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EFFECT OF INTEREST RATE ON CUSTOMERS’ DEMAND FOR
LOANS IN ATIWA RURAL BANK PLC, GHANA
1
Raymond Obeng Boateng,
2
Albert Mensah,
3
Daniel Osei,
4
Abdul Wahab Atta Bashiru
5
Oscar Agyemang Opoku
1
Kwame Nkrumah University of Science and Technology, Ghana
2
Mankranso Business Resource Centre, Ghana
3,5
University of Cape Coast, Ghana
4
University of Northampton, United Kingdom
[email protected]cc.edu.gh
Abstract
This study sought to determine the influence of interest rate on demand for loans among Rural Banks in Ghana.
The study adopts an explanatory design of the quantitative approach. Secondary data from the Atiwa Rural Bank
PLC database was used. The data were analysed using frequencies and percentages. Also, binary logistic and
linear regression were used in analysing the relationship among the key variables of this research. The study found
that interest rate of Atiwa Rural Bank PLC was rated as moderate while repayment status was high. There were
differences between the category of the respondents and the repayment status. More males repay their loans as
compared to females and groups. Also, differences existed between the employment status of the respondents and
the repayment status. Moreover, insignificant differences were identified between the employment status of the
respondents and the repayment status. Interest rate affects loan period positively. Also, a strong positive
correlation between interest rate and loan period was determined. Interest rate affects amount of facility
negatively. Moreover, credit facility with high interest rate is 1.020 times more likely to default in paying back
the credit facility as compared to respondents who obtained their credit facility as a moderate or low interest rate.
Increasing interest rate was associated with low or default in repayment of credit facility. The study therefore,
recommend that management of the Atiwa Rural Bank PLC put up measures to able to track and retrieve all small
amount of facility or loans given to clients. Also, the management of the Atiwa Rural Bank PLC should target
more salaried workers and loans used for emergency services such as medical bills, school fees among others in
order to reduce Non-Performing Loans (NPL). Moreover, the management of the Atiwa rural bank should
improve upon the mechanisms implemented regarding giving of group loans and repayment issues.
Keywords: Interest Rate, Loans, Atiwa Rural Bank PLC, Credit Risk, Non-Performing Loans
INTRODUCTION
Bill Ganzel (1992), of the Ganzel Group, researched the history of rural banking and
identified the primary objective that led to its development. It was discovered that in order for
farmers to start businesses, make progress, and make it through the agricultural sector, they
required credit in the form of advances with a predetermined purpose. Great times were had on
the farm as a result of a convoluted network of credit organizations that was established in the
late 1940s. The people who lived in rural areas required two different kinds of credit. To begin,
they needed cash advances with long repayment period of time to purchase land and machines.
Second, they required short-term advances in order to purchase the "inputs" that are necessary
for agricultural production on an annual basis. They need money to acquire items like seed,
manure, herbicides, and insecticides as well as other things related to generation. Prior to the
establishment of banks, farmers and people living in rural areas in general obtained their credit
from private parties and from enterprises located in their immediate area (Odoom, Opoku, &
Ntiakoh-Ayipah, 2016).
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Approximately 32 years ago, the Bank of Ghana with the help of Ministry of Finance
first broached the idea of rural banking. At the time, rural banking was referred to as the junior
league of banking institutions, and its purpose was to cater to the particular requirements of
individuals living in Ghana's rural communities. The traditional and approved financial
institutions of the time were all structured, equipped, and operated as urban-focused businesses.
The majority of their customers were involved in the mining industry or the business of
importing and exporting goods. After that, it became essential to incorporate the rural
population into the financial system using principles that were tailored to the specifics of their
socioeconomic environments (Bawuah, 2012). Recently, Ghana's rural banks have begun
offering these services to everyone, including the country's metropolitan population.
