and provide the basis for a solid evaluation.

2.2 Theoretical Review

It is important to note that there several theories have been put forward which have implications

on loan repayment. Interest rate theories acknowledge that interest rates have an effect on loan

repayment because the higher the interest rate, the greater the risk that the loan would not be repaid

and, as a result, the greater the loan default.

2.2.1 Traditional theory Model

According to this conventional theory, interest rate is the cost of savings that is determined by the

supply and demand for loanable funds. When a capital market is present, it is the rate at which

investment and savings are equal. According to the loanable fund theory, non-monetary factors

influence interest rates. The amount of money saved, the level of income, or institutional variables

like the government and commercial banks are not given any weight. According to the
9
conventional hypothesis, real interest rates remain fixed while nominal interest rates fully adjust

to the anticipated rate of inflation. Irvin Fisher in his theory of interest which he labeled “impatient

and opportunity theory” held similar sentiments in which he believed that there is a positive

relationship between expected future price and nominal interest rate. An increase in price he said

increase the nominal value of trade, resulting in increase in demand for money and leading to an

increase in nominal interest rate (Fisher, 1930). Fishers’ theory is one of the most controversial

theories particularly when it is interpreted as suggesting a constant real interest rate. He pointed

out that the real interest rate is equal to the nominal interest rate (the one we perceive) minus the

predicted inflation rate. The actual interest rate is just 5% if, for instance, the nominal interest rate

is 12% and consumers anticipate a 7% inflation rate.

2.2.2 Keynes’ Theory of Liquidity Preference

In his classic work, “The General Theory of Employment, Interest and Money” Keynes offered

his view of how the interest rate is determined in the short run. The theory of liquidity preference

proposes that interest rates adjust to balance supply and demand for the economy's most liquid

asset - money. According to the theory of liquidity preference, interest rates are one determinant

of how much money people choose to keep. The reason for this is that interest rates are the

opportunity cost of holding money: they are what you forego by holding money in liquid or cash,

which does not bear interest. When interest rates rise, people want to keep less of their wealth in

money/liquid/cash (Investopedia, 2022). Interest rate is a function of income. Its primary role is to

help mobilize financial resources and ensure the efficient utilization of resources in the promotion

of economic growth and development. Moreover, the central belief of Keynesian economics is that

government intervention can stabilize the economy.

10
2.2.3 The seminal credit market Model

Stiglitz and Weiss' seminal credit market model proposes that asymmetric information between

borrowers and lenders creates a moral hazard in which borrowers have an incentive to invest in

risky projects, laying the groundwork for a rationing equilibrium in credit markets. According to

this idea, asymmetric information is to blame for the dysfunctional operation of financial markets

in emerging nations. It is this inadequate information that causes moral hazard and unfavorable

selection as its two results. While lenders allocate funds to projects that are hazardous and might

not be bankable, creditors are granted at prices corresponding to the opportunity cost of funds,

such as the supply price paid to savers or fixed depositors. These are the two main characteristics

of the model.

2.3 Empirical Review

2.3.1 Factors that determine the interest rates in MFIs

According to numerous researchers, there are a number of factors that affect the interest rates

charged by financial institutions in various nations. Banks typically charge higher interest rates in

developing nations with unreliable financial markets because there is an information gap between

lenders and borrowers, borrowers' creditworthiness is questionable, the value of collateral is

exaggerated, and institutional inefficiency is prevalent.

Cost of funds

Commercial banks are one of the sources of funding for microfinance organizations. These funds

are provided to microfinance institutions so they can offer their clients financial services as well.

This fund's cost is determined by the market interest rate. This financial outlay is added to the fees

paid on these loans and the deposit withheld from the general fund to cover the profitable

microlenders' 23% interest rate (MicrofinanceInformationExchange, 2010).

11
Profit Maximization
Kamau (2008) finds that interest rate was rated highest as the factor that determines the

profitability of Microfinance Institution and the high rate was to achieve growth through profit.

He came to the conclusion that the conversion of microfinance institutions into banks or other

types of regulated institutions has been a recent development in the microfinance industry in Kenya

and worldwide. Yet, for this change to take place, the microfinance institution must demonstrate

that it has the capacity to compete with other well-established institutions in the financial market

and the potential to be financially successful. The interest rate charged is high in order to address

this growth in profit, which must be maintained in order to account for any potential expansion

(Kamau, 2008).

In the same regard, Fehmeen argues in favor of profitability factor of Microfinance Institutions in

that, microfinance institutions must operate more like businesses than charitable organizations

while nevertheless including a social component into their operations (Fehmeen, 2005). This can

be a tricky balance to strike given some institutions' inexperience and lack of corporate

governance. Some of them entirely lose sight of their social goal, while others fail to remember

that the microfinance model must ultimately be financially viable.

According to Fernando (2006), the primary source of income for microfinance institutions is

interest on loans. As a result, they need to be high enough to pay operating expenses. Interest rates

continue to be high since microlending is still a costly operation. According to his research,

microfinance institutions charge rates that range from 30 to 70% annually (Nimal, 2006). He

advises that it's crucial to keep in mind that making comparisons with the interest rates levied by

commercial banks is improper because larger loans entail reduced transaction costs, which lower

interest rates.

12
In contrast to the notion that profits are the primary motivators of interest, Gonzales discovered

that the profitability of sustainable microfinance institutions has decreased by around one-tenth

(0.6 percentage points) annually (Gonzalez, 2007). According to his research, the average

microfinance institution's interest rate would only decrease by around a sixth in the extreme and

implausible case of total profit elimination. He contends that while a reduction in interest rates of

this magnitude would not be inconsequential, it would still leave microcredit rates at levels that

would appear exploitative to the public and to legislators. He comes to the conclusion that since

microfinance institutions receive income from other sources as well, the interest rate is unaffected

by them.

Transactional Costs

Like the price of any other item or service, the price of microfinance services depends on

transaction costs. The costs of money for on-lending, the costs of risk (loan loss), and

administrative costs are the fundamental three components of transaction costs in the supply of

financial services (processing loan applications, educating or training of clients and monitoring for

loan repayment). The aforementioned makes it necessary to draw the conclusion that a poor

individual has a higher absolute transaction cost per head than someone who uses a formal

financial institution.

