DOI: 10.11648/j.ijafrm.20261103.11 ISSN: 2578-9376

Effect of Interest Rate on Loan Repayment for Small and Medium Enterprises in Kenya

Abdikadir Fidow
Show PDF Cite
The study researched how interest rate, inflation, and economic growth affect loan repayment of small and medium enterprises (SMEs) in Kenya. SMEs contribute Ninety eight percent of the business population and provide employment, economic growth, goods and services for low and middle income population in Kenya. The target population of the study was commercial, micro finances, and online lenders in Nairobi, Kenya. Secondary data was collected from financial lenders in Nairobi. SPSS tools of descriptive and inferential analysis were employed to analyze the data. The result indicated that interest rate is negatively and significantly correlated with loan repayment (r = -.431, p=.000). In the regression analysis result, interest rate is negatively and significantly related to loan repayment (β=-0.564, p=0.015). Inflation and economic growth were positively related to loan repayment, but not significantly. This means that, when lenders charge high interest rates, default rate increases thus reducing loan repayment rate. The study concluded that lenders should reduce interest rate as much as possible in order to reduce default rate and improve loan repayment. Payment period should be also extended to give the borrowers a leeway and reduced payment amount per term.

More from our Archive