THE EFFECTS OF INTEREST RATES ON LOAN REPAYMENTS IN MICRO FINANCE

INSTITUTIONS IN ZAMBIA WITH A CASE STUDY OF KALINGALINGA TOWNSHIP .

BY

NAMALANGWA MUTUKWA

STUDENT NO:………….

CELL: +260979009925

EMAIL ntamuka.mutuka002@gmail.com

SUPERVISOR:………………………………………….

A RESEARCH REPORT SUBMITTED TO THE DEPARTMENT OF ECONOMICA

AND MANAGEMENT LUSAKA UNIVERSITY IN PARTIAL FULFILLMENT OF
THE REQUIREMENT FOR THE A WARD OF A BACHELORS DEGREE IN
BANKINGAND FINANCE

JULY 2020

i
DECLARATION.

I hereby declare that this report is as a result of my own independent research and has not been
submitted to any institution of higher learning for any award.

Signature…………………………… ……………………………..

NAMALANGWA MUTUKA Date

(RESEARCHER)

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RESEARCH APPROVAL.

I certify that Ms. Namalangwa Mutuka carried out this research under my supervision and is
submitted with my approval.

Signature:………………………………………… ………………………………

Name………………………… Date

(SUPERVISOR)

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DEDICATION

This book is dedicated to my lovely mother, husband and dear children.

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ACKNOWLEDGEMENT

I would like to thank first of all, my Supervisor Dr. Muyinda Paul Birevu for his great
encouragement and guidance, which enabled me to carry out this research up to its rightful
conclusion.

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Contents

DECLARATION...........................................................................................................................................2

RESEARCH APPROVAL.............................................................................................................................3

(SUPERVISOR).............................................................................................................................................3

DEDICATION...............................................................................................................................................4

ACKNOWLEDGEMENT.............................................................................................................................5

CHAPTER ONE............................................................................................................................................9

1.1 Introduction.............................................................................................................................................9

1.2 Background to the study.......................................................................................................................10

1.3 Statement of the problem......................................................................................................................12

1.4 General Objective..................................................................................................................................12

1.5 Specific objectives................................................................................................................................13

1.6 Research questions................................................................................................................................13

1.7 Significance of the study.......................................................................................................................13

1.8 Delimitation (scope) of the study..........................................................................................................14

1.9 Definition of terms................................................................................................................................14

CHAPTER TWO.........................................................................................................................................15

2.0 LITERATURE REVIEW.....................................................................................................................15

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2.1 Introduction...........................................................................................................................................15

2.2 Theoretical framework..........................................................................................................................15

2.2.1 Individual Model............................................................................................................................15

2.2.2 Fisher’s Theory of Interest............................................................................................................16

2.2.3 Stakeholder Theory........................................................................................................................17

2.3 Empirical literature review....................................................................................................................17

CHAPTER THREE......................................................................................................................................23

3.0 RESEARCH METHODOLOGY..........................................................................................................23

3.1 Introduction...........................................................................................................................................23

3.2 Research design.....................................................................................................................................23

3.3 Target population..................................................................................................................................23

3.4 Sampling method..................................................................................................................................23

3.5 Sample size...........................................................................................................................................24

3.6 Data collection methods instruments....................................................................................................24

3.7 Primary data..........................................................................................................................................24

3.7.1 Secondary........................................................................................................................................25

3.8 Data analysis.........................................................................................................................................25

3.9 Ethical considerations...........................................................................................................................25

3.10 Possible limitations of the study.........................................................................................................25

CHAPTER FOUR........................................................................................................................................27

4.0 PRESENTATION, INTERPRETATION AND DISCUSSION OF FINDINGS.................................27

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4.1 Introduction...........................................................................................................................................27

4.1 Data Presentation..................................................................................................................................27

Table 4.2: Interest Rates of Microfinance Institutions in Kalingalinga......................................................28

4.3 Relationship between Interest Rates and Loan Repayment in MFIs in Kalingalinga...........................31

Table 4.3: Relationship between Interest Rates and Loan Repayment in MFIs in Kalingalinga................31

Table 4.4 Interest Rates and Loan Repayments between 2018 and 2019...................................................33

Table 4.5 Computation of Pearson’s Correlation Coefficient.....................................................................33

CHAPTER FIVE..........................................................................................................................................35

5.0 SUMMARY, RECOMMENDATIONS AND CONCLUSIONS.........................................................35

5.1 Introduction...........................................................................................................................................35

5.2 Summary...............................................................................................................................................35

5.3 Recommendations.................................................................................................................................35

5.4 Conclusion............................................................................................................................................36

5.5 Areas of Further Research.....................................................................................................................36

BIBLIOGRAPHY........................................................................................................................................38

APPENDIX..................................................................................................................................................40

QUESTIONAIRE.......................................................................................................................................40

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 CHAPTER ONE

1.1 Introduction

One of the major roles of financial institutions is to advance credit facilities to their customers at a
specified interest rate. Indeed, the primary source of revenues for financial institutions such as commercial
banks, saving and Credit Cooperatives, microfinance banks (MFBs) and microfinance institutions (MFIs)
is the interest they charge on the loans they lend their customers. MFIs ordinarily thrive on the interest
they charge borrowers; a fact that underpins the importance of the subject of interest rates to these firms.
However, the interest rates are capped by specific regulations. Usually laws and restrictions on interest
rates could affect the operations of MFIs (Avgouleas, 2007). The afore stated laws are put in place
purposely to protect customers from MFIs by placing a ceiling above which interest rates should not be
charged. This, however, is argued could negate the financial performance and viability of MFIs (Delfiner,
Pailhe & Peron, 2006). The chapter talks about the background of the effects of interest rates on loan
repayments, includes the statement of the problem, the objectives of the study, the research questions,
significance of the study, delimitation of the study and definition of key words .

1.2 Background to the study

Microfinance is the provision of financial services to the unbanked and under-banked households and
small businesses (Reserve Bank of Zimbabwe, 2012). Such services range from consumer loans, money
transfers, insurance products and other payment services. The purpose is to finance their microenterprises
and small businesses to enable them to improve their standards of living through raising their income
levels. Microfinance originated in 1976 in Bangladesh by Dr. Mohammed Yunus when he started
microfinance scheme as part of an experiment in the rural areas in Bangladesh. The scheme later became
the Grameen Bank which has created the way for many microfinance banks and institution all over the
world.

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The nature of microfinance has changed over the years and depending on a country, the goal of players
and their activities is no longer only for social economic development but most are out for profit. They are
no longer ‘non-profit’ organizations but businesses that are aimed at making a profit at member’s
expenses. The microfinance industry has many players in it and the industry experiences a lot of changes
in regulation and policies (Robinson, 2001).