Campion et al, (2010) found that the advent of the global economic and financial crisis in the last

quarter of 2008 had further constrained liquidity in the region. They assume that, microfinance

Institution continues to grow, but at more modest rates, since their cost of financing has increased

and many were facing challenges in acquiring capital at any price. The number of nonperforming

loans was growing at the same time that remittances from foreign employees had decreased. The

latter is concerning since recipients frequently utilized the funds to pay back loans, and some
13
microfinance institutions had been making a sizable fee revenue from facilitating these

remittances. According to the report, the majority of microfinance institutions were coping with

the crisis by enhancing the effectiveness of their internal processes (Campion, Rashmi, &

Wemmer, 2010).

2.3.2 Effects of changes in interest rates on the repayment of loans in MFIs

According to a study done in Ghana by Quartey (2000), changes in interest rates may have a direct

impact on consumer and personal financial decisions. Increasing interest rates make saving

relatively more appealing while increasing the cost of borrowing. The result of falling interest rates

is the reverse. Hence, whether you are a saver or a borrower would determine how an interest rate

increase or decrease affects you.

Mubanga (2019) conducted research to assess the effects of interest rates on loan repayment on

Micro Finance Institutions in Zambia taking the case of Lusaka. The study reveals that the rise and

fall of interest rates affect borrowers‟ ability to repay loans. Unlike low interest rate, high interest

rate poses a challenge for the borrowers to repay loans to MFIs and Banks thereby increasing the

number of defaulters (Mubanga, 2019).

The research by Amonoo and friends in 2003 indicates that there is an interplay between interest

rates, annual profit and owners’ equity affect the demand for credit by the poor and SMEs. The

results show that the relationship that exist is negative and that the higher interest rates impact the

demand for loans. Consequently, the study reveal that the causes of poor loan recovery as revealed

by the banking and non-banking institutions are high interest rates, poor appraisal and weak

monitoring (Amonoo, Acquah, & Asmah, 2003).

14
A recent study by Negatu (2021) on the impact of interest rates on credit and loan repayment in

Ethiopia with reference to credit cooperatives indicate that Interest rate has an impact on demand

for credit because the higher the cost of loan is leads to inability to repay the loaned amount by

customers. On the other hand, the research shows that the lower the interest rate by itself also have

impact on the development of investment in the country, and again saving does not takes place.

The research proposes proper management to ensure economic development (Negatu, 2021).

2.3.3 The influence of interest rates on the demand for credit in MFIs

The debate on whether or not high interest rates affect the demand for credit is a debate that is

quite inconclusive to some extent. In this regard, there are two schools of thought that have given

consent to this assertion. The first school of thought indicated that high interest rates negatively

affect the demand for credit in Micro-Finance Institutions. This assertion comes in those only

limited borrowers with high-risk projects may have their demand satisfied. According to Stiglitz

and Weiss, high interest rates encourage adverse selection of loan seekers (Stiglitz & Weiss, 1981).

As such among the people who take loans, the poor and SMEs cannot be part of the group.

Cotler (2010) conducted research to determine the factors that influence the loan interest rates in

the microfinance industry. He discovered that the lending interest rate is negatively correlated with

the productivity of financial institutions and with the number of years these Institutions have been

operating and positively correlated with the funding costs using data from Microfinance Institution

from Asia, Africa, and America (Cotler, 2010).

In the same vein, a group of researchers Amonoo Acquah and Asmah (2003). conducted research

to assess the impact of interest rates on demand for credit and loan repayment by the poor and

SMEs in Ghana. They discovered that the causes of poor loan recovery as revealed by the banking

and non-banking institutions are high interest rates, poor appraisal and weak monitoring.
15
According to them, the high interest rate stood at 45% negative effect to loan repayment and

demand for credit. The study indicated that there is a negative relationship between interest rate

and demand for loans (Amonoo, Acquah, & Asmah, 2003).

In 2019, Philip Mubanga conducted research on the effects of interest rates on loan repayment in

micro financial institutions (MFIs) in Zambia a case of micro finance institutions in Lusaka. The

survey indicates that there is a link between interest rates and demand for loans in Zambia.

According to this researcher interest rates also affect loan repayment. Further, the findings from

the study revealed that MFIs in Zambia had policies/ control strategies that guide the management

of loans. These control strategies in some ways effective in ensuring loan repayments from the

borrowers (Mubanga, 2019).

2.3.4 Measures to enhance the repayment of loans of MFIs

Nawai (2012) conducted research to assess the factors affecting repayment performance in micro

finance programs in Malaysia. The study discovered that borrowers' ability to repay loans would

improve as income and sales volume rise. As a result, by giving the borrowers training in areas

like marketing their products and financial management and accounting, they would be able to

grow their businesses and boost their revenues. According to the study, rewarding responsible

borrowers with a refund may motivate them to make their loan repayments on time and without

penalty. The mindset of borrowers to try to avoid paying the whole amount when due or to

postpone payment can be changed by this refund. The report also recommends the creation of a

formal, specialized microfinance banking institution to meet the demands of micro and small

business owners, particularly in Malaysia, who use both group lending and individual lending

approaches (Nawai, 2012).

16
Waruru (2011) conducted research to assess the determinants of interest rates in Micro Finance

Institutions in Kenya. The study makes several recommendations, including that governments

should cut costs by giving money to microfinance institutions in the form of interest-free loans in

order to reduce the interest charged to low-income earners and that there should be a proper

regulatory body to oversee the operation of microfinance institutions. The study also urges

management of microfinance institutions to adopt technology in their operations to reduce

operating costs (Waruru, 2011).

2.4 Research Gaps

Research has largely disregarded the factors that affect interest rate in its quest to learn how

effective microfinance firms are at reducing poverty. There has been little research done on the

factors that affect interest rates, and the research that has been done so far has produced conflicting

conclusions. What has an impact in one location might not have an impact in another or might

have an unfavorable impact. The study's conflicting findings are a result of both the research

technique and the field in which it was conducted. There were no certain findings that could be

proved to be global or applicable to all nations. As indicated above, the researches done by most

scholars focused largely on various Microfinance Institutions. On the contrary, research focused

on a single micro finance institution. This gave us a clearly picture of what specifically affects the

Microfinance Institutions. Moreover, some scholars aimed at identifying and studying the factors

that affect interest rates but this research focused on identifying the effects of interest rates on

borrowing and lending thus providing basis for creation of a win – win situation for both the

lenders and the borrowers. This research used descriptive research that gave us concrete

information on FINCA as a Microfinance Institution that provides loans to poor and vulnerable

people in the community.

