Interest Rate And Loan Repayment In Commercial Banks In Nyeri County, Kenya

ABSTRACT

Interest rates are ordinarily the drivers of financial institutions’ financial performance. They are the ones that determine the size of the profit margin for every transaction between a financial institution and its customers. Yet, there are many reported cases of defaults in loan repayment in commercial banks in Nyeri County. In fact, there is plenteous confirmation that the financial/banking emergencies in Kenya were preceded by high nonperforming loans. When borrowers default on in repaying the credit facilities advanced to them, the bank concerned will be negatively affected. There will be limited finances to run its operations and also to loan out to other potential borrowers. In the event the challenge of nonrepayment persists for long, the firm will have huge bad debts; a situation that is likely to result in downsizing its workforce, stalls its market expansion, and ultimately collapses. The purpose of this study was to determine interest rate and loan repayment in commercial banks in Nyeri County, Kenya. The study is guided by the following objectives; assess the extent to which liquidity premium, default risk premium, customer classification and risk analysis and appraisal on loan repayment in commercial banks in Nyeri County. Descriptive methodology was used. Primary and secondary data was used in this survey. The secondary data in quantitative form was sourced from industry information like the annual financial reports, and other from research articles, books and casual interviews. The study targeted 57 credit officers in the commercials banks under study. The primary data was collected through a questionnaire with structured questions and a few unstructured questions. Data collected from the field was analyzed by both descriptive and inferential statistics through statistical package for social sciences. The respondents strongly agreed that banks faced liquidity risks and that liquidity risks arose from depending on the type of loan advanced to the client. They also agreed that the larger the amount issued as credit determined the level of risk in terms of liquidity. It was strongly admitted that customers sometimes default in loan repayment and that interest rate on loans was subject to risk of default of the borrower. It was also strongly agreed that their banks blacklists loan defaulters against being awarded future loans. Majority of the respondents strongly agreed those loan customers are classified according to their capabilities which help to reduce loan default rate. Further, the study found that risk analysis had a strong positive correlation with the loan repayment. The study concluded that banks faced loan default on funds advanced. It was concluded that liquidity risk premium contributed to the low loan repayment of loans due to potential rise in interest rate which discourages repayment of loans. The study recommends that customers to be classified according to their loan repayment capabilities and loans advanced accordingly