Habibu (2010) and John (2011) noted in their respective studies that MFIs loan facilities had amplified the
income in most owners and poor individuals in Zimbabwe and Bangladesh respectively. Both studies
focused on business performance in areas such as acquisition of assets and increased sales. Khandker
(2003) goes on to make it clear that the main objectives of MFIs as agents of development includes that of
servicing the financial needs of un-served or marginalized markets as viable ways to attaining
development objectives such as that of employment creation, poverty alleviation, women and poor people
empowerment, and encourage new business development.

MFIs’ main objective is to provide financial services for the poor people and low income earners with a
range of financial services at costs that are bearable. These institutions derive most of their incomes from
the interests they charge on the loan advances they provide and as a result of the massive costs they incur,
they translate to also high rates being charged. Four key factors that specify these rates includes the
funding costs, the MFI's operating expenses, loan losses, and profits needed to expand their capital base so
as to fund probable future growth . High inflationary levels also contribute to the MFIs funding costs as
this eats into the organization’s equity. Thus, rising inflation rates also contributes to higher nominal rates
of interest through their effect on the real value of equity (Ghatak, 1999).

MFIs’ two types of operating expenses can be categorized as administrative and personnel. Because some
of these MFIs have labor-intensive operations, it translates their personnel costs being high as well.
Administrative costs contain such factors as rentals, utility bills, transportation, stationary as well as wear
and tear of fixed assets. Administering and recouping small loan advances is expensive on a per unit basis.
Often time’s loan recovery is done by staff members whom have to pay visits to customers which
increases costs as well as time taken together with transport costs. Poor repayment performance by many
borrowers is a serious concern to many financial institutions (Pulley 2000).

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Pitt and Khandker, (1998) Says the poor structures, insufficient road networks and technological
advances in various nations where most MFIs operate especially developing countries, also contribute to
the increase in their administration costs which will in turn increase also the operating cost of the
microfinance. Insufficient and or poor policies also contributes to high administrative costs since most
MFIs operations usually involved cash dealings and the physical movement of cash though in Zambia the
central bank has been on a drive of making sure that these MFIs embrace the use of other forms of
transacting not to be attached to hard cash due to the cash crisis bedeviling the economy and concerns of
security.

In most developing countries the majority of microcredit is provided by a few lending institutions and
competition is mostly on non-price terms. This might not be the case in Zambia where microfinance
institutions spring up every day.

In Zambia financial sector reform was introduced in despite the strengthening of the Zambian banking
sector and the introduction of numerous financial institutions, such as the stock market, a venture capital
company and business assistance funds (see section below), access to institutional credit for working
capital and equipment continues to be a major constraint for micro, small and medium scale enterprises
(Maimbo and Mavrotas, 2015). Moreover, the findings of an IRIS team indicated that Zambia would
benefit from a new legal structure that recognizes the unique nature of the microfinance sector and enables
its integration into the larger financial market by providing a tiered structure of operations and
performance. In this way, the legislation and developing regulation provided realistic support and growth
options for MFIs, rather than being burdensome or contradictory.

The annual rate of inflation was recorded at 17.4 percent as at May 2004. This rate is 0.4 of a percentage
point lower than the April rate of 17.8 percent. Compared with May 2003, the annual rate of inflation
declined by 6.3 percentage points, from 23.7 percent in May 2003 to 17.4 percent in May 2004. Of the
total 17.4 percent annual inflation in May 2004, increases in food prices accounted for 9.0 percentage
points while non-food items in the CPI accounted for 8.4 percentage points. Although the rate of inflation
has reduced from three digits to 17.4% in May 2004, it still remains high. The challenge for monetary

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authorities is to reduce current double-digit inflation rates to single digits and to achieve a relatively stable
and competitive exchange rate in order to reduce uncertainties in the financial markets (BoZ, 2018).

1.3 Statement of the problem

According to the Microfinance association of Zambia (2011), quite a huge chunk of MFIs have been
offering various loan facilities at usurious interest rates in the name of maximizing profits and also to
cover on the operational costs involved as most of these institutions are labor intensive. The number of
microfinance institutions in Zambia has continued to increase day by day at a high rate, which has
aggravated the competition between government and the private sector for loanable funds.

There has been an increase in interest rate this is because Zambia’s debt has been rising dramatically. In
2011, total debt was recorded at US$3.5 billion and as of March 2018, this has risen to US$14.4 billion.
These debt levels are alarming: it has been almost one year since the IMF declared Zambia at high risk of
debt distress, and during this time, debt has risen significantly. Zambia’s debt risk has also made
international news, with the Economist running two articles on Zambia’s debt in a recent edition. (CUTS
International Lusaka, 2019)

Despite the increased competition especially amongst many microfinance institutions, interest rates have
remained high. This has reduced the customers borrowing and loan repayment capacity leading to an
increased number of loan defaulters. The intent of this study therefore was to examine the effect of interest
rates on loan repayment and why customers fail to repay back the loans in time.

1.4 General Objective

The general objective of this study is to investigate the effects of interest rates on loan repayment in
microfinance institutions in Zambia with a case study of microfinance institutions in Kalingalinga
Township

1.5 Specific objectives.

1. To determine the effect of the default risk premium on loan repayment in microfinance institutions in
Kalingalinga.

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 2. To establish the effect of interest rates fluctuation (rising and falling interest rates) on loan repayment
in Kalingalinga.
3. To determine the effect of liquidity risk premium on loan repayment in microfinance institutions in
Kalingalinga

1.6 Research questions

1. What is the effect of the default risk premium on loan repayment in microfinance institutions in
Kalingalinga Township?
2. What is the impact of interest rates fluctuation (rising and falling interest rates) on loan repayment
in Lusaka Kalingalinga Township?
3. What is the effect of the liquidity risk premium on loan repayments in Kalingalinga Township?

1.7 Significance of the study

1. This research will be conducted to identify the effects of interest rates on loan repayment of
microfinance institutions MFIs.
2. The research will try to fill the gap which literature has omitted as previously many studies have been
conducted on the impact of interest rates on loan repayment of commercial banks yet very few
attention has been ushered to the growing micro financing business in Zambia.
3. The research findings will benefit microfinance institutions MFI players in setting their mind clear
when formulating their respective institutions’ interest rates as the decision may haunt them through
poor repayment rates.
4. It is envisaged that the results that will be obtained from this research will contribute to the body of
knowledge in Banking and Finance, Economics, Microfinance institutions and other related
disciplines.
5. This study will also be an attempt to expose the strengths and weaknesses of the Microfinance
institutions, especially in banking and finance.
6. Significantly, it is believed that the study would inspire more researchers to expand and evaluate the
effect of interest rates on loan repayment.

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7. Another significance of this research is that it is one of the requirements by the University of Lusaka
for the fulfillment and award of the Bachelors’ Degree in Banking and Finance, a programme which
the researcher has been undertaking for four years now.

1.8 Delimitation (scope) of the study

The researcher is mainly going to focus on the impact of interest rates on loan repayment in microfinance
institutions MFI. This research will be conducted based on the information that will be provided by
microfinance institutions in Zambia. The researcher is mainly concentrating on the Zambian microfinance
institutions MFIs specifically in Kalingalinga though over the boarders references will be made.