17
 CHAPTER THREE
RESEARCH METHODOLOGY
3.1 Introduction

In this chapter we discuss the methodology that was be implored to undertake this research and

reporting the results thereto. It aims at explaining the methods and tools used in the collection of

data and eventual analysis. The Data was tested for its validity and reliability and quality.

3.2 Research Design

To collect the data for this research, a survey design was used. In this regard a descriptive survey

design was used to collect data from the respondents. This design was used because descriptive

research determines and report the way things are in the survey in an attempt to collect data from

the respondents in relation to the various variables included. Thusly, descriptive survey is an

appropriate as it seeks to ascertain the state performance of Microfinance Institution and the

suitability of the different measures as per the outcome of research. While the researcher would

want to use a mixed method research, more inclination was towards the qualitative research

paradigm. This paradigm is more descriptive in nature and helped the researcher to gather

information from a single Microfinance Institution.

3.3 Research Approach

The researcher employed a mixed approach involving quantitative and qualitative paradigm.

According to Hennink, Hutter and Bailey (2014) the mixed methods research is a methodology for

conducting research that involves collecting, analyzing and integrating quantitative and

qualitative. On the other hand, mixed design with its features of mixed methods research gave the

possibility and assurance of triangulation. This means various methods; data sources and

researchers can be used to examine the same phenomenon. The triangulation allowed the
18
researcher to identify aspects of a phenomenon more accurately by approaching the various

variables from different points of view using different methods and techniques.

3.4 Population and Sampling

For the purpose of this research the study was carried out in one Micro Finance Institution (MFI)

in Lusaka. FINCA is the Micro Finance Institution that has been chosen. As such the three branches

in Lusaka (North mead, Lusaka Main and Chawama) was targeted for the research. The selection

of the population has been done purposively so that the researcher be able to identify and

understand the variations in terms of loan repayment between low-income communities like

Chawama and high-income communities like North mead and Lusaka Main Branch.

More complete data must be gathered in order to properly analyze this type of study on Micro

Financial Institution in Lusaka. The researcher first took into account the two measures that impact

the accuracy of the data in order to determine a sample population that participated in the study.

The margin of error and the confidence interval are these two. The margin of error is the amount

of positive or negative divergence that can be made from the results of a sample of this kind.

Amedeho (2002) asserts that the best sample size for accurately representing the full population is

between 5 and 20%. Since this research is solely academic, a huge population was used to create

the sample.

3.5 Sampling Techniques

Sampling is the process of selecting a sufficient number of elements from the target study
population so that the study of the sample and understanding of its properties or characteristics
made it possible for people to generalize such properties or characteristics to the population
element.

19
To choose participants for the study, purposeful and straightforward random sampling was used.
The element's chance of being chosen as a subject is not equal or predefined in purposive sampling.
Every member of the population has an identical chance or probability of being chosen as a sample
subject in a simple random sampling circumstance. (Sekaran, 2006).

Purposive sampling was used to select the Micro Finance Institution and the senior staff while
simple random sampling was used to select subordinated staffs in different departments
irrespective of sex or age. This design is convenient in that it was easy to locate the respondents
and ensure that data is collected from the right people. The simple random technique also ensured
objectivity in the study and gave everyone an equal opportunity to be selected. These techniques
were selected for the sake of acquiring vast information, and to make efficient utilization of the
resources allocated to the study.

3.6 Sources of data

Primary Data

The primary data refers to raw information that was obtained from the area of study and is
unpolished. This research mainly depended on the primary information that was obtained from the
field using a questionnaire and interview guide. This information helped in bridging the gaps or
weaknesses of the secondary data and it gave the actual answer to the objectives of the study.
Information from primary data also contributed to the theory, practice and policy that justified the
reason for the research. This information was collected from the field as raw unprocessed data
after which it was be exposed to analysis.
Secondary Data

The references and usage of published research findings from prior studies, along with other

published materials like articles, journals, and books pertaining to the research topic, were all

included as secondary data sources for this study. The internet was also be used. Secondary data

was gathered to serve as both a foundation for the research and as a source of advice while it is

being conducted. The gathering of secondary data aided in preventing task duplication. It also

20
aided in identifying gaps in previously done research on the subject, so promoting additional study

of the subject and generating fresh data.

3.7 Data Analysis

The data gathered from the questionnaire was examined for uniformity, consistency, accuracy, and

completeness in order to analyze it and make sense of it. Where appropriate, questions was coded

and data was altered to make data analysis easier. The data was defined and evaluated using various

data analysis software, such as SSP and or Excel Worksheets, in accordance with the study's

objectives and presumptions.

3.8 Limitations of the Study

Every scholastic undertaking is subject to limitations of any kind. Realizing that this study would

not cover all the Micro Finance Institutions, the study is limited to a single micro finance institution

and this may not give us the true picture of the other Micro Finance Institutions. However, the

limitedness of this research does give us the deeper insight in the objectives which this project

wishes to achieve. The results from the study could then guarantee authenticity and reflect the true

picture about that particular MFI. Another limitation envisaged is the failure by the finance

institution to disclose issues that are sensitive to their operations. This may also hamper the access

to a true reflection of that particular organisation.

3.9 Reliability and Validity

The reliability and validity of the information and this research was anchored upon the supervisor

who monitored the tools to be used in the research and who guideed the process to its completion.

21
3.10 Ethical Considerations

Ethical consideration is very vital in any academic pursuit to avoid certain misconceptions and

also ensure provision of right information. The protection of dignity of subjects and the publication

of the information in the research need to ensure that the respondents are well informed and consent to

the interview. The principles of beneficence- do not harm, respect for anonymity and confidentiality,

and respect for privacy should be observed. As such in this study the researcher obtained ethical

approval from the University and in the field, the researcher sought informed consent from the

participants on what the research is all about. This enabled the respondents to make informed decisions

as to whether or not to participate in the interview.