It is widely held that providing locals with access to financial resources makes it possible
for them to raise their levels of output and income by subscribing financial offers, products and
services, hence increasing the likelihood of a fall in abject poverty and growth in their
wellbeing (Henry & Schimmel, 2011). The poor stay poor not because they are lazy but because
they have no access to capital is a proverb (Thurman, 2007). Financial institutions such as rural
banks contribute to the development and sustainability of economic and financial systems by
providing access to loans for customers typically exempted from commercial banks operations
(Lopatta, Tchikov, Jaeschke, & Lodhia, 2017). This is one way to increase productivity and
reduce poverty in Ghana (Lopatta et al., 2017; Million, 2012; Zerai & Rani, 2012).
People are able to raise their family incomes, levels of savings, consumption, and
education, as well as their levels of education, and acquire assets so that they can begin
engaging in self-employment activities because of the atmosphere that is created by rural banks
(Banerjee et al., 2014). Credit from rural banks is seen as a method for alleviating poverty since
it increases access to various forms of financing offers (GAROMSA, 2017; Kinde, 2012;
Werema & Opanga, 2016). In rural finance, the ideal goals include providing credit services
that are productive, efficient, cheap in cost, and recover a great percentage of the loans
disbursed (Wenner, 1995).
The primary goals of rural banks are the development of employment possibilities, the
alleviation of poverty, the promotion of economic autonomy for the underprivileged, and the
promotion infant businesses (Kinde, 2012; Pasha & Negese, 2014). As a result, microfinance
institutions (MFIs) came into existence in order to bridge the gap created by a lack of available
financial resources. These institutions give money to people with low incomes and the needy
in order to help them escape financial challenges and improve economic activities (AfDB &
UNECA, 2012). Their services include providing microloans, micro savings, micro insurance
service, money transfer, leasing, and other relevant finance programs to the target rural
individuals excluded by the industrial commercial banks as a result of a lack of collateral
demands, asymmetric information, and high processing costs. They are able to do this because
of the fact that the conventional commercial banks do not require collateral, they have
incomplete information, and they have high service fees (Melese & Asfaw, 2020; Pasha &
Negese, 2014; Woldeyes, 2012).
According to Ramkumar, Bekele, & Sivasankaran, (2015) users of rural banks have been
given the opportunity to create income, acquire better services, which may result in an
improvement in the clients' level of living. When opposed to informal sources of funding,
formal financial institutions provide smallholder farmers with more adequate loans at lower
interest rates. This makes formal financial institutions the backbone of the smallholder farming
community. Even more essential, smallholder farmers need access to capital in order to
complete a total change from an orientation toward subsistence farming to one focused on
market agriculture. This is due to the fact that credit is the determining factor in whether or not
farmers have access to appropriate materials, tools and equipment (Mgbebu & Achike, 2017).
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There is little room for debate on the significant roles that credit plays in the expansion of the
economy.
Lending has been and continues to be the most significant aspect of a bank's operations,
and especially in developing economies such as Ghana, which have not yet established fully
functional capital markets. Lending operations, on the other hand, have been a contentious and
problematic issue for the vast majority of economies that are through transformation, and
Ghana in particular (Afriyie & Akotey, 2012). Customers of commercial finance firms are
moaning about a shortage of credit and high requirements because banks have experienced
enormous losses as a result of poor loans.
In spite of the fact that the rising NPLs rate is one of the most significant issues facing
finance companies like rural banks Kohansal & Mansoori, (2009), the difficulty of making loan
repayments discourages financial firms from giving more loans (Melese & Asfaw, 2020). If
the loan funds in an economy are not repaid, it limits the retrieving of the funds, and it is
lowered by the amount of classified loans, which may lead to economic stagnation if the funds
are not recovered. The large percentage of borrowers who do not follow through with their
obligations to repay loans is the primary factor contributing to the subpar performance of
finance firms in developing nations, including Ghana (Reta, 2011). It is necessary to state that
the borrowers are not solely responsible for the failure to repay the loan.
However, it is imperative to inspect the level of risk borrowers and lenders bear by the
loan agreement, as well as the nature of the responsibilities, duties, and duties of both parties
as revealed in the plan of the credit program. It is important to state that the borrowers cannot
be held solely responsible for the failure to repay the loan (Afolabi, 2010). When it comes to
the status of a loan and the repayment of that loan, however, other macroeconomic elements,
like the interest rate, cannot be ignored. When calculating the interest rate, the amount of money
that is charged for borrowing money is considered the cost of capital.
