INFLUENCE OF COST STRUCTURE ON INTEREST RATE LEVEL OF MICROFINANCE BANKS IN NAKURU COUNTY, KENYA

Abstract

Microfinance institutions incur costs not only in sourcing funds and disbursement of these funds to microfinance clients but also in promotion and monitoring of microfinance client groups and development of processes for improving efficiencies of service delivery. The general objective of the study was to assess the Influence of cost structure variables and interest rates level on loans charged by MFBs in Nakuru County, Kenya. Specifically, the study sought to establish the influence of financial costs, credit administration costs, loan default costs and cash holding costs on interest rate level of microfinance banks in Nakuru County. The study was based on three theories: Conventional Economic Efficiency Theory, Financial Sustainability Theory, and Free Cash Flow Theory. Descriptive survey study design was adopted for the study. The target population comprised 127 respondents where a sample size of 56 respondents was selected through stratified random sampling. Primary data was used which was collected using structured questionnaires. Data collected was analyzed using both descriptive and inferential statistics with the aid ofSPSSand presented using inferential statistics tables. The research findings indicate that there a statistically significant non causal relationship between Financial Costs and Interest rates level of microfinance banks (r= 0.677, p<0.05). It was established that financial costs have a significant influence on interest rate level set by microfinance banks (β = 0.424, p<0.05). There a statistically significant non causal relationship between credit administration costs and Interest rates level of microfinance banks (r=0.724, p<0.05). It was established that credit administration costs have a significant influence on interest rate level set by microfinance banks (β =0.566, p<0.05). The results further indicated that default costs are positively correlated with interest rates level of microfinance banks (r=0.542, p<0.05). Further loan default costs had a statistically positive influence on interest rate level of microfinance banks (β = 0.364, p<0.05). The results further indicated that cash holding costs had are positively correlated with interest rates level of microfinance banks (r= 0.636, p< 0.01). Further cash holding costs had a statistically positive influence on interest rate level of microfinance banks (β = 0.311, p<0.05). It can be concluded that financial costs, credit administration costs, loan default costs and cash holding costs have a significant influence on interest rate level of microfinance banks. It was recommended that the microfinance banks in Nakuru County should take measures to minimize costs in order to keep their interest rates at the lowest possible level and remain competitive