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Influence of Cost Structure on Interest Rate Level of Microfinance Banks in Nakuru County, Kenya

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Influence of Cost Structure on Interest Rate Level of Microfinance Banks in Nakuru County, Kenya INFLUENCE OF COST STRUCTURE ON INTEREST RATE LEVEL OF MICROFINANCE BANKS IN NAKURU COUNTY, KENYA KENNEDY KIMUTAI NGETICH A RESEARCH PROJECT SUBMITTED TO THE DEPARTMENT OF ECONOMICS, ACCOUNTS AND FINANCE IN THE COLLEGE OF HUMAN RESOURCE DEVELOPMENT IN PARTIAL FULFILLMENT FOR THE DEGREE OF MASTER OF SCIENCE IN FINANCE OF THE JOMO KENYATTA UNIVERSITY OF AGRICULTURE AND TECHNOLOGY MAY 2018 DECLARATION This research project is my original work and has not been submitted for examination to any other university. KENNEDY KIMUTAI NGETICH ………….… ………………. HD335-C007-7882/2015 Signature Date This research project has been submitted for examination with my approval as the university supervisor. WECHE ESHIWANI ……………. ………………. JKUAT, Kenya Signature Date ii DEDICATION I dedicate this research project to my parent Mr. and Mrs. Kitur, my grandparents Mr. and Mrs. Ngeno and Mr. Collins whose wishes were for me to take this course, for moral and inspirational support they provided to me during my studies. Dedication also goes to my classmates and lecturers for their encouragement and making my studies possible. iii ACKNOWLEDGEMENT I wish to express my gratitude to my supervisor, Mr. Weche and all those who helped to make this research project possible. May the Almighty God bless you. iv 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 Key words: costs structure, interest rate level v TABLE OF CONTENTS DECLARATION ............................................................................................................................. ii DEDICATION ................................................................................................................................ iii ACKNOWLEDGEMENT ............................................................................................................. iv ABSTRACT ..................................................................................................................................... v TABLE OF CONTENTS ............................................................................................................... vi LIST OF TABLES ........................................................................................................................ viii LIST OF FIGURES ........................................................................................................................ ix ACRONYMS AND ABBREVIATIONS ....................................................................................... x DEFINITION OF TERMS ............................................................................................................ xi CHAPTER ONE: INTRODUCTION ............................................................................................ 1 1.1 Background of the Study ................................................................................................ 1 1.2 Statement of the Problem ................................................................................................ 5 1.3 Objectives of the Study ................................................................................................... 6 1.4 Research Hypotheses ...................................................................................................... 6 1.5 significance of the Study ................................................................................................. 7 1.6 Scope of the study ........................................................................................................... 7 1.7 Limitations of the Study.................................................................................................. 8 CHAPTER TWO: LITERATURE REVIEW .............................................................................. 9 2.1 Introduction ..................................................................................................................... 9 2.2 Theoretical Framework ................................................................................................... 9 2.3 Conceptual Framework ................................................................................................. 12 2.4 Empirical Review.......................................................................................................... 13 2.5 Critique of Literature Review ....................................................................................... 22 2.6 Research Gaps ............................................................................................................... 22 2.7 Summary of Literature Review ..................................................................................... 23 CHAPTER THREE: RESEARCH METHODOLOGY ............................................................ 25 3.1 Introduction ................................................................................................................... 25 3.2 Research Design............................................................................................................ 25 3.3 Target Population .......................................................................................................... 25 3.4 Sample Size and Sampling Procedures ......................................................................... 26 3.5 Research Instruments .................................................................................................... 27 vi 3.6 Pilot Testing .................................................................................................................. 28 3.7 Data Collection and Procedures .................................................................................... 29 3.8 Data Analysis and Presentation .................................................................................... 29 CHAPTER FOUR: RESEARCH FINDINGS AND DISCUSSION ......................................... 31 4.1 Introduction ................................................................................................................... 31 4.2 Response Rate ............................................................................................................... 31 4.3 General Characteristic of the Respondents ................................................................... 31 4.4 Reliability ...................................................................................................................... 33 4.5 Descriptive Statistics and Discussions .......................................................................... 34 4.6 Correlation Analysis ..................................................................................................... 41 4.7 Test of Research Hypotheses ........................................................................................ 43 CHAPTER FIVE: SUMMARY, CONCLUSIONS AND RECOMMENDATIONS ............... 46 5.1 Introduction
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