According to UHUNMWANGHO & IGBINOSA, (2022), interest rate is defined as the
percentage of principal the lender charges the borrower in exchange for the usage of their
money. According to Onyeagocha, (2012) and other researchers, interest rates are a significant
factor that influences the amount of money that is repaid to rural banks for loans. As a result,
the purpose of this research work is to investigate the effect that interest rates have on the
demand of loans by customers of rural and community banks in Ghana.
Whilst financial institutions in developing nations try to broaden the scope of their
offerings and increase the number of customers they serve, one of the most significant
challenges they confront is the persistent problem of borrowers failing to repay the money they
have borrowed. Despite the fact that rural banks contribute to the alleviation of poverty, the
creation of jobs, and the sustained development of the economy of both developed and
developing nations, there are a great number of obstacles that rural banks must overcome in
order to carry out their operations. The government and other financial institutions collaborate
more closely with the goal of reducing the financial obstacles that impoverished people face
while also innovating and extending the many different options that are available to them
(Tarekegn & Molla, 2018).
The risk that a financial institution, particularly a rural bank, will not recover its money
back from borrowers is the most widespread and frequently the most serious weakness that the
organization faces. In the event of loan default, new applicants may be denied access to loan
facilities. This is because the management of rural banks may experience an increase in
challenges in direct proportion to the growing NPLs. Later on, a low payback rate inhibits
financial institutions from refinancing defaulting members, and as a result, those members are
unable to remain viable due to the problem of default. Borrowers will also be unable to gain
access to loans and will be forced to live in poverty, all of which hinders overall growth of the
nation (Gebeyehu, Beshire, & Haji, 2013; Sileshi, 2014).
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According to Sileshi, (2014), the demand of a credit facility is influenced both directly
and indirectly by a variety of circumstances including policies enacted by the government,
demographics, and institutional, cultural, and environmental factors. Some researchers have
discussed the benefits, drawbacks, accessibility, and function of loan facilities for better
production efficiency; nonetheless, prompt repayment of loan is vital for maintaining
creditworthiness. Therefore, inability of borrowers to return the total loan amount acquired is
essential to the continued existence of finance institutions over the long term. As a direct
consequence of this, a wide variety of studies have attempted to investigate the various socio-
economic groups' levels of success in acquiring loan facilities.
Garomsa (2017), factors affecting a credit facility and repayment revealed that variables
such as gender, income from other sources, monitoring utilization of other members in a group,
credit timeliness, repayment time suitability, repayment trend monthly, and training adequacy
are found to be significant factors that affect loan facility and repay rate of the borrowers. These
factors include gender, income from other sources, monitoring utilization of other members in
a group, monitoring utilization of other members in a group, and training adequacy.
Other studies (Sunday and Anthonia, 2017; Jote, 2018; Sileshi, 2014; Abera and Asfaw,
2019; Yibrie and Ramakrishna, 2017; Gebeyehu et al., 2013; Alemayehu and Lemma, 2014;
Abu et al., 2017; Garomsa, 2017; Ume et al., 2018; Yimer, 2019) focused on the effect of socio-
economic characteristics of the borrower, poor management procedures, loans diversion,
financial knowledge and among others on repayment of loans. In Ghana, studies including Yao
(2012), Kwasi (2016), Musah (2013), Afroze, Rahman and Yousuf (2014), and Amonoo,
Acquah and Asmah (2003) considered access to loans, determinants of loan default, factors
that influence loan repayment, and multiple borrowing on ability to repay loans.
On the other hand, macroeconomic considerations, particularly interest rate and how it
affects demand for loans, receive a very small amount of attention. Both Amonoo, Acquah,
and Asmah (2003) and Oteng and Ntim (2014) investigated the influence that high interest
rates have on borrowers' ability to repay loans, as well as the reaction that interest rate has on
demand for credit and loan repayments. In light of this, the goal of this research is to investigate
the effect that interest rates have on the demand of loans, loan repayment period, and repayment
status by customers of rural and community banks located in Ghana, the case of Atiwa Rural
Bank PLC.
