Interest rate ceiling and financial sustainability of microfinance institutions in Zambia

 

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dc.contributor.advisor Alhassan, Abdul Latif en_ZA
dc.contributor.advisor Mphuka, Chrispin en_ZA
dc.contributor.author Kambole, Christopher Ngolwe en_ZA
dc.date.accessioned 2018-11-23T06:58:47Z
dc.date.available 2018-11-23T06:58:47Z
dc.date.issued 2017 en_ZA
dc.identifier.citation Kambole, C. 2017. Interest rate ceiling and financial sustainability of microfinance institutions in Zambia. University of Cape Town. en_ZA
dc.identifier.uri http://hdl.handle.net/11427/29087
dc.description.abstract Interest rate ceilings are often considered as an effective way of preventing lenders from charging extortionate interest rates. However, setting the rates too low may cause institutions to fail to raise enough revenue to cover their costs. Low rates may pressure MFIs to reduce costs, increase loan sizes, withdraw services from areas where it is expensive to operate, or exit from the market altogether. A 42% interest rate ceiling was introduced in Zambia on the effective annual lending interest rate of MFIs in January 2013, which was later removed in November 2015. This research was aimed at investigating the effect of interest rate ceiling and microfinance direct costs on the financial sustainability of microfinance institutions in Zambia. The study used time series data from consolidated quarterly financial statements from March 2006 to September 2016 and employed Autoregressive Distributed Lags (ARDL) approach to analyse the effect of Yield on Gross Portfolio, Cost of Funds, Operating Expenses and Loan Loss provisions on Operational Self Sufficiency (OSS). OSS was used as a proxy for financial sustainability (dependent variable). Results of the time series analyses showed a positive and significant effect of Yield on Gross Portfolio and Cost of Funds on OSS in the long run. On the other hand, Operating Expenses and Loan Loss provisions had a negative relationship with OSS, albeit statistically insignificant. Trend analysis of the Yield on Gross Portfolio showed a downward trend and consequently the OSS also trended downwards, with the lowest OSS being recorded during the period interest rate ceilings were introduced. However, the trend showed that the microfinance sector was generally sustainable during the study period. The reduction in OSS following the introduction of the ceiling confirmed findings from prior studies regarding the negative impact of interest rate ceilings on the financial sustainability of MFIs. Although the study results showed that the MFIs were generally sustainable during the study period, it was evident that they were negatively impacted by the interest rate ceiling. Therefore the recommendation from this study is that interest rates must be set at levels where costs can be adequately covered. Furthermore, managing costs and loan delinquency should be core priorities among Zambian MFIs to ensure financial sustainability. en_ZA
dc.language.iso eng en_ZA
dc.subject.other Development Finance en_ZA
dc.title Interest rate ceiling and financial sustainability of microfinance institutions in Zambia en_ZA
dc.type Master Thesis
uct.type.publication Research en_ZA
uct.type.resource Thesis en_ZA
dc.publisher.institution University of Cape Town
dc.publisher.faculty Faculty of Commerce en_ZA
dc.publisher.department Research of GSB en_ZA
dc.type.qualificationlevel Masters
dc.type.qualificationname MCom en_ZA
uct.type.filetype Text
uct.type.filetype Image
dc.identifier.apacitation Kambole, C. N. (2017). <i>Interest rate ceiling and financial sustainability of microfinance institutions in Zambia</i>. (Thesis). University of Cape Town ,Faculty of Commerce ,Research of GSB. Retrieved from http://hdl.handle.net/11427/29087 en_ZA
dc.identifier.chicagocitation Kambole, Christopher Ngolwe. <i>"Interest rate ceiling and financial sustainability of microfinance institutions in Zambia."</i> Thesis., University of Cape Town ,Faculty of Commerce ,Research of GSB, 2017. http://hdl.handle.net/11427/29087 en_ZA
dc.identifier.vancouvercitation Kambole CN. Interest rate ceiling and financial sustainability of microfinance institutions in Zambia. [Thesis]. University of Cape Town ,Faculty of Commerce ,Research of GSB, 2017 [cited yyyy month dd]. Available from: http://hdl.handle.net/11427/29087 en_ZA
dc.identifier.ris TY - Thesis / Dissertation AU - Kambole, Christopher Ngolwe AB - Interest rate ceilings are often considered as an effective way of preventing lenders from charging extortionate interest rates. However, setting the rates too low may cause institutions to fail to raise enough revenue to cover their costs. Low rates may pressure MFIs to reduce costs, increase loan sizes, withdraw services from areas where it is expensive to operate, or exit from the market altogether. A 42% interest rate ceiling was introduced in Zambia on the effective annual lending interest rate of MFIs in January 2013, which was later removed in November 2015. This research was aimed at investigating the effect of interest rate ceiling and microfinance direct costs on the financial sustainability of microfinance institutions in Zambia. The study used time series data from consolidated quarterly financial statements from March 2006 to September 2016 and employed Autoregressive Distributed Lags (ARDL) approach to analyse the effect of Yield on Gross Portfolio, Cost of Funds, Operating Expenses and Loan Loss provisions on Operational Self Sufficiency (OSS). OSS was used as a proxy for financial sustainability (dependent variable). Results of the time series analyses showed a positive and significant effect of Yield on Gross Portfolio and Cost of Funds on OSS in the long run. On the other hand, Operating Expenses and Loan Loss provisions had a negative relationship with OSS, albeit statistically insignificant. Trend analysis of the Yield on Gross Portfolio showed a downward trend and consequently the OSS also trended downwards, with the lowest OSS being recorded during the period interest rate ceilings were introduced. However, the trend showed that the microfinance sector was generally sustainable during the study period. The reduction in OSS following the introduction of the ceiling confirmed findings from prior studies regarding the negative impact of interest rate ceilings on the financial sustainability of MFIs. Although the study results showed that the MFIs were generally sustainable during the study period, it was evident that they were negatively impacted by the interest rate ceiling. Therefore the recommendation from this study is that interest rates must be set at levels where costs can be adequately covered. Furthermore, managing costs and loan delinquency should be core priorities among Zambian MFIs to ensure financial sustainability. DA - 2017 DB - OpenUCT DP - University of Cape Town LK - https://open.uct.ac.za PB - University of Cape Town PY - 2017 T1 - Interest rate ceiling and financial sustainability of microfinance institutions in Zambia TI - Interest rate ceiling and financial sustainability of microfinance institutions in Zambia UR - http://hdl.handle.net/11427/29087 ER - en_ZA


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