22
 CHAPTER FOUR
PRESENTATION OF FINDINGS
4.1 Introduction
The fourth chapter presents the research findings, analysis and interpretation in accordance to the
study objectives that were set out. In doing so it presents an analysis from the researcher of all data
gathered in reference to the methodological framework earlier discussed in the previous chapter.
The research findings are presented in line with the research questions and the objectives. The
data presented in this chapter is based on a sample survey carried out in three FINCA Microfinance
Institution conducted in North mead, Lusaka Main and Chawama.
Out of the sample population of about 80 respondents, 12 Respondents represented FINCA and 68
represented bank customers. The general objective of the study was therefore, to investigate the
Effects of interest rates on loan repayment on FINCA as a Micro Financial Institution (MFI)

The researcher collected data using the two different techniques:

Interview method
The interview method was employed to collect data from banking officials in the loan department
as key informants. It was preferred basing on the fact that most of the administrators are usually
more respective to detailed discussions especially when conducted at their workplaces. The face-
to-face interviews certainly allowed in-depth investigation especially because they facilitated
probing of the study subjects for both additional responses and/or clarity. An interview format was
designed to guide the interviews and as a tool that ensured consistency in the interview process.

Questionnaire technique
A questionnaire is a predetermined written set of questions used to obtain data from the
respondents by having the responses in writing. The researcher used questionnaires in order to
gather quantitative data from both categories of respondents. Questionnaires were preferred in the
study because they are a convenient method since respondents gave their responses independently
and secretly.

23
4.2 Demographic Data
4.2.1 Age of respondents
The table below indicates the age groups of the informants.
Table 1: Distribution of respondents by Age
Age Percentage %
20-29 6
30-39 38
40-49 46
50-59 10

From Table 1 above, the people aged between 40 to 49 years represents the highest age range of
people that get loans from Micro-Finance Institutions followed by those in the age range of 30 to
39 years. Quite a few individuals represent those that are within the range of 50 – 59 and the least
were representing the age range between 20 – 25 years.

4.2.2 Sex of respondents

Figure 1: Distribution of respondents by Sex

Male Female

The table above represents the distribution of respondents by sex. Out of the total number of 80
respondents, 44 respondents representing 55% of the respondents were female and 36 people
representing 45 respondents are male. Of the 68 respondents from the customers, 63% of this
number was dominated by female respondents.

24
4.3 Factors that determine the interest rates at FINCA
Having factored out the demographic information of the respondents, the researcher was
determined to understanding the factors that determine the interest rates at FINCA as a Micro
Finance Institution operating in Zambia. In this regards the following were put into consideration.

4.3.1 Whether economic environment and Market size has an influence on interest rates
Figure 2: Whether economic environment and market size have an influence on interest rates

YES NO The respondents from the Bank were

asked whether economic environment
and Market size has an influence on the
25%
interest rates. 75% of the 12
respondents from the Financial
Institution agreed that the environment
and Market size have an influence on
75%
interest rate while 25% indicated that
they have no effect on the rate of
interest.

4.3.2 Extent to which economic environment and market size have an influence on interest rates
For those that responded yes to the previous question, they were asked to what extent the
economic environment and market size have an influence on interest rates.
Figure 3: Extent to which economic environment and market size have an influence on interest rates
7 Of the 9 respondents representing
6
6 75% of the respondents, 6
5
respondents indicated that market
4
size and economic environment
3
2
moderately affects the rate of
2
1 interest while 2 indicates great
1
0 extent and 1 respondent indicated
0
Great Extent Moderate Extent Low Extent Not at All low extent.

25
4.3.3 Factors that influence economic environment with regard to loan borrowing and
repayment
In the context of this research, the researcher also wanted to find out the factors that influence
economic environment with regard to borrowing and repayment. From the interview the
following were the results given.

Table 2: Percentage distribution of factors that influence economic environment with regard to
loan borrowing and repayment
Factors Frequency Percent
The extent of competition in the markets 9 75%
Expected behaviour of bank customers 12 100%
The level of government’s borrowing 7 58%
Discount rates 12 100%
Exchange rate volatility 12 100%

From the table above, the representatives from FINCA were asked what factors influence
economic environment with regard to loan borrowing and repayments. All the representative i.e.,
100% mentioned that economic environment is influenced by Expected behaviour of bank
customers, discount rates and exchange rate volatility. However, only 75% of the respondents
indicated that the extent of competition on the market affects economic environment in relation to
borrowing and repayment. On the other hand, about 58%v of the respondents were for the view
that the level of governments borrowing has an effect on borrowing and repayment respectively.
Consequently, the respondents were asked what other factors may influence economic
environment and the following were outlined:
• An economic slowdown or a recession
• Debt and Equity
• Demand for Capital

26
 4.4 Determining the effects of changes in interest rate on loan repayment at
FINCA
Changes on interest rate are said to have an effect on Loan repayment by most micro finance
institutions. As such it worth for the researcher to determine what effects these changes have on
the loan repayment at FINCA.
4.4.1 Whether there is any connection between interest rate and loan repayment
In the first place the researcher wanted to find out whether there is a relationship between interest
rate and loan repayment. This was from both the representatives from FINCA as well as the
customers.
Table 3: Whether there is connection between interest and loan repayments

Percentage Distribution of respondents

12%

12%

76%

Yes No Not Sure

As seen from the chart above the respondents were asked whether or not there is a connection
between the interest rates and loan repayment at FINCA. Both the customers and the
representatives from FINCA were interviewed. 76% of the total respondents agreed that there is
a connection between the two variables. 12% of the respondents indicates that there in no
connection between the two and the other 12% was not sure whether or not a relation exits that
affect the other. This was also accentuated by the proceeding question in which the respondents
were asked whether the rise and fall of interest rates affects consumer ability to pay.

27
Figure 4: Weather rise and fall of IR affects consumer ability to repay loans

4.4.2 Whether rise and fall in interest rates affects consumer ability to repay loans
When asked whether the rise and fall of interest rate affects loan repayment. On this regard, the
respondents had mixed feelings and the responses are shown in the chart below.
From the figure, we can see those 68
respondents representing 85% of the
15% respondents indicated that the rise and fall in
interest rates affects consumer ability to repay
loans while 15% represented by 12
respondents indicated that the change in
85% interest rate does not affect consumer ability to
repay. While both respondents where right in

Yes No their own way, they were asked to provide

reasons for the answers that they had provided.

4.4.3 Reasons why rise and fall in interest may or may not affects consumers ability to repay the
loan.
The researcher received multiple answers on this and in order to present well the findings, the
results were grouped according to association. Similar responses were grouped together. The
qualitative results were compiled and analyzed. On the contrary the representatives from FINCA
were asked whether the change in interest rates alters the firm financing costs.