RESEARCH METHOD
Research approach is essential aspect of any research work because it provides the
roadmap, procedures, plans and strategies for conducting the research. In pursuance of this,
quantitative approach was used for the study (Creswell & Creswell, 2017). The quantitative
approach as suggested by Creswell and Plano Clark (2011) employs statistical methods to
verify what is understood and needs to be learned through analysis. In essence, it helps to
understand cause-and-effect relationship among the variables guiding the study. Also, the
quantitative approach provides more objective responses because it is appropriate for
predicting the influence of one variable on the other (Creswell & Creswell, 2017). Therefore,
the study adopted the quantitative approach because it responds to relational questions of
variables within the study on the effect of interest rate on loan product, repayment status, and
repayment period and loan amount.
The study employed explanatory research design. With this design, aside describing the
various variables, the research was able to determine the relationship between interest rate on
loan product, repayment status, and repayment period and loan amount. Loan application forms
of various loan products of Atiwa Rural Bank PLC for 2019 to 2021 accounting year are used
as the data collection instrument for the study. The data are analyse using Pearson r correlation.
Moreover, linear regression is used to analyse the effect of interest rate on various variables
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such as loan amount, loan amount, repayment period and status. The t-test and ANOVA
analysis are used to determine the difference between demographic characteristics of the
customers and their loan repayments period. Furthermore, chi-square is used to differentiate
difference between interest rate and loan product subscribed by the customers of the rural bank.
RESULT AND DISCUSSION
This section focuses on the presentation of results, interpretation and discussions. The
study sought to examine the influence of interest rate on demand for loans among rural banks.
The presentation of results is organized in two main themes; characteristics of the respondents
and the specific objectives (examine the effect of interest rate on loan amount; examine the
effect of interest rate on loan repayment period; analyse the effect of amount facility on loan
repayment; compare the characteristics of the loan applicants and their repayment status) of the
study.
Characteristics of the Respondents
Background characteristics of the respondents are assessed. This is crucial since many
people perceived things differently and opinions may differ based on the background
characteristics of the respondents. In view of this, the study gathers data on the background
characteristics of the respondents including sex, occupation, and type of facility. These
characteristics are discussed subsequently respectively.
On the category of respondents involved in the study. It shows that out of the 203
respondents, 150 was males and 40 was female. On the other hand, 13 of the respondents are
in a form of a group. This group includes religious bodies, market women or sellers. Almost
all of the respondents who accessed credit facility from the rural bank were employed. Aside
12.8 percent who were pensioners, 75 percent was salaried workers, followed by about 5
percent that were traders while about 7 percent was in a form of groups. It can be seen that
more of the respondents were salaried workers. These respondents have at least stable income
and therefore, can be deducted every month with ease as compared to unemployed or market
women who do not have consistent or stable income. About 70 percent had either GH¢ 1000
or less as their average monthly income, followed by 21 percent who earned between GH¢
1001-2000 and 8 percent of the respondents earned within GH¢ 2001-3000. This means that
most of the respondents earned below GH¢ 2000 and this affect the amount of facility that
respondents can accessed.
Table 1: Purpose of facility
Frequency
Percent
Business
50
24.6
Building
35
17.2
Financial Problem
4
2.0
Medical bills
16
7.9
Education
69
34.0
Personal
13
6.4
Funeral
16
7.9
Total
203
100.0
Loan facilities are accessed for a purpose. Therefore, data were gathered from the
database of Atiwa Rural Bank PLC on the reasons for why respondents sought for credit facility
and the outcome in Table 1. It depicts that about one-third of the respondents accessed loan for
educational purposes, about quarter of the respondents sought for credit for business purposes,
followed by 17.5 percent of the respondents had loan facility for building or renting of house
purposes while others were meant for funerals or medical bills. This shows that more of the
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respondents sought for loan facility due to education, business and buildings while only few
respondents accessed loans due to financial problem, personal, medicals bills and funeral.
