Effect of Interest Rate on Loan Repayment

Effect of Interest Rate on Loan Repayment

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Chapter One of Effect of Interest Rate on Loan Repayment

INTRODUCTION

Background to the Study

Every developing nation’s development depends on the private sector of the country. The small and medium scale enterprises contributes immensely to the development of the nation in terms of taxes to the state, provision of quality goods and services to the larger public at a comparatively reduced prices as well as its contributions to poverty alleviation. Many of the small and medium enterprises in Nigeria face many challenges, but the most significant among them is that of financing decision of their operations. Different governments in Nigeria have tried at different times to assist these enterprises in addition to assistance given by other development partners and foreign donors yet the challenges have remained unresolved. This therefore, renders these upcoming organisations with no option than to run to financial institutions for assistance. Going to those financial institutions also brings new phenomena for these SMEs.

Pandey (2010) in his study on financial management in India opined that MFIs and other financial institutions are required to develop a credit policy to govern their operations. In the same light, the author noted that, given that MFIs obtain their revenue from interest accruing from advancing credit facilities to low income persons, the loan repayment may be uncertain. Also, Ditcher (2003) in his study advised that the success of lending out finances is based on an extensive appraisal of the risk of extending such facilities and also the characteristics of the borrower. It is lamented that lending decisions by all these financial institutions are more often than not based on the subjective feelings regarding risk in relation to repayment by the borrower. The MFIs in its justification of employing this appraisal is that it is both simple and inexpensive (Horne, 2007).

In China, banks look to put emphasis on deposits than the borrower’s capability to settle up the loans in terms of interest rates. In 2006, the Indian governments splintered down on two large micro financial institutions subsequently to suicide of slightest sixty of their consumers who were in stress to repay loans on high interest rates. This rise in deceptive movement, ensuing in some cases to company failure with disastrous effects for shareholders, employees and other stakeholders has brought into sharp focus on the importance of interest rates. Such interest rate will not only reduce the frequency of loans borrowed within companies, but also facilitate bank management to deal with quickly changing economic investment, shifting customer demands and priorities, and restructuring for future growth. In effect, interest rates are utilized to maintain the company on the course of profitability goals, achievement of its surprises along the way.

In Africa, most small businesses fail to pay the credit they borrow from banks in the first year, this due to high interest rate from bank regulatory authorities. It has been the main objective of Nigerian government to achieve high rate of economic growth that would lead to high economic growth and reduce poverty level. This could be achieved through improvement of micro, small and medium enterprises (MSMES) output indicates the ability of an economy to increase and diversify the production of goods and series with stock of capital and (equity/debt) and other factors of production within the economy (Idowu, 2010; Akingunola, 2011).

Statement of the Problem

The effects of Bank of Industry lending on Micro Small and medium enterprises output do not present a bright future. Upon government policies on the stability of Nigerian economy through, micro, small and medium enterprises (MSMES) output despite the establishment of Bank of Industry (BOI) as one of the government policies to stabilize micro, small and medium enterprises (MSMES) by increasing the size of long term loans to (MSMES) and reduce rate of interest, a lot of problems seem to have persisted. Some of the problems are the inability to get loan (Gloria & Cosol, 2011) high interest rate charges by financial institutions (Adnan, 2010) corruption and ineffective economic policies, Gbosi (2007) Mismanagement of fund which reduce rural-urban development (Odebiyi and Olaoye, 2012) and insufficient infrastructural facilities such as electricity, good road, network and good pipe borne water in Nigeria (Idowu, 2010). Bank of Industry’s inability to impact positively on the micro, small and medium Enterprises output in Nigeria no therefore calls for investigation.

Research Questions

The following are some of the questions which this study intends to answer:

i)                   what are the effects of interest rate on MSMES in Nigeria?

ii)                 what are the reasons that make MSMES collect loan in Nigeria?

iii)               what are the roles of government on interest rate and loan repayment by the MSMES to banks?

Objectives of the Study

The objective of the study is to investigate the effort of the EFCC towards fighting corruption in Nigeria. The specific objectives are:

i)                   to analyse the effects of interest rate on MSMES in Nigeria

ii)                 to evaluate the reasons that make MSMES collect loan in Nigeria

iii)               to inquire the roles of government on interest rate and loan repayment by the MSMES to banks

Significance of the Study

The findings from the study will be beneficial to management of banks and monetary policy makers of the government also found this study of value to them for it provided a formative evaluation of investment process. The findings from this study will be useful for further discussions with the customers in business research topics that found this study relevant. It will also help the investors in identifying the challenges and signal early warning towards the implementation of interest rates. 

Scope of the Study

The research focused on the effects of interest rate on loan repayment. A lot of literature has to be reviewed on investment performance, loan repayment and interest rate normally place a lot of emphasis on investment as measure to ensure sustainable and improved business performance, however, it was the perception of the researcher that there are still gaps in the research so far to be done. This study therefore, established the effects of interest rate on loan repayment.

Limitation of the study

The research was limited to some selected MSMES and micro finance banks in Lagos State. Most of the staff was too occupied with their work and they had little time to respond to the questions. The main limitation of study was of its inability to include commercial banks but only micro finance banks. The study would have covered more banks across Lagos State but lack of adequate funds prevented it.

Definitions of Terms

The following terms were used in the course of this study:

Commercial bank: This is a type of banking services which is provided.

Interest rates: This is a rate which is charged or paid for the use of money. It is often expressed as an annual percentage of the principal.

Loan repayment: Paying back the money borrowed from banks

Micro finance:

MSMES: Micro, Small and Medium Enterprises

REFERENCE

Adnan, A., (2010). Role and performance of micro credit in Pakistan. Department of

Economics, University West, 3(2): 26 – 35.

Akingunola, R.O., (2011). Small and medium scale enterprises and economic growth in

Nigeria: An assessment of financing options. Pakistan Journal of Business and Economic Review, 2(1): 78-97.

Ditcher, B. (2003). Corporate Finance and Investment: Decisions and Strategies. England;

Prentice Hall.

Emmanuel Nyakundi, (2017). Effect of Interest Rates on Business Investment Performance

of Selected Commercial Banks in Kisii Town, Kisii County, Kenya. Journal of Accounting & Marketing

Gbosi, A.N., (2007). Human Resources Development and Manpower Planning in Nigeria.

Yenogua Nigeria: A Publication of Godsisi Press Ltd.

Gloria, E.D. and T.M. Cosol, (2011). Microcredit and women empowerment: An empirical

case-study based in Cataloria. Published Research Project Submitted to the Department of Economics, University of Barcelona. pp: 2-15.

Horne, J. C. & Wachowicz, J. M. (2007). Fundamentals of Financial Management. New

Jersey: Prentice Hall.

Idowu, K.O., (2010). A Preliminary Investigation into the Causal Relationship Between

Micro Finance Banks and Economic Growth in Nigeria. CBN Economic and Financial Review, 43(3): 29-50.

Odebiyi, O.C. & O.J. Olaoye, (2012). Small and Medium Scale Agriculture Enterprises

(SMES) Development in Ogun State, Nigeria: The Role of Micro Finance Banks. Libyan Agriculture Research Centre Journal International, 3(1): 01-06.

Pandey, (2017). Study on Financial Management in India

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