1.9 Definition of terms

Interest rate: This is the money that is charged on borrowed money as the cost of capital.

Repayment: This is the act of returning back the monies one has obtained through an advancement from a
financial institution.

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

Clients: Customers who come to buy goods or services of an entity.

Default risk: Default risk is the chance that a company or individual will be unable to make the required
payments on their debt obligation. Lenders and investors are exposed to default risk in virtually all forms
of credit extensions. A higher level of risk leads to a higher required return, and in turn, a higher interest
rate.

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 CHAPTER TWO

2.0 LITERATURE REVIEW

2.1 Introduction

This chapter discusses the literature related to the study on the effects of interest rates on loan repayment
in MFIs. It contains both theoretical framework and empirical literature and seeks to display knowledge
and understanding of the major scholarly work published by other authors on the matter. Different
literatures relating to the study in various countries on nature and behaviour of MFIs and loan repayment
was reviewed to give a deeper understanding on the study at hand. The objective of this chapter is to
obtain more insights on the interest rates and repayment in microfinance institutions MFIs. The chapter
partly looks into the background of MFIs and some of the lending models being employed with various
perspectives on loan repayment across different organizations’. The chapter also looks at the close
relationship between loan repayment and borrowers and also various studies in relation to the effect of
interest rates on loan repayment.

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2.2 Theoretical framework

While providing small loans to the poor, microfinance institutions MFIs risk none repayment of their
monies and viability of their day to day operations. In trying to circumvent these challenges that are
inherent in their business practices, various lending models and theories of loan disbursing are being
adopted so as to boost the repayment motive within the sector. These include, among others Fisher’s
Theory of Interest and individual model (Morduch, 1999).

2.2.1 Individual Model

This is a self-explanatory credit lending model whereby micro-loans are given directly to the borrower and
it falls under the welfarist approach. This model does not support the notion of formulating peer groups to
foster loan repayment as loans are advanced on individual capacities. The move towards individual loans
has been remarkable in recent years. As Pearson and Slyness (2017) said “recent estimates suggest that
about one-half of MFIs are individual liability lenders” and this is true also to the Zimbabwean case where
most MFIs are making use of the model as there is a notion that repayment is not obliged to other parties
making it easy for MFIs to recoup their monies, ZAMFI (2014). This implies that loans are advanced to an
individual based on his/her own personal credit profile and as such there is a notion that this model tends
to improve on loan repayment at various levels of interest rates especially if the MFIs is administering a
salary based facility. This type of lending is more common with customers who require a bigger sized loan
facility at the same time having the potential to pay back. At times it is used where the economy is hard
miss firing and hence the MFI will be requiring a solid line of defense like in the current Zambian case
where there is growth in individual salary based loans are being advances to different groups in order to
foster high repayment rates as through salary based facility repayment is guaranteed.

This model stresses out that MFIs would anchor their credit analysis on the personal knowledge they have
for their clients including society reputation among peers, sources of income and also the position of the
business. Though it is a bit different from what the local MFIs do as most of the analysis is based on the
employee’s records as well as the income sources among others. Also individual guarantors are usually
requested for by these MFIs. These may include family members, relatives, friends that are very close to
the borrower and also who are ready to shoulder the burden of repaying the loan in case the borrower
defaults. In some cases were the amount required is large, the MFIs takes some goods as collateral

16
security so as to keep the repayment rate close to hundred percent. The model entails that the financial
institution must administer regular and close contacts with individual customers so as to provide them
with credit products tailor made to suit the specified individual requirements. It has been most successful
in urban-based, larger, production-oriented businesses and the loan repayment though high, it is relatively
less as compared to other models such as the group model (Bangura ,2012).

2.2.2 Fisher’s Theory of Interest

The Fisher’s theory was invented by Irving Fisher in 1930 but has been advanced and criticized by various
theorists and scholars ever since (Harrod, 1971; Fisher, 1974; Tymoigne, 2006). The theory base its
argument on that, individuals are impatient to spend income and opportunity to spend it. It is stated that
the nature of capital and income was primarily supposed to serve as a basis for the interest rate which
immediately followed it. It is stated that the link between income and capital is the rate of interest. In other
words, the theory defines the interest rate as the per cent of premium paid on money at a particular date in
terms of money to be paid one year later. Theoretically, it is argued that money can be substituted with
other sorts of goods. However, practically, it is only money that is traded between present and future, the
foregoing argument justifies why the rate of interest is at times referred to as price of money and the
market in which present and future money are traded for that price or premium is referred to as money
market (Fisher, 1974).

It is opined that Fisher’s real rate of interest framework is essential for the inflation targeting framework.
This is due to the reasoning that it rationalizes the notion that monetary policy ought to be concerned
mainly with managing inflation expectations so as to keep interest rates at a stable level that enhances
saving and investment (Cottrell, 1994; Smithin, 2003). In tandem with the interest rates and MFIs’ loan
performance, the Fisher’s theory could be employed to explain the implication of inflation risk premium
as a component of interest rates on the loan financial performance.

2.2.3 Stakeholder Theory

Stakeholder theory was the brainchild of Freeman (1984). The theory which is argued to exist in tension
suggests that, firms have stakeholders whom they should pay attention to. Philips (2003) asserted that
firms that diligently seek to serve the interests of a broad group of stakeholders are bound to create more

17
value over time. Yet, it is averred that there are so many and various interpretations of basic stakeholder
ideas that theory development has been difficult (Scherer & Patzer, 2011). Freeman, Harrison, Wicks,
Parmar and de Colle (2010) supported the argument of the existence of a positive relationship between
stakeholder-oriented management and the performance of a firm.

The firm’s performance according to Choi and Wang (2009) is more often than not measured in terms of
financial returns. In other words, financial performance is the most relevant measure of the value created
by a firm. More so, loan performance depicts financial performance of MFIs to a great extent given that
these financial institutions rely on the interest accruing from loans advanced to borrowers. In the context
of MFIs, stakeholder theory can be employed to illustrate how those firms advance the interests of the
stakeholder thorough enhancement of loan repayment.

2.3 Empirical literature review

The empirical literature shows the evidence of the applicability of the research topic at hand and below are
various case studies from both developing and developed countries in support of the literature reviewed
above. The Central Bank of Zambia (2018) in the industry’s first quarter report alludes to the fact that one
of the problems that have been contributing to high levels of Non-Preforming Loans has been attributed to
the usurious interest rates which are being charged by microfinance institutions MFIs. The Bank of
Zambia has with immediate effect introduced a cap on the effective annual lending interest rates that
licensed non-bank financial institutions can charge their customers. The central bank has capped interest
rates at 42% in Zambia across microfinance institutions as at 2013. This follows similar recent measures
taken on commercial banks by the central bank, this measure has been necessitated on account of the
exorbitant interest rates that some non-bank financial institutions have continued to charge their customer.
(The Central Bank of Zambia, 2018)

The central bank of Zambia in its quest to protect the interest of borrowers or microfinance clients has
called for transparency in the way interest rate charges are calculated adding that it is in the interest of the
borrowers to know how the rates are calculated before signing the loan agreement (show when this was
issued). This echoes with the requirements of the new money lenders Act Number 398 of 1964 that make
provision with respect to persons carrying on business as money-lenders; and to provide for matters

18
incidental there to. Requires MFIs to display information pertaining to the annual interest rates and other
charges on their loans and advances.