Table 2: Interest Rate of Atiwa Rural Bank PLC
Frequency
Percent
LOW
16
7.9
MODERATE
153
75.4
HIGH
34
16.7
Total
203
100.0
Table 2 shows that interest rate is regrouped into three main mutually exclusive groups:
low, moderate and high interest rate. Interest rate at 20 percent and below were classified as
low, interest rate between 20 and 40 is rated as moderate while more than 40 percent of the
interest rate is rated as high. Table shows that 7.9 percent of the interest rate was rated as low,
followed by 75.4 percent of the interest rate rated as moderate while about 16 percent of the
interest rate is rated as high. Thus, majority of the interest rate was rated as moderate. The
theory of credit market proposed that lenders give money to proposals that are risky and
possibly cannot be banked, and credits are given out at charges that are equal to the opportunity
cost of funds. It is conceivable that financial institutions would utilize the interest rates that a
person is willing to pay as a screening method to identify borrowers who have a high possibility
of repaying the money they borrow. However, when interest rates go up, the average level of
riskiness of borrowers goes up, which could potentially result in a reduction in earnings for the
bank.
Table 3: Repayment Status
Status
Frequency
Percent
Yes
161
79.3
No
42
20.7
Total
203
100.0
Table 3 shows the repayment status of the respondents. The repayment status is
categorized into two main groups: Yes or No. Loans or credit facility that was paid off was
categorized as “Yes” while those that have expired or still current is classified as “No”. Table
five (5) indicates that about 79 percent of the respondents have paid off their loans while about
21 percent of the respondents have not paid for their loans or credit facility. Though most of
the respondents have repaid their loan or credit facility, a significant number of the respondents
(20.7%) have not paid off their loan or credit facility obtained from Atiwa Rural Bank PLC.
Comparison between the characteristics of respondents and the repayment status
As it is argued that there is difference between perceptions of respondents based on their
gender, age, income, religious affiliations among others. Therefore, it was expected that there
were differences between the characteristics of the respondents and the repayment status.
Therefore, data are gathered from the database of Atiwa Rural Bank PLC and the outcomes are
shown in Table 4.
Table 4: Sex and Repayment Status
No
Yes
Total
x-test
Male
112
38
150
7.55
Female
37
3
40
P=0.023
Group
12
1
13
Total
161
42
203
Table 4 depicts that there are variations between the category of the respondents and the
repayment status. More males repay their loans as compared to females and groups. There is
the need to test whether this difference was significant or not. Chi-square test was used and the
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result shows there was a significant difference (X=7.55, p<0.05) between the category of
respondents and repayment status.
Table 5: Facility code and repayment status
No
Yes
Total
x-test
Pensioner
12
14
26
21.65
Salaried
127
26
153
P=0.023
Trader
10
0
10
Group
12
2
14
Total
161
42
203
Table 5 shows that there are differences between the employment status of the
respondents and the repayment status. More males repay their loans as compared to females
and groups. There is the need to test whether this difference was significant or not. Chi-square
test was used and the result shows a significant difference (X=21.65, p<0.05) between the
employment status of respondents and repayment status.
Table 6: Purpose and Repayment Status
No
Yes
Total
x-test
Business
42
8
50
1.846
Building
26
9
35
P=0.933
Financial Problem
3
1
4
Medical Bills
12
4
16
Education
55
14
69
Personal
11
2
13
Funeral
12
4
16
Total
161
42
203
Table 6 shows that there are differences between the employment status of the
respondents and the repayment status. More males repay their loans as compared to females
and groups. There is the need to test whether this difference was significant or not. Chi-square
test is used and there is no statistical significant difference (X=1.85, p>0.05) between the
purpose of the facility and repayment status of respondents.
Effect of Interest Rate on Repayment Status
Intention of the study sought to examine the effect of interest rate on loan period. It is
expected that interest rate affect loan period. Thus, interest may influence the number of
months or loan period that respondents may like to access credit facility. Therefore, data are
gathered from the loan database of the Atiwa Rural Bank PLC and the end result is presented
in Table 7.