4.4.4 Whether change in interest rates alters firms financing costs

Table 4: Whether change in interest rates alters firms financing costs

Frequency Percentage
Yes 8 66.7%
No 2 16.5%
Not Sure 2 16.5%
12 100%
From the table above we note that some respondents from the Micro Finance Institution agree
that interest rates alter the firm’s financial costs. These are represented by 66% of the
respondents while the remaining respondents equal in number indicates that they are either not
sure or they do not conform to the assertion that interest rates alter firms financing costs.

28
4.4.5 Factors that affect interest rates
Interest rates could be affected by various factors. The respondents were asked what could be
some of the factors they think affect the rate of interest. Multiple responses were received and
grouped for easy analysis. The terminologies used may not be the exact words of the respondents
but through deduction they are grouped as such. Some of the factors identified by respondents
are:

i. Extent of government dependence on the domestic banking sector for the financing
of its fiscal deficit
ii. Unfavorable macroeconomic environment such as inflation
iii. Diseconomies of scale
iv. The exchange rate volatility
v. Discount rates
vi. Cost of holding cash and operational costs
vii. Market size

29
4.5 Establishing whether interest rates influence the demand for credit with FINCA
4.5.1 Level of agreement on whether interest rates influence the demand for credit with FINCA
Figure 5: Extent to which interest rates influence the demand for credit
45
41
40

35

30

25

20
16
15 13

10 7

5 3

0
Strongly Agree Agree Indifferent Disagree Strongly Dis
Agree

From table above respondents were asked to indicate their levels of agreement that interest rates
influence the demand for credit on a scale of 1-5, (1=Strongly Agree, 2=Agree, 3=Neutral,
4=Disagree, 5= Strongly Disagree). It can be shown that 41 (51%) majority respondents strongly
Agreed, 13 (16%) agreed, 16 (20%) were neutral, whereas 7 (9%) Disagreed, and 3 (4%)
strongly disagreed.

4.5.2 Determinants of interest rates on lending money to consumers at FINCA

The respondents from FINCA were also asked what determines the interest rates on lending
money and the responses are highlighted in the table below

Table 5: Determinants of Interest Rates at FINCA as a MFI

Determinant Level of influence

The cost of funds High

The risk associated with lending to low-income High

individuals and small businesses.

30
 The level of competition in the microfinance Medium
industry
The regulatory environment in which MFIs High
operate

From table 5 above, the respondents indicated that the Cost of funds, the risk and the regulatory
environments are some of the key determinants of interest rates at FINCA. The level of competition
according to the respondents determines interest rate moderately.

4.6 Investigating the measures adopted to enhance the repayment of loans at FINCA
4.6.1 Whether institution have policies that guide management of loans
The respondents from FINCA were asked whether the institution have policies that guide
management of loans. 100% of the respondents affirmed that the institution has policies that
guide the management of loans. The respondents were also asked to evaluate the effectiveness of
the policies that guide their operations.

4.6.2 Rate at which strategy practices are effective on loan management and repayment
Figure 6: Percentage Distribution by rating of effectiveness of strategies on loan management and repayment

43%

24%
20%

Category 1

Very Effective Effective Not Effective

31
The respondents were asked to rate the strategy practices on loan management and repayment.
Out of the 12 respondents, 8 respondents representing 43% of the total respondents indicated that
they are very effective, 3 respondents representing 24% indicated that they were effective while
the rest respondent that they were not effective. This is represented by 20% of the total
respondents.

4.6.3 How often are the policies /control strategies reviewed?

Table 6: Percentage distribution of how often policies and control strategies are reviewed
Rate Frequency Percent
Very often 2 17%
Often 3 25%
Not often 7 58%
Total 12 100

Table 6 above shows the respondents’ responses on how often the policies/control strategies on
loan management and repayment were reviewed. It was shown that 58% indicated not often,
followed by 25% indicating often and 17% indicating very often.

4.6.4 Whether stringent policy on giving out loans is more effective in loan recovery
Figure 7: Whether stringent policy is more effective in loan recovery

33%

Yes
67%
No

32
From the figure above, it can be seen that 67% of the respondents indicated that stringent
policies are more effective in loan recovery, whereas 33% disagreed.

4.6.5 Measures to put in place to improve loan repayments in Microfinance Institutions

The respondents were asked to indicate what measures can be put in place to improve loan
repayments at FINCA. The respondents were presented with a set of measures and asked to
indicate if they could be good measures.

Figure 8: Measures to put in place to improve loan repayment at FINCA

Measures Frequency
Adopt non-performing loans management practices e.g., ensuring 28
sufficient collaterals
Conducting sound credit evaluation before granting loans to customers 34
Come up with credit policies and devise strategies that would recover 44
Loans
Low interest rates to allow customers to pay back 33
Imposing loan size limits 28
Total

The table above shows the results from a multiple response question on measures recommended
in improving loan repayments in Micro Financial Institutions. It can be seen from the table that
44 (55%) majority of respondents attributed come up with credit policies and devise strategies
that would recover loans; and conducting sound credit evaluation before granting loans to
customers each respectively, followed by 33 (41%) suggested ensuring low interest rates to allow
customers to pay back.

33
 CHAPTER FIVE
DISCUSSION AND INTERPRETATION OF FINDINGS
5.0 Introduction
This chapter presents a detailed discussion of the findings with particular focus on the specific
objectives. Hence, this section presented a detailed discussion and analysis of the findings of the
study ranging from background characteristics of the respondents, and focusing more much on
specific objectives as well as other relevant findings relating to the research topic. Thereafter a
conclusion was drawn.

5.1 Detailed discussion of findings

The principal objective this was to assess the effects of interest rates on loan repayment at FINCA
as a Micro Finance Institution (MFI) operating in Zambia. To achieve this the study was
guided by four (4) specific objectives which were: 1) To investigate the factors that determines
the interest rates at FINCA as MFI; 2) To determine the effects of changes in interest rate on the
repayment of loans at FINCA; 3) To establish whether interest rate influence the demand for
credit with FINCA, and 4) To investigate the measures adopted to enhance the repayment of loans
at FINCA.

5.1.1 Demographic information of respondents

From the study, it was revealed that out of 80 respondents that took part in the study, majority
represented by 45% were males, whereas 35% were females. Of the respondents from the
customers, 63% were female. 38% and 46% of the respondents were in the aged range between 30
to 39 and 40 to 49 years respectively. A few of them were aged 50 – 59 and those below the age
of 29.