A study by Kashuliza (1993), was conducted using a linear regression model to analyze contributing
factors of loan repayment in smallholder agriculture in the southern highlands of Tanzania. The findings
indicated that the perception towards repayment, education levels, farm incomes and off-farm income
positively impact loan repayment and farm income was very substantial, whilst household expenditure,
interest rates, age and household size have negative influence on loan repayment performance. Zellar
(1996) went on to analyse the contributing factors of loan repayment in credit groups operating in
Madagascar. The author’s main idea was to try and quantify the effects of inside-group pooling of highly
volatile risky assets by controlling for community level and program design factors that influence the
repayment rate of group loans. The Tobit model was used with data sets on various groups from diverse
MFIs. His findings indicated that socially cohesive groups pool risks by diversifying the members’ asset
portfolios so that their repayment performance is improved even in communities with high risk exposure.

Another similar research was done by Nkusu (2011), in Nigeria where he was exploring on the
macroeconomic elements of NPL using panel vector autoregressive model together with panel regressions
model. He pointed out in his research article that an increase in interest rates will result in the corrosion of
the borrower's ability to repay their dues and hence, causes an increase in NPL. This draws down to the
fact that interest rates policies have a significant contribution in the growth of NPL in developing
economies.

Kimando, Kihoro and Njogu (2012) studied the factors influencing sustainability of MFIs in Murang’a
Municipality, Kenya. The study findings indicated that the greatest challenge was non-repayment of loans
borrowed as shown by 88.9 per cent of the study respondents. It was found that credit rationing is a tool
employed by many MFIs as a way of hedging the effects of default by borrowers. In this respect, it is
advisable that MFIs demand for some form of collateral before giving loans. In addition, Bichanga and
Aseyo (2013) examined the causes of loan default within microfinance institutions in Kenya. The authors
noted that there are many such firms that depend on the government for subsidy as one way of addressing
financial losses incurred through loan default. The study realized that the default in loan repayment was
occasioned by non-supervision of borrowers on how to employ the credit advanced to them and also

19
inadequate training of borrowers on how to put into use those funds prior to their receipt of the loan. More
so, it was found out that some borrowers divert the funds borrowed to other projects which may not be
financially viable and as such increasing the risk of default.

Another study conducted by Hoque and Hossain (2008), which was carried out in Egypt investigated on
the relationship between higher interest rates and loan defaults and they applied three different regression
models. They advocated for a reduction of interest rates so as to foster the repayment capacities of
borrowers thus reducing the loan default rates. Their findings entailed that loan defaulting and higher
interest rates had a high positive correlation and this adds up to the borrower’s debt obligations which will
translate into loan defaults resulting in banks’ capital reduction. A similar research carried out by Asari
(2011), in Ethiopia also pointed out that Non-Performing Loans and interest rates have a positive
relationship. His research concluded that increases in NPL translates to a reduction of the bank’s assets
and in turn eats on the capital. Interest rates and their volatility are amongst the most precarious and
closely monitored variables in the economy. Dash and Kabra (2010) in India postulated that commercial
banks which extend loan facilities at aggressively higher rates also incur greater NPL which was the case
of some MFIs in developing countries Zimbabwe being no exception.

A study conducted by Monyo (2004) in Bangladesh elucidated on various factors that drive poor loan
repayment and they include lack of sound credit collection techniques in most MFIs, poor customer
analysis before granting loans, inadequate borrower supervision and site follow ups, lack of proper
business know-how, misappropriation of funds to other uses other than the sole purpose of borrowing.
When firms gets to decide on the types of investments to undertake, apart from the expected rates of return
they also consider the cost of capital which in most cases includes the interest charges on the money
borrowed. Thus interest charges affects many business decisions as they hinder the development and
growth of many SMEs, which in turn weakens debtor’s capability to repay both the total principal and
interest. 14

A complementary study carried out by Abreham (2002) which was focusing on the determinants of loan
repayment of borrowers and the criteria of credit rationing was done in relation to the private borrowers in
Ghana. The estimation results using the Tobit model showed that having other income sources, higher
education, vast working experience in interrelated economic activities prior to the loan application and

20
also venturing in various economic activities apart from agriculture are well enhancing factors while loan
diversion, being a male borrower and also offering extended loan repayment periods are negatively
affecting the loan repayment performance.

In another study conducted by Rose, (2007), she define successful loan repayment as the capability to
payback the extended loan facility in line with stipulated terms enshrined in the loan agreement. She also
defined loan defaulting as the failure by the borrower to meet his or her obligations of repaying the loan
facility or servicing his or her debt. Her study on the factors that cause defaults in government micro credit
programs in Kenya, she concluded that there is a strong relationship between domestic problems, income
sources and loan defaults

Taylor (2011) also argues that high interest rates by MFIs promotes debt trap for the borrowers which may
hinder the loan repayment process. Exorbitant lending rates have also been observed to hinder the uptake
of micro loans, thereby hindering the original intention of MFIs Dehejia (2012). With the global campaign
for financial inclusion among the unbanked, there is a general concern that high interest rates reduce
demand and uptake of microfinance services.

However Capozza (1998) during conducting their study in mortgage defaults, found out that increased
volatility in interest rates contribute less in loan defaults. Basing on the statistical and theoretical analysis,
they highlighted that various empirical studies may encounter challenges in drawing up a conclusion on
the major impact of interest rate volatility on loan defaults. Their study was in disagreement with literature
as they advocated for other factors to be behind bad loans apart from interest rates even though the study
was based on commercial banks not MFIs.

The studies conducted so far in this area have gave more attention mainly to the relationship between
interest rates and nonperforming loans in the commercial banking sector. Other studies in line with loan
repayment in MFIs have focused on other developing countries around the world excluding Zambia.
Hence a need to determine whether there exists a relationship between borrowing interest rate charges and
loan repayments in MFIs in Zambia.

Bekele (2003), in analyzing the various elements influencing the loan repayment performance in Ethiopia
used the logistic regression model. They made use of data from 309 borrowers of input loans in the

21
Oromia and Amhara National Regional states and their findings concluded that individuals who access
huge loan amounts had higher repayments as compared to those who obtain small loan amounts. In
addition the results showed that late disbursement of inputs purchased by the loan funds was an important
bottleneck in loan repayment while livestock were found to be vital in bettering the farmers’ repayment
capability.