Table 7: Effect of Interest Rate on Repayment Status
B
S.E.
Wald
Df
Sig.
Exp(B)
rate_code
.042
2
.979
rate_code(1)
-.116
.768
.023
1
.008
.890
rate_code(2)
.020
.468
7.821
1
.002
1.020
Constant
-1.350
.424
10.130
1
.001
.259
a. Variable(s) entered on step 1: rate_code.
A logistic regression is performed to ascertain the effects of interest rate on the likelihood
that respondents have positive repayment status or pay back the credit facility obtained from
the Atiwa rural bank and the result is shown in Table 7. The logistic regression model is
statistically significant, χ
2
(4) = 60.15, p < .0005. The model explained 32.0% (Nagelkerke R
2
)
of the variance in repayment status and correctly classified 79.3% of cases. Credit facility with
high interest rate is 1.020 times more likely to default in paying back the credit facility as
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compared to respondents who obtained their credit facility as a moderate or low interest rate.
Increasing interest rate is associated with low or default in repayment of credit facility.
Table 8: Effect of Amount of facility on Repayment Status
B
S.E.
Wald
Df
Sig.
Exp(B)
Amount_facility
.041
.487
.007
1
.932
1.042
Constant
-1.492
1.758
.721
1
.396
.225
a. Variable(s) entered on step 1: amount_facility
A logistic regression is performed to ascertain the effects of amount of credit or loan
facility on the likelihood that respondents have positive repayment status or pay back the credit
facility obtained from the Atiwa rural bank and the result is shown in Table 8. The logistic
regression model is statistically significant, χ
2
(4) = 60.15, p < .0005. The model is explain by
12.0% (Nagelkerke R
2
) of the variance in repayment status and correctly classified 79.3% of
cases. Higher amount of facility is 1.042 times more likely to pay back the credit facility as
compared to respondents who obtained lower amount of facility. However, this relationship is
statistically not significant (wald, 0721, p=0.932).
Effect of Interest Rate on Loan Period
Objective of the study seeks to examine the effect of interest rate on loan period. It is
expected that interest rate affect loan period. Thus, interest may influence the number of
months or loan period that respondents may like to access credit facility. Therefore, data are
gathered from the loan database of the Atiwa Rural Bank PLC and the outcome is presented in
Table 9.
Table 9: Effect of Interest Rate on Loan Period
Predictor
Unstad.
Coefficient
Std Error
Standardized
Coefficients
Beta
t-statistics
Prob.
Constant
-.249
.326
-.766
.445
Rate
.372
.009
.949
42.679
.000
a. Dependent Variable: loan period
From Table 9, the standardized coefficient shows that interest rate affects loan period
positively. Moreover, this effect is statistically significant (β=0.949, t=42.68, p<0.05). In
addition, it is deduced that when there is a percent increase in loan period, interest rate is
expected to be increased by 0.372.
Effect of Interest Rate on Amount of Facility
Objective of the study seeks to examine the effect of interest rate on amount of facility.
It is expected that interest rate affects amount of facility. Thus, interest may influence the
amount of facility or credit assess by the respondents. Therefore, data are gathered from the
loan database of the Atiwa Rural Bank PLC and the outcome is presented in Table 10.
Table 10: Effect of Interest Rate on Amount of Facility
Predicto
r
Unstad. Coefficient
Std
Erro
r
Standardized Coefficients Beta
t-
statistics
Prob
.
Constant
2.736
.161
16.949
.000
Rate
-.019
.004
-.295
-4.370
.000
a. Dependent Variable: amount of facility or credit
From Table 10, the standardized coefficient shows that interest rate affects amount of
facility negatively. Moreover, this effect is statistically significant (β=-.295, t=-4.37, p<0.05).
In addition, it is deduced that when there is a percent increase in amount of facility, interest
rate is expected to be decreased by 0.19.