From Analysis it is indicative that most of the people that are involved in getting credit loans are
between the age of 30 to 49 years and this is mainly a female phenomenon.

5.1.2 Factors that Determine interest rates at FINCA

Microfinance institutions (MFIs) are financial institutions that provide financial services to low-
income individuals and small businesses who typically lack access to traditional banking services.
These institutions offer a range of financial products, including loans, savings accounts, and

34
insurance. One of the most important factors that determine the rate of interest on lending in
microfinance institutions is the cost of funds.

Cost of funds
The cost of funds is the cost that MFIs incur to obtain the funds they lend to their clients. This cost
includes the interest rate that MFIs pay to their own lenders, such as banks or investors, as well as
the administrative costs associated with managing these funds. The higher the cost of funds, the
higher the interest rate that MFIs will charge their clients.

Risk lending low-income individuals

Another factor that determines the rate of interest on lending in MFIs is the risk associated with
lending to low-income individuals and small businesses. These borrowers often have limited
collateral and a higher likelihood of defaulting on their loans. To compensate for this risk, MFIs
may charge higher interest rates to cover potential losses.

Level of competition
The level of competition in the microfinance industry also plays a role in determining the rate of
interest on lending. In areas where there are many MFIs competing for clients, interest rates may
be lower as institutions try to attract borrowers with more competitive rates. Conversely, in areas
where there are few MFIs, interest rates may be higher as borrowers have limited options for
obtaining credit.

The Regulatory environment

The regulatory environment in which FINCA operate also impact the rate of interest on lending. In
some countries, governments may impose interest rate caps on MFIs to protect borrowers from
predatory lending practices. While these caps may benefit borrowers, they can also limit the ability of
MFIs to cover their costs and provide financial services to those who need them most.

In conclusion, the rate of interest on lending in microfinance institutions is determined by a variety of

factors, including the cost of funds, the risk associated with lending to low-income individuals and
small businesses, the level of competition in the industry, and the regulatory environment.
Understanding these factors is essential for both FINCA and borrowers to make informed decisions
about borrowing and lending.

35
5.1.3 Effects of changes in interest rate on loan repayment at FINCA
The rise and fall of interest rates can have a significant impact on loan repayment. When interest
rates rise, the cost of borrowing money increases, making it more expensive to take out loans. This
means that borrowers will have to pay more in interest charges, resulting in higher monthly
payments and longer repayment periods. On the other hand, when interest rates fall, the cost of
borrowing money decreases, making it cheaper to take out loans. This means that borrowers will
have to pay less in interest charges, resulting in lower monthly payments and shorter repayment
periods.

However, it's essential to note that the impact of interest rate changes on loan repayment will
depend on the type of loan. For instance, fixed-rate loans have a set interest rate that doesn't change
over the life of the loan. So, if you have a fixed-rate loan, your monthly payments will remain the
same, regardless of changes in interest rates. Conversely, variable-rate loans have an interest rate
that can change over time, depending on market conditions. If you have a variable-rate loan, your
monthly payments can increase or decrease depending on how interest rates change.

In summary, the rise and fall of interest rates can have a significant impact on loan repayment.
Borrowers should be aware of how changes in interest rates can affect their monthly payments,
and adjust their budgets accordingly. It's also important to consider the type of loan you have when
assessing the impact of interest rate changes on loan repayment.

5.1.4 Interest rate and its influence the demand for credit with FINCA
Interest rates play a crucial role in determining the demand for credit with microfinance
institutions. When interest rates are high, borrowers are less likely to seek credit due to the
increased cost of borrowing. This can lead to a decrease in demand for credit with microfinance
institutions. On the other hand, when interest rates are low, borrowers are more likely to seek credit
because the cost of borrowing is lower. This can lead to an increase in demand for credit with
microfinance institutions.

Furthermore, interest rates can also impact the profitability of microfinance institutions. If interest
rates are too low, the institution may not be able to cover its operating costs and generate enough
profit. On the other hand, if interest rates are too high, borrowers may default on their loans,
leading to losses for the microfinance institution.

36
This simply entails that there more demand for loans in MFIs interest rates are loan as compared
to when they are high. These findings are in line with those of Ayyagari, Beck, and Demirgüç-
Kunt (2007) who observed that factors affecting demand for credit include rate of interest, and
cost of borrowing, internal financing, loans from other banks, loans from non-banks, issuance of
debt securities, issuance of equity, available investment opportunities, drop in CBR and political
risk.

Overall, finding the right balance when it comes to interest rates is essential for microfinance
institutions. They must consider the demand for credit from borrowers as well as their own
profitability when setting interest rates.

5.1.5 Investigating the measures adopted to enhance the repayment of loans of MFIs
The fourth objective was focused on investigating the measures adopted to enhance the repayment of
loans of MFIs. The findings from the study revealed that MFIs in Zambia had policies/ control
strategies that guide the management of loans. These control strategies in some ways effective in
ensuring loan repayments from the borrowers. However, these policies were not reviewed at a regular
basis. Thus, a stringent policy on giving out loans in MFIs is more effective in loan recovery. To this
effect, most of respondents suggested for the need by MFIs to come up with credit policies and devise
strategies that was effective in recovering loans; and conducting sound credit evaluation before
granting loans to customers, and above all ensuring that there are low interest rates to allow customers
to pay back in turn benefiting the MFIs.
These findings agreed with a study done by Hoque and Hassain, (2008) on flawed interest rate policy
and loan default: experience from a developing country and covered 89 firms financed by the
Bangladesh Shilpa Bank (BSB) between 1985 and 2005. The study suggested that banks and DFIs
should rationalize their interest rate policy so that such policy is supported by the cash flows of the
firm or repayment capacity of the borrowers. This would contribute towards reducing loan defaults in
developing countries. The results further complement a study carried out by Jackson (2008), a
managing director of National Bank suggested that an alternative way to deal with default is the
rescheduling of loans as banks accept less payment over an extended
repayment period.