A research paper authored by Adela and Iulia (2010) revealed the link that exists between interest rates
and NPLs. Another study carried out by Kaplin (2009), empirically supports the notion that interest rates
and loan defaults are negatively correlated and they were using information from large non-financial US
firms for the period 1982-2008. They concluded that no positive correlation exists between interest rates
and loan defaults after they conditioned the expected default frequency credit measure.

Roslan and Zaini (2009) investigates the impact of some borrower related characteristics, project related
features together with loan related characteristics on loan repayment of agro bank micro credit scheme.
The characteristics of the borrowers are (i) marital status (ii) occupation (iii) level of education (iv) race
(v) gender (vi)age (vii) number of dependents, experience. The project related characteristics includes the
project ownership structure, project type, project proximity to closest agro bank office, and revenue
accumulated from the project. The loan characteristics include the loan amount and also the repayment
period lengths. The data used in the study is a primary data, which is gathered through a survey carried out
among agro-bank micro credit scheme borrowers in 86 branches of agro bank throughout Malaysia.

A study on the trade-off between sustainability and outreach as experienced by microfinance institutions
(Milson, 2013), and a global analysis of leading micro banks in respect of financial performance and
outreach (Cull, Demirguc-Kunt & Morduch, 2007) revealed some common observations. The two studies
indicated that the real gross portfolio yield is a proxy for interest rates charged by MFIs. In addition, they
argued that the depth of outreach-viability controversy determines whether or not to subsidize interest
rates. The authors gave a contextual and practical analysis involving the poor, interest rates charged and
loan repayment default. It was exemplified in the event the interest rate prevailing in the market cannot be
afforded by poor people and these people continue borrowing loans aware they would default in
repayment, and if the loss from such interest rate induced default is outweighs the revenue gain from
higher interest rates, then real yield is anticipated to negate operational self-sufficiency (OSS).

22
Gashaw (2014) examined MFIs in Ethiopia, Uganda and Kenya. The specific point of interest was loan
outreach to the poor and the quest for financial viability. In the study it is acknowledged that it is very
unlikely for a well-to-do client to borrow loans from MFIs in these countries due to the dominance of the
commercial banking sector. The study observed that, the repayment rates amongst MFIs are part of their
success stories which interpretatively implies that these firms have managed to keep the default risk
sufficiently low. The authors further opined that, they are is a great belief that borrowers of credit from
MFIs are able and willing to pay commercial interest rates. On the part of these institutions, low default
rates are reported.

2.4 Conceptual Framework

The conceptual frame work in a research study is a diagrammatical presentation of the different variable’s
being analyzed in the research study. The conceptual frame work provides a clear outline of the
interrelationship that exists among the variables of the study. This framework was chosen based on the
literature review consulted and it was chosen for this study because it comes nearer in capturing all the
variables needed for the study. According to the conceptual frame work above there are a lot of factors
that influence loan repayment through interest rates and these include among others default risk premium,
liquidity risk premium, fluctuating interest rates and huge and small loans from microfinances.

CONCEPTUAL FRAMEWORK
INDEPENDENT VARIABLE

DEFAULT RISK

23
 DEPENDENT VARRIABLE

LIQUIDITY RISK PREMIUM LOAN REPAYMENT

(LOAN PERFOMANCE)

Fluctuating interest rates

Loan Amount

CHAPTER THREE

24
3.0 RESEARCH METHODOLOGY

3.1 Introduction

The section outlines and discusses the methodology which will be used in this study. It describes the
research design, Target population, data collection method and tools, sampling methods and data analysis.

3.2 Research design

Research design is the blueprint of conducting a research study. It is the guide that the study relied on in
the due course of the research. Specifically, this study will adopt descriptive research design. Descriptive
design primarily aims to provide precise and valid representation of the factors that are relevant to the
research questions or objectives (Kothari, 2008). In this light, the current study seek the answer to the
general question, that is, what is the effect of interest rates on loan repayments of MFIs in Lusaka.

3.3 Target population

The target population describes the population to which the study findings are generalized. This
population will comprise all the employees and customers of the MFIs under discussion with operations
in Kalingalinga. The purpose of this research is to gather information on the effect of interest rate on loan
repayment in microfinance institutions MFIs and therefore the targeted respondents are the microfinance
MFIs personnel both top management and credit officers (loans officers) as well as the customers situated
in Lusaka. These will be targeted since they are involved in the day today determination of the loan
repayment activities within various MFIs.

3.4 Sampling method

The study will use probability sampling; because it gives an assurance that the sample is representative
and can estimate errors for sampling. In particular the study will make use of stratified random sampling
since the study wants to ensure that representatives from each subgroup within the population are
represented in the sample. What the study will do is to divide the sample in such a way that elements of all
the strata are represented. With this, the study will be able to have more precise information inside the
subpopulations about the variables that will be studied, and this will raise precision of the estimators of the

25
variables of the whole population. The study will ensure that stratified sampling provides better results by
ensuring that the strata are more different and more homogeneous internally. The sample will be
calculated using the following formula.

n = Z2· (P)·(1-P)
d2
n = expected sample size

Z = normal standard distribution

P = Probability of previous similar studies

d = Degree of errors

3.5 Sample size

The sample size will be 30 comprising of 5 microfinance officials and 25 microfinance customers. This
has been arrived at by the estimation of the number of microfinance officials in charge of loaning and the
planned number of customers who will participate in the study.

3.6 Data collection methods instruments

The researcher will utilize both primary and secondary sources to gather data. This will be attained
through utilization of questionnaires and past literature.

3.7 Primary data

The researcher will use primary data to obtain the answers required to satiate the study. Data that will be
collected from primary sources will be raw data and it has to be processed in a way that it matches the
objectives of the research enabling easier data analysis. Primary data will allow the researcher to gather
the much needed information to satisfy the objectives of the study on the effect of interest rates on loan
repayment in microfinance institutions MFIs. It will also allow the researcher to fulfil on the challenges
that microfinance institutions MFIs are facing. Primary data that will be used in this study will be obtained
through the administering of questionnaires to different respondents.

26
3.7.1 Secondary

Write your source here. Most of it is already on literature review

3.8 Data analysis

For the purpose of this paper, data will be statistically analyzed using the STATA/SE (version 13.0).The
use of the statistical package STATA is preferred, among other statistical programmes, due to the fact that
it is user friendly, relatively large sample size and the amount of variables that will be involved. STATA
will be used for obtaining percentages for easy and precise interpretation of information. Moreover,
STATA is appropriate for statistical manipulations among the few which include the cross tabulations.
Inferential statistics and chi- square will be performed to compare the factors associated with loan
repayment and borrowing interests of microfinance institutions. Since the study is about a relationship,
chi-square statistic will be used to establish whether a relationship exists among the variables. Statistical
significance will be assumed for P – values, < or = 0.05. Basic descriptive analysis will be done using
frequency distributions.