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Comparison between the characteristics of respondents and the repayment status
As it is argued that there is difference between perceptions of respondents based on their
gender, age, income, religious affiliations among others. According to Garomsa (2017),
“elements affecting loan repayment revealed that variables including gender, income from
other sources, monitoring utilization of other members in a group, credit timeliness, repayment
time suitability, repayment trend monthly, and training adequacy are found to be significant
factors that affect loan repayment rate of the borrowers.” In addition, the borrowers' proceeds,
the amount of agricultural experience they had, loan application cost, the interest rate, the size
of the loan, the security, and the number of instalments were found to be significant factors in
the loan payback rate (Sunday and Anthonia, 2017). Therefore, it was expected that there were
differences between the characteristics of the respondents and the repayment status. There were
differences between the category of the respondents and the repayment status. More males
repay their loans as compared to females and groups. There was the need to test whether this
difference was significant or not. Chi-square test was used and the result shows a significant
difference (X=7.55, p<0.05) between the category of respondents and repayment status.
A study on the factors that determine how well a borrower pays back their loan was
conducted by Fikirte (2011) for the credit and savings institutions in Addis Ababa, Ethiopia.
According to the findings of the binary logit model, factors such as the respondents' ages, the
sorts of businesses they own, their genders, and their levels of business experience all have a
significant function in determining loan repayment. In a study of a similar nature, Mokhtar,
Nartea, and Gan (2012) investigated the challenges that microfinance borrowers in Malaysia
had while trying to repay their loans to Tekum and Yum organizations. According to the
findings of the logit regression model, characteristics that contributed to microcredit loan
repayment included the borrower's age and gender as well as the type of business, manner of
payment, and quantity of repayment.
Employment status and Repayment status
There are differences between the employment status of the respondents and the
repayment status. More males repay their loans as compared to females and groups. Chi-square
test is used and the result shows a significant difference (X=21.65, p<0.05) between the
employment status of respondents and repayment status. A study was conducted by Nguta and
Huka (2013) on the factors that influence loan repayment default in microfinance institutions
in the Imenti North district of Kenya. Employed a descriptive survey design with a sample size
of four hundred participants According to the data, there was a substantial association between
the default on loan repayment and the kind of business, the age of the business, the number of
employees, and the amount of profit the business made. The results of the study are consistent
with this observation.
Effect of Amount of facility on Repayment Status
A logistic regression was performed to ascertain the effects of amount of credit or loan
facility on the likelihood that respondents have positive repayment status or pay back the credit
facility obtained from the Atiwa rural bank. It is found that higher amount of facility is 1.042
times more likely to pay back the credit facility as compared to respondents who obtained lower
amount of facility. However, this relationship is statistically not significant. This may be due
to the fact that financial institutions normally monitor respondents who obtained higher loan
facility due to high Non-Performing Loan issues in Ghana. Therefore, respondents with higher
amount of loan facility are more likely to pay back or greater portion of the loan as compared
to respondents with lower amount of facility.
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This finding is comparable to those that were discovered by Derban et al. (2005) as well
as Roslan and Karim (2009). There is a negative (positive) correlation between small loans and
repayment performance, as found by Derban et al. (2005), who found that lending small
amounts to businesses causes higher loan losses in the setting of MFIs. This indicates that there
is a bad relationship between small loans and repayment performance. According to the
findings of the study that Roslan and Karim (2009) conducted on Malaysia, there is a
correlation between the size of a loan and how well it is repaid, and this correlation is a positive
one. This suggests that the greater the loan amount, the better the performance of the
repayment, and vice versa.
Purpose and Repayment Status
There are differences between the employment status of the respondents and the
repayment status. More males repay their loans as compared to females and groups. Chi-square
test was used and the result shows that there was no statistical significant difference (X=1.85,
p>0.05) between the purpose of the facility and repayment status of the respondents. Mokhtar,
Nartea, and Gan (2012) investigated the difficulties that microfinance borrowers in Malaysia
had when it was time to repay their loans to Tekum and Yum organizations. According to the
findings of the logit regression model, characteristics that contributed to the repayment of
microcredit loans included the borrower's age, gender, kind of business, manner of payment,
purpose of facility, and total amount repaid.