37
 CHAPTER SIX
CONCLUSION AND RECOMMENDATION
6.1 Conclusion
Interest rates play a crucial role in determining the demand for credit with microfinance
institutions. When interest rates are high, borrowers are less likely to seek credit due to the
increased cost of borrowing. This can lead to a decrease in demand for credit with microfinance
institutions. On the other hand, when interest rates are low, borrowers are more likely to seek credit
because the cost of borrowing is lower. This can lead to an increase in demand for credit with
microfinance institutions. Furthermore, interest rates can also impact the profitability of
microfinance institutions. If interest rates are too low, the institution may not be able to cover its
operating costs and generate enough profit. On the other hand, if interest rates are too high,
borrowers may default on their loans, leading to losses for the microfinance institution.
Interest rates have a significant impact on the repayment of loans. Essentially, interest rates
represent the cost of borrowing money. When interest rates are higher, it means that borrowing
money is more expensive, and as a result, monthly loan payments will be higher. This is because
a higher percentage of each payment goes towards paying off the interest instead of the principal
balance of the loan. Conversely, when interest rates are lower, it means that borrowing money is
cheaper, and monthly loan payments will be lower. This is because a smaller percentage of each
payment goes towards paying off the interest, allowing more money to go towards paying down
the principal balance of the loan.
Additionally, interest rates can affect the overall amount that a borrower will pay back over the
life of the loan. When interest rates are high, borrowers will end up paying more in interest over
the life of the loan, resulting in a higher total cost. On the other hand, when interest rates are low,
borrowers will end up paying less in interest over the life of the loan, resulting in a lower total
cost.

On the other hand, the research findings looks also at some of the economic environment and its
implications on interest rates: There are several factors that influence the economic environment
with regard to loan borrowing and repayment, which includes: interest rates, inflation, economic
growth, political stability, market competition, creditworthiness, and loan term. These factors
significantly influence the economic environment of loan borrowing and repayment, and

38
understanding them is crucial for borrowers, lenders, and policymakers to make informed
decisions.

Overall, it is important for borrowers to consider interest rates when taking out a loan and to
understand how they will impact monthly payments and the total cost of the loan over time.

Overall, finding the right balance when it comes to interest rates is essential for microfinance
institutions. They must consider the demand for credit from borrowers as well as their own
profitability when setting interest rates.

6.2 Recommendations
The recommendations presented in this section have taken into account the findings and
interpretations of this study. Consideration has been made to the effect of micro-credit on the
performance of small businesses, factors responsible for the poor of micro-enterprise performance
in FINCA in regards to micro-credit scheme and the suggested solutions to this poor business
performance and collapse.

The foregoing findings on business performance in the area and other parts of the city and country
at large confirms that there is little being done to make people aware of the economic environment
and its implications on the loans that they borrow. People are afraid to borrow and invest much
because they are afraid to make the returns and this in turn make MFIs hike their interest rates in
order to ensure that they survive. The researcher therefore makes the following recommendations:

• The MFIs ought to extend the repayment duration in times of inflation as per the
indication from the respondents. Adjustments in loan repayments in time of inflation
are not necessarily done to deal with default but also to save the bank from loss of
revenue.
• The government should encourage disclosure of costs and information by the lender
so that the borrower is able to make informed decisions in times of high inflation
• The government should in some way discourage banks from arbitrarily adjusting
their rates in terms of high inflation.
• The Central Bank and monetary policy committee should continue to use the
fiscal policies at its disposal it ensure that inflation remains stable and that way no
39
 adjustments will have to be made by the lender and the borrowers on loan
repayments.
6.3 Areas for Further Study
The study has revealed that for a better understanding of micro-credit scheme and Microfinance
institutions and its tenet effect on micro-enterprise performance in the growing global economic
sector, other emerging business trends need substantial investigation. The suggested areas are:

• Assessment of the links between micro-credit in the crossroad to macro entrepreneurship

in Zambia.
• The factors affecting the development of micro-enterprises in rural and -urban business
centers.
• Entrepreneurship skills development and business/enterprise development in Zambia
today.

40
 REFERENCES
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Credit and Loan Repayment by the poor and SMEs in Ghana. Geneva: International
Labour Office Publication.
Banda, C. M. (2010). The Determinants of Banking Sector Interest Rate Spreads in Zambia: A
dissertation submitted to the University of Zambia in partial fulfillment of the
requirements of the degree of Master of Arts in economics. Lusaka: University Press.
BoZ. (2021, June 30). Publication of Financial Charges. Retrieved from Bank of Zambia:
https://www.boz.zm/publication_of_charges_30_june_2021.pdf
Campion, A., Rashmi, K., & Wemmer, M. (2010). Interest Rates and Implications for
Microfinance in Latin America and the Caribbean. IDB Working paper.
Cotler, P. (2010). What drives lending interest rate in microfinance sector: microfinance
institution in Africa, Asia and America. Micro Finance Workshop, 21-28. Groningen
University.
Fehmeen, K. (2005). How has Micro Finance Changed. International Seminar on Attacking
Poverty with Microcredit. Dhaka, Bangladesh.
Fisher, I. (1930). The Theory of Interest. New York: The MacMillan Company.
Gonzalez, A. (2007). Efficiency Drivers of Microfinance: Institutions: The Case of Operating
Costs. Micro Banking Bulletin(15).
Investopedia. (2022, September 21). Keynesian Economics Theory: Definition and How It's
Used. Retrieved from Investopedia:
https://www.investopedia.com/terms/k/keynesianeconomics.asp#toc-what-is-keynesian-
economics
Kamau, J. (2008). Determinants of Profitability of Microfinance Institutions in Kenya. Nairobi:
University of Nairobi.
MicrofinanceInformationExchange. (2010). Efficiency Drivers of Microfinance: A case of
operating Costs. Micro Banking Bulletin.
Mubanga, P. C. (2019). Effectst of interest rates on loan repayment in Micro Financial
Institutions (MFIs) in Zambia: A case of Micro Finance Institutions in Lusaka. Lusaka:
CAVENDISH University Zambia.
NationalAssemby. (2022, March 13). Finance Control and Management Act. Retrieved from
National Assembly of Zambia:
https://www.parliament.gov.zm/sites/default/files/documents/acts/Finance%20%28Contr
ol%20and%20Management%29%20Act.pdf

41
Nawai, N. (2012). Factors Affecting Repayment Perfomance in Micro Finance Programs in
Malaysia. Kedah: Northern University of Malaysia.
Negatu, B. S. (2021, May 5). A study on impact of interest rates on Credit and loan repayment in
Ethiopia. Ilkogretim Online - Elementary Education Online, 20(5), 7371-7376. Retrieved
March 15, 2023, from ilkogretim Online.
Nimal, F. (2006). Understanding and Dealing with High Interest Rates on Microcredit: A Note
to Policy Makers in the Asia and Pacific Region Asian Development Bank. Retrieved
from Asian Development Bank: https://www.adb.org/Documents/Books/interest-rates-
Stiglitz, J., & Weiss, A. (1981). Credit Rationing in Markets with Imperfect Information. The
American Economic Review, pp. 393-410.
Uppal, R. (2014). Indian Banking in the Globalized World. New Delhi: New Century
Publication.
Waruru, J. M. (2011). Determinants of interest rates in Micro Finnace Institutions in Kenya: A
reserach Paper Submitted in Partial Fufilment for the Award of a Degree. Nairobi:
University of Nairobi.
William, K., & Trochiim, M. (2006). Research Method Knowledge Base. Washington: St. Louis
Washington University.