3.9 Ethical considerations

Ethics is defined as a system of moral values that is concerned with degree to which research procedures
adhere to professional, legal and social responsibilities to the study participants (Polit & Hungler, 2001).
The researcher will take consideration of the ethical issues and will adhere to the rules and regulation of
the ethical committee. The purpose and nature of the study will be explained to the study participants.
Written informed consents will be obtained from the respondents before administering the research
instruments. The respondents who will agree to take part in the study will be requested to sign a consent
form. Respondents who will decline to participate will be reassured that no privileges would be taken
away from them. These respondents will be in their usual home or work environment and hence will not
be exposed to any physical and emotional danger or harm. Confidentiality and anonymity will be
maintained in that the respondents’ names will not be recorded on the questionnaires. Instead numbers
will be written on each completed questionnaires.

27
3.10 Possible limitations of the study
This research work is also subjected to limitations associated with time in which the research will be
conducted seem to be short hence the research will work tireless to ensure it is completed in good time.
Taking into consideration that there is no grant to this study, there will most likely be the problem of
finance and transportation that will enable a more enormous study of this research to work. Having taken
into consideration the large and vast nature of the area of study the researcher wants to limit the
population of this study to only microfinance officials and customers in Lusaka. The researcher will use
own resources available to ensure that the study is done and completed.

28
 CHAPTER FOUR

4.0 PRESENTATION, INTERPRETATION AND DISCUSSION OF FINDINGS.

4.1 Introduction

Under this chapter, a presentation, interpretation and discussion of the findings is done in accordance with
the study objectives. For precision and conciseness, the following codes are used; SA- Strongly Agree, A
– Agree, NS – Not Sure, D – Disagree and SD – Strongly Disagree. Customer Views on the Different
Interest Rates in Selected microfinance institutions

This section answered the first research question which was to find out customer views on interest rate
charged in selected financial institutions in Kalingalinga Township

4.1 Data Presentation

According to the organizations records available, microfinance institutions charged 35% per month on
village group loans, 20% per month on business loans above K2,500, 25% per month on loans below
2,500 and 30% per month on top up loans. These rates are charged on flat rate basis not on reducing
balance basis as (73%) of the respondents strongly agree with this, making interest rates in Kalingalinga
Township unfriendly compared to other micro Finance institutions who charge interests on reducing
balance basis. In order to establish this, respondents were asked to provide their level of agreement and
disagreement through several statements. These included the financial institutions credit officials and
clients, and the findings are as tabulated below.

29
Table 4.2: Interest Rates of Microfinance Institutions in Kalingalinga
# Questions SD D NS A SA Total
f % f % f % F % f % ∑f %
1. Microfinance Institutions 37 83 2 4 1 2 5 11 45 100
in Kalingalinga interest
rates on loans are fair to
its clients?

2. fair compared to other micro

25 finance
56 10 22 2 4 5 11 3 7 45 100
Institutions?

Interest rates on MFIs in

Kalingalinga loans are

3. Interest rates on MFIs in Kalingalinga 2 4 10 22 33 73 45 100

loans are
charged on a flat rate basis?
4. Interest rates on MFIs in 35 78 5 11 5 11 45 100
Kalingalinga loans are

30
 determined by forces of
demand and supply?
5. Interest rates in on MFIs 40 89 5 11 45 100
in Kalingalinga are the
same for all types of loans
offered to its clients.
6. Clients are made aware of 13 29 10 22 12 27 10 22 45 100
the interest rates prior to
taking the loans?
7. Interest rates on MFIs in 2 4 5 11 5 11 3 7 30 67 45 100
Kalingalinga loans change
over time?

31
Responses in Table 4.2 above show that most of the respondents (83%) strongly disagree that
Microfinance Institution interest rates are fair to its clients. This can be evidenced by the 56% of the
respondents strongly disagreeing with Interest rates in microcrofiaince institutions loans being fair
compared to other micro finance institution elsewhere. These rates seem to favor big borrowers who end
up paying lower interest rates compared to the small borrowers. This is in line with Rich Rosenberg (June
17, 2008 ) who said that one approach is to compare MFI interest rates in a country to the rates on other
kinds of small loans that lower income people use. The idea is that making lots of small loans will
inevitably cost more than making a few big loans.

Interest rates are not determined by the forces of demand and supply in Kalingalinga Township as
evidenced by the (78%) of the respondents who strongly disagree that Interest rates on loans are
determined by the forces of demand and supply .As asserted by Keynes, the quantity of money played a
key role determining the rate of interest. He viewed the equilibrium interest rate as that rate which equates
the supply with the demand for money. The modern view of interest rate is based on the imperfect
information paradigm as explained by Hoff and Stieglitz (1990)

From the above the interest rates charged by Microfinance Institutions in Kalingalinga Township are not
the same for its products. These ranges from village group loans at 35% per month to 25% on business
loans. This is however due to lack of collateral security required for the later because it is only three
ground member who stand as assurances for the colleague before a loan is granted. This makes the
business loans cheaper due to the collateral security attached compared to other products offered in terms
of interest rates.

Asa chaffer (2010) wrote that It won't come as a huge surprise to discover that the cheapest unsecured
loans are offered to those applicants who are in the best position to repay them. This type of low interest
rate loan is provided without collateral so it can be extremely difficult for the lender to recover its money
in the event of default. This is true with Microfinance Institutions in Kalingalinga as most of its clients are
low income earners who have small or no security to qualify for the cheap business loans. They end up
going with the alternative source of the village group loans at a higher interest rate.

32
In the table 4.2 above 29% of the respondents strongly disagree that the clients are made aware of the
interest rates to be paid. And also 27% and 22% agree and strongly agree respectively that clients are made
aware of the interest rates prior to taking the loans. Further investigations were made and it is true that the
customers get the forms to fill in on which the interest to be paid is clearly indicated. However the few
clients take interest in analyzing the interest to be paid.

4.3 Relationship between Interest Rates and Loan Repayment in MFIs in Kalingalinga

This section answered the second research question which was to find out the relationship between interest
rates and loan repayment in microfinance institutions in Kalingalinga. According to the organizations
official records, the interest rates are 35% per month on village group loans, 25% per month on business
loans above K2, 500, 25% per month on loans below K2, 500 and 30% per month on top up loans. This
may be so to ensure that the organization meets its operational costs and obtain at least a profit margin.

In order to find out this, respondents were asked to provide their level of agreement and disagreement
through several statements .The findings are as tabulated below.

Table 4.3: Relationship between Interest Rates and Loan Repayment in MFIs in Kalingalinga
Questions SD D NS A SA Total
f % F % f % f % f % ∑f %
1. Loans repaid by 5 11 10 22 1 2 4 9 25 56 45 100
clients are delayed
as scheduled in
MFIs in
Kalingalinga
due to high
interest rate
charged?

33
2. Loans repaid in 5 11 5 11 10 22 25 55 45 100
MFIs in
Kalingalinga
are lower
compared to other
micro finance
institutions due to
interest rates
being high?