Effect of interest rate on repayment status
Objective of the study seeks to examine the effect of interest rate on loan period. It is
expected that interest rate affect loan period. Thus, interest may influence the number of
months or loan period that respondents may like to access credit facility. Credit facility with
high interest rate is 1.020 times more likely to default in paying back the credit facility as
compared to respondents who obtained their credit facility as a moderate or low interest rate.
Increasing interest rate was associated with low or default in repayment of credit facility. The
interest rate that a bank charges for its loans may, in and of itself, have an effect on how risky
the pool of loans is due to either adverse selection or moral hazard.
According to Cassar, Crowley, and Wydick (2007), “loanable funds have a cost (interest),
and this cost is just as significant in determining whether or not a loan will be repaid. In the
future, lenders are likely to offer preference to borrowers who can return their loans in full,
including interest (Cassar et al., 2007). However, a higher interest rate raises the cost of
borrowing, which worsens loan repayment performance (Afolabi, 2010). This is contrarily to
the findings of this study. This study found that respondents with high interest rate loan facility
were more willing to repay as compared to respondents with moderate or low interest rate.
Effect of interest rate on loan period
Interest may influence the number of months or loan period that respondents may like to
access credit facility. The standardized coefficient shows that interest rate affects loan period
positively. Moreover, this effect is statistically significant (β=0.949, t=42.68, p<0.05). In
addition, it is deduced that when there is a percent increase in loan period, interest rate is
expected to be increased by 0.372. Thus, respondents perceived the interest rate as high, but
due to the emergency of the situation, they will go in for such loan and therefore were willing
to pay back due to high interest rate. This may also be so due to the fact that more of the
respondents were salaried workers and their monthly deductions are made at the source.
This finding lends credence to the conclusions drawn by Kaplin et al. (2009), who
conducted research using data collected from large non-financial companies in the United
States between the years 1982 and 2008 and found that interest rates and the number of
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defaulted loans have an inverse relationship. After conditioning the expected default frequency
credit measure, they came to the conclusion of no positive link between interest rates and loan
defaults. This was their finding. Nevertheless, Hoque and Hossain (2008) undertook out
research in Egypt that investigated the relationship between higher interest rates and loan
defaults. They used three distinct regression models in their investigation. They called for the
reduction of interest rates in order to boost the repayment capacity of borrowers, which would
ultimately result in a reduction in the percentage of borrowers who default on their loans.
According to their findings, loan defaulting and higher interest rates showed a strong positive
link. This adds up to the borrower's financial obligations, which will eventually convert into
loan defaults, resulting in the erosion of the banks' capital. Asari, et al. (2011) in Ethiopia
carried out research that was quite similar to this one, and they came to the conclusion that
NPL and interest rates have a positive link. According to the findings of his study, a rise in
non-performing loans (NPL) leads to a decrease in a bank's assets, which, in turn, reduces the
bank's capital. The level of interest rates, as well as the volatility associated with them, is one
of the most vulnerable and meticulously tracked variables in the economy. It was hypothesized
by Dash and Kabra (2010) in India that commercial banks that issue loan facilities at
aggressively higher interest rates also incur increased NPL. This was the case for some MFIs
in developing nations, and Zimbabwe was not an exception.
Effect of interest rate on amount of facility
It is expected that interest rate affects amount of facility. Thus, interest may influence the
amount of facility or credit assess by the respondents. At a high interest rates, people do not
want to borrow money from the bank because it is harder to pay back the loans, and fewer real
estate purchases are made. However, people may borrow despite higher interest rate for
emergency situation such as medical bills, funerals, school fees among others. It was found
that interest rate affects amount of facility negatively. Moreover, this effect is statistically
significant (β=-.295, t=-4.37, p<0.05). In addition, it is deduced that when there is a percent
increase in amount of facility, interest rate is expected to be decreased by 0.19. Therefore, it is
expected that respondents borrow high when interest rate is low and vice versa.
CONCLUSION
Interest rate of Atiwa Rural Bank PLC is rated as moderