Interest rate regulation and sustainability of microfinance institutions in Nairobi County, Kenya.

Abstract

Microfinance Institutions services have continued to play an important role in Kenyan economy. It is viewed as the provision of financial services to the poor and low income group. Microfinance Institutions in Kenya have gained wide recognition since 1990’s for the role they play in providing financial services to the low-income households, and their contribution to poverty alleviation. Despite this vital role, the interest rates charged by the MFIs in Kenya have been relatively high ranging between 20% - 30%. This has raised concerns with policy makers on how MFIs can fulfill their social obligations while charging their clients interest rates that are higher than those offered by non-microfinance institutions such as traditional commercial banks and SACCOs. The objective of the study was to determine the effects of interest rate regulation and sustainability of microfinance institutions in Nairobi County, Kenya. The study was guided by liquidity preference theory. The study employed a cross - sectional descriptive survey research design. The target was 49 microfinance institutions operating in Nairobi County, Kenya. A census was conducted on all the 49 microfinance institutions in Nairobi County. The primary data was collected by use of questionnaires whereas secondary data was collected by use of a record survey sheet. Pretesting was done to determine the reliability and validity of the questionnaire. The data collected was analyzed using Statistical Package for Social Sciences (SPSS). The study established that changes in interest rates by the government affected sustainability of MFIs. The Pearson correlation and ANOVA results showed that the relationship of lending rate and sustainability of MFIs is negative and statistically significant. This means that increasing the interest rate reduces the return thus rendering the MFIs unsustainable. The government and other policymakers should come up with better interest rates policies that will make MFIs more sustainable.