34
 3. The default rate in 10 22 25 55 2 4 3 5 11 45 100
MFIs in
Kalingalinga is
low
compared to the
standards set in the
Sector?
4. Does MFIs in 5 11 5 11 35 78 45 100
Kalingalinga find
any problem
with some clients
not being able to
pay due to the
interest rate
Charged?

Source; Primary data

Loans repaid by clients seem to be delayed as scheduled in microfinance institutions in Kalingalinga due
to high interest rate charged as seen from the 56% of the respondents who strongly agree. This may be
evidenced by the high default rate of more than 10% compared to the industrial standard. This is line with
Rachel Shirley (2009) who asserts that lenders have to tighten the eligibility criteria for low interest loans
due to rising levels of default. In order to get approval for an affordable loan, it is necessary to have a
good credit score, a stable job and a sustainable level of existing debt. Whilst financial institutions make
money by lending money to customers, many have withdrawn unsecured low costs loans due to the
growing risk of bad debt.

Loans repaid in microfinance institutions in Kalingalinga seem not to be lower compared to other micro
finance institutions in Zambia due to interest rates. As seen in the table above 55% of the respondents
disagree and 22% who strongly disagree with this. Like Rich Rosenberg (2008 ) asserts that the most
powerful approach to the question of whether interest charges are too high is to look at the individual cost
items that those charges cover. The default rate in microfinance institutions in Kalingalinga seems to be
high being between 15% and 20%, compared to the standards set in the industrial sector as 55% of the
respondents disagree and 22% strongly disagree that the default rate is low compared to the sector of 10%.

35
Microfinance institutions in Kalingalinga finds problems with some clients not being able to pay due to
the interest rate charged. This is evidenced by the 78% of the respondents strongly agreeing and 11%
agree that the organization find some difficulties in collecting these loans from its clients due to high
interest rates. This is contrary to Martin Bell (2009),who urged that receiving approval for the cheapest
loans means that less interest will be paid over the full lending term. Despite low central bank base rates,
the cost of borrowing has actually risen over the last couple of years.

Table 4.4 Interest Rates and Loan Repayments between 2018 and 2019
Year 2016 2017 2018 2019

Interest rate (average in %) 35 35 34 33

Loan repayment rates (%) 81 83 88 89

Source: microfinance institutions in Kalingalinga January 2020

Findings revealed that the lower the interest rates, the higher the rate of loan recovery in microfinance
institutions in Kalingalinga. Basing on this, the mathematical relationship was derived using Pearson’s
correlation coefficient as follows;

Table 4.5 Computation of Pearson’s Correlation Coefficient.

Correlations Interest Rates Loan Repayment
rate

Interest Rates Pearson’s 1.000 .8511**

Correlation

Sig. (2- tailed) .006

Loan Repayment Pearson’s .851** 1.000

Rate Correlation

Sig. (2- tailed) .006

36
 ** Correlation is significant at the level 0.01 level (2- tailed)

Source: Primary data.

The results showed that there is a significant positive relationship between interest rates and loan
repayment of 0.851 magnitudes. This is also highlighted by Bategeka (1995), Mugisha (1995), Rachel
Shirley (2009) and Jeffrey Sachs (2001) who asserted that a positive relationship existed between interest
rates and loan repayments in that a high interest rate is expected to directly affect the loan repayment
capacity of a client.

37
 CHAPTER FIVE

5.0 SUMMARY, RECOMMENDATIONS AND CONCLUSIONS

5.1 Introduction

Under this chapter, the researcher summarized the study findings, recommendations and makes
conclusions in accordance with the study objectives.

5.2 Summary

Under this study the topic was interest rate and loan repayment, case study of microfinance institutions in
Kalingalinga. The study aimed at finding out the relationship between interest rates and loan repayment.
The study took a sample of 30 respondents from which data was collected using both a questionnaire and
interview method.

On the interest rate charges, the study found out that there are a number of interest rates charged on
different types of loans ranging from 20% to 35% depending on the type of loan. These loans include
business loans school fees loans, village group loans asset loans, energy loans and special loans.

On loan repayments rates fostered by microfinance institutions in Kalingalinga, the study found out that
many loan recovery procedures do exist like legal procedures, on time repayment schedules and good
credit risk analysis on part of staffs.

38
On the relationship between interest rate and loan repayment, a significant positive relationship was found
out between the variables using Pearson‟s correlation coefficient.

5.3 Recommendations

From the above conclusion, it is recommended that:

The microfinance institutions in Kalingalinga should make a revision of the interest rate charged by
looking at the competitor’s rates, inflation rates and the industry lending rates from the central bank.

39
With loan repayment, there should be improvement in the policy of credit management to avoid high
portfolio at risk by revising the credit limits, proper evaluation of the client’s character, capital,
collateral, capacity and conditions before a loan is disbursed to a person.

The microfinance institutions in Kalingalinga should improve on the recovery procedures in that demand
notices should be sent to clients quite often before it‟s too late, taking legal action as the last
resort; putting into consideration of its effect on goodwill, resorting to writing off some bad debts in case
the recovery costs are beyond the recovery amounts. These consequently will reduce on losses due to poor
repayments by clients and will enhance profits to the company.

5.4 Conclusion

From the above findings, the researcher concludes that:

Microfinance institutions in Kalingalinga has a well-established tax rate which depends on what type of
loan is given out ranging from 20% to 35% per month .It’s upon the prospective customer to choose what
loan to take, the microfinance institutions in Kalingalinga sets the other credit terms and finally loan
disbursement takes place.

On loan repayments, it is concluded that the microfinance institutions in Kalingalinga has most of the
recommended procedures to ensure that a client pays well and on time but still does not exploit all of
them. Procedures like seeking security against any loan were found lacking on some loans like the village
group loans yet it should be the best policy if a good repayment record is to be enhanced.

On the relationship between interest rate and repayment, it can be concluded that the cause of many losses
in micro finance institutions through loan write offs as seen from the statement of problems was as a result
of high interest rates charged on the loans which leaves the client with little or zero profit and
consequently a poor repayment record is enhanced.

5.5 Areas of Further Research

In the process of the study, the researcher felt that the following areas should be further researched about
since findings never went into details of them:

40
 The relationship between legal procedures and loan repayment.

 The relationship between employee‟s remuneration and loan repayment.

 The role of credit assessment on loan repayment capacity

41
 BIBLIOGRAPHY

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Industry in Ethiopia. AEMFI, March.

Microfinance Association of Zambia (2011): Survey on Microfinance Institutions in Lusaka Zambia.

Nkusu (2011): Exploring on the macroeconomic Elements of Non-Performing Loans Nigeria

Bank of Zambia (2018): ZAMBANKER Journal Bank of Zambia, Bank Square, Lusaka Zambia June
2018

Chandaran, E. (2004): Research methods. A qualitative approach. Nairobi Daystar University.