42
 APPENDICES
APENDIX A: QUESTIONNAIRE
I am CHRISTABEL M TEMBO, a final year student at Zambia Open University pursuing
Bachelors of Business in Banking and Finance. You have been selected to participate in research
about ‘a comprehensive examination of the effect of interest rate on loan repayment: A case
study of FINCA Lusaka Branches. You are requested to participate in this research and provide
honest information on the questions asked. Be rest assured that the information availed to me
through this questionnaire is for academic purposes only hence the information given was strictly
confidential.
Please complete this questionnaire in accordance with instructions given. The case will take
approximately 10 minutes and your contributions would be greatly appreciated.

Section A: Demographic Information

1. Gender
a. Male
b. Female

2. Age
a. Less than 19
b. 20-29
c. 30-39
d. 40-49
e. 50-59
f. 60 plus

4. What is your position in this institution?

……………………………………………………..
5. How many years have worked for FINCA?
a) 1-4 ( )
b) 5-9 ( )
c) 10-14 ( )

43
d) 15-19 ( )
e) 20 and above ( )

44
Section B: Investigating the factors that determines the interest rates at FINCA
6. Do you think the economic environment and the market size has an influence on MFIs Interest
Rates?
a) Yes
b) N o

7. If your answer is yes to Question 6, indicate to what extent?

a) Great extent ( )
b) Moderate extent ( )
c) Low extent ( )
d) Not at all ( )

8. What are some of the factors that influence the economic environment with regards to loan
borrowing and repayment?

Factors Tick those Applicable

Yes No
The extent of competition in the markets
Expected behaviour of bank customers
The level of government’s borrowing
Discount rates
Exchange rate volatility
Others Specify:

……………………………………………………………………
……………………………………………………………………
……………………………………………………………………
……………………………………………………………………
……………………………………………………………………
……………………………………………………………..……..

45
Section C: Determining the effects of changes in interest rate on loan repayment at FINCA
9. Is there any connection between interest rates and loan repayment?
a) Yes ( )
b) No ( )
c) Not Sure ( )

10. Does rising and falling interest rates affect consumer ability to repay loans?
a) Yes ( )
b) No ( )

11. Give reasons for you answer?

………………………………………………………………………………………………………
………………………………………………………………………………………………………
…………………………………………………………………………………………..……….…
…………………………………………………………………………………………………….
12. Does the change in interest rates alter the firms financing costs?
a) Yes
b) No
13. What are some of the factors that influence interest rates?
………………………………………………………………………………………………………
………………………………………………………………………………………………………
………………………………………………………………………………………………………
………………………………………………………………………………………………………
………………………………………………….…………………………………………………

Section C: Establishing whether interest rate influence the demand for credit with FINCA
14. The high interest rate affects the borrower’s ability to get a loan.
a) Strongly Agree ( ) b) Agree ( ) c) Indifferent ( ) d) Disagree ( ) e) Strongly Agree ( )

46
15. Give reasons for answer?
………………………………………………………………………………………………………
………………………………………………………………………………………………………
………………………………………………………………………………………………………
………………………………………………………………………………………………………
…………………………………………………………………….………………………………

16. What determines the interest rates on lending money to consumers in your microfinance
institution?
……………………………………………………………………………………………………..

Section D: Investigating the measures adopted to enhance the repayment of loans of FINCA
17. Does your institution have policies/ control strategies that guide the management of loans?
a) Yes
b) No
17. How would you rate the effectiveness of these strategies practices on loan management and
repayment?

a) Very effective
b) E f f e c t i v e
c) Not Effective

18. How often do you review these policies/ control strategies?

a) Very often
b) Often

c) Not Often

19. Do you think a stringent policy on giving out loans is more effective in loan recovery?
a) Yes ( )
b) No ( )

47
20. What should be done improve loan repayments in your institution?
Tick those applicable
Measures Yes No
Imposing loan size limits
Put stringent measure when conducting loan appraisal process
Come up with credit policies and devise strategies that will
Conducting sound credit evaluation before granting loans to customers
Adopt non-performing loans management practices e.g. ensuring
sufficient collaterals,
Low interest rates to allow customers to pay back
Others specify:

…………………………………………………………………………
…………………………………………………………………………
…………………………………………………………………………
………………………………………………………………………….
.…………………………………………………………………………
…………………………………………………………………………

Thank you for your participation!!

48
APPENDIX B: INTERVIEW GUIDE KEY INFORMANTS
1. Do you have knowledge on the Micro-Credit loans in FINCA?
………………………………………………………………………………………………
2. Do you know how they operate?

……………………………………………………………………………………………….

3. Have you ever used Micro-Credit loans from FINCA?

…………………………...........................................................................................................

4. When did you start and for how long have you been using Micro-Credit loans?

………………………………………………………………………………………………….

5. Do you think there has been an improvement in your business since you started using
Micro- Credit loans?
………………………………………………………………………………………

6. Do you encounter any problems in using the Micro-Credit loans?

………………………………………………………………………………………………….

7. What challenges do you encounter while using micro credit loans?

……………………………………………………………………………………………

Kindly comment on the liquidity position in your Bank and how it affects loan
repayment………………………………………………………………………………………
…………………………………………………………………………………………………
8. Other than collection costs on loans and changes in interest rate, kindly comment on any
other factor contributing to the default rate in the bank
…………………………………………………………………………………………………
………………………………………………………………………
9. On the factors you have listed in (9) above, kindly comment on their effects on
loan repayment……………………………………………………………………….
……………………………………………………………………………………

49