Ghatak, M. and Guinname, T.W., (1999): The economics of lending with joint liability: Theory and
practice. Journal of Development Economics 60, 195-228.

ZAMFI. (2016): Microfinance Monitor, Issue No. 6; December 2016. Harare, Zimbabwe: The official
Newsletter. [Online] Available: http://www.jcc.com.na/files/microfinance%20monitor. (27 January 2017).

Zeller. M. (1998): Determinants of repayment performance in credit groups: the role of Interest Rates on
loan repayment

Weinberg, B.R., (2008): FOR-PROFIT VERSUS NON-PROFIT MICROFINANCE: HOW ARE THE
POOR AFFECTED? The Eagle Feather, 5(2008).

Verhelle, C. & Berlage, L. (2003): Determinants of microfinance group performance: An empirical

analysis of self-help groups in India, MSE paper, Department of Economics.

Sani, H. and Mohd-Khan, S.J., (2016): Effect of Social Capital, Loan and Saving on the Growth of SMEs
in Nigeria: A Proposed Research Framework.

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Kimando, L.N., & Njogu, G.W. (2012): Factors that affect quality of customer service in the banking
industry in Kenya: A case study of Postbank head office Nairobi. International Journal of Business and
Commerce, 1(10), 82-105.

Robinson, M., (2001): The microfinance revolution: Sustainable finance for the poor. World Bank
Publications.

Roslan, A., & Mohd Zaini, A. K. (2009): Determinants of microcredit repayment in Malaysia: the case of
Agro bank. Humanity and Social Sciences Journal, 4(1), 45-52.

Sani, H. and Mohd-Khan, S.J., (2016): Effect of Social Capital, Loan and Saving on the Growth of SMEs
in Nigeria: A Proposed Research Framework.

Onyeagocha, S.U.O., Chidebelu, S.A.N.D. and Okorji, E.C., 2012: Determinants of repayment of loan
beneficiaries of micro finance institutions in Southeast states of Nigeria. International Journal of
Agricultural Management and Development, 2(3), pp.167-175.

Kumar, P. and Sharma, C. (2011): People Empowerment & Financial Inclusion through Microfinance in
India, Journal of Applied Management & Computer Science (2011), pp. 1-11

Makundi, L., 2015. Effects of loan repayment on SMES business performance in Tanzania: a case of
CRDB bank plc; Morogoro branch (Doctoral dissertation, Mzumbe University).

Karlan, D. and Zinman, J., 2011: Microcredit in theory and practice: Using randomized credit scoring for
impact evaluation. Science, 332(6035), pp.1278-1284.

Khandker, S. (2005): Microfinance and Poverty: Evidence Using Panel Data from Bangladesh, the World
Bank Economic Review, and Issue. 19, no. 2, pp. 263-286.

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Congo, Y., 2002: Performance of microfinance institutions in Burkina Faso (No. 2002/01). WIDER
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44
 APPENDIX

QUESTIONAIRE
LUSAKA UNIVERSITY
School of business
BACHELOR OF BANKING AND FINANCE
FINAL YEAR PROJECT
TITLE OF TOPIC: The effects of interest Rates on loan repayments in microfinance banks
in Zambia with a case study of microfinance banks in Kalingalinga Township

Survey questionnaire

Dear respondent; my name is Namalangwa Mutukwa final student of Bachelor of Banking and
Finance Lusaka University. The purpose of this research is to identify the effects of interest Rates
on loan repayments in microfinance banks in Zambia with a case study of microfinance banks in
Kalingalinga Township

Thank you for your participation.

Instructions:

1) There is (4) sections in this questionnaire. Please answer ALL questions in ALL
sections.

2) Completion of this form will take you approximately 10 to 15 minutes.

A QUESTIONNANNIARE TO THE RESPONDENTS FROM CREDIT/LOAN OFFICERS

A MICROFINANCE BANKS IN KALINGALINGA

45
SECTION A: DEMOGRAPHIC CHARACTERISTICS OF THE RESPONDENTS. (Tick
where appropriate)

1. Sex of the owner

(a). Male 4. Family Size

(b). Female (a) 0-3

2. Age of the owner (b) 4-5

(a). Less than 18 year (c) 6-11

(b) Married (d) Above 11

(c) Window 5. Education level

(d) Divorced (a) Can read write

(b) Up to grade twelve

(c) Vocational certificate

(d) Diploma

(e) First degree

6. What department do you serve in?

………………………………………………………………………………………………

………………………………………………………………………………………………

7 What is your Job title?

………………………………………………………………………………………………

46
8. How long have you saved served in this MFIs
(a) 1 to 3 years
(b) 4 to 6 years
(c) 7 to 9 years
(d) 9 and above years

47
Part B: Interest Rates of Microfinance Institutions in Kalingalinga
Questions Strongly Disagree Not Agree Strongly
Disagree Sure Agree

Microfinance Institutions in
1. Kalingalinga interest rates on loans are
fair to its clients?

Interest rates on MFIs in Kalingalinga

2. loans are
fair compared to other micro finance
institutions?

Interest rates on MFIs in Kalingalinga

3. loans are
charged on a flat rate basis?

Interest rates on MFIs in Kalingalinga

4. loans are
determined by forces of demand and
supply?

Interest rates in on MFIs in

5. Kalingalinga are the same
for all types of loans offered to its
clients.

6. Clients are made aware of the

interest rates prior to taking the
loans?

Interest rates on MFIs in Kalingalinga

7. loans
change over time?

48
 Questions Strongly Disagree Not Agree Strongly
Disagree Sure Agree

1. Loans are repaid by clients

promptly as scheduled in MFIs in
Kalingalinga

Loans are repaid in MFIs in

2. Kalingalinga
promptly as compared to other
micro finance institutions?

Default rate in MFIs in Kalingalinga

3. is fair
compared to the standards set?

Staffs of MFIs in Kalingalinga find

4. no problem
with some clients not being able to
pay?

5. Fines are charged to clients in case

of failure to pay as scheduled?

6. Clients are made aware of their due

dates to pay back their loans in
advance?

The clientele base grown in MFIs in

7. Kalingalinga
over time?

Part C: Loan Repayment in in MFIs Kalingalinga.

49
50
Part D: Relationship between Interest Rates and Loan Repayment in MFIs in Kalingalinga
.
# Questions Strongly Disagree Not Agree Strongly
Disagree Sure Agree

1. Loans repaid by clients are delayed

as scheduled in MFIs in Kalingalinga
due to high
interest rate charged?

Loans repaid in MFIs in Kalingalinga

2. are lower
compared to other micro finance
institutions due to interest rates
being high?

The default rate in MFIs in

3. Kalingalinga is low
compared to the standards set in the
Sector?

Does MFIs in Kalingalinga find any

4. problem
with some clients not being able to
pay due to the interest rate
Charged?

Thank you so much for your time and cooperation

51
52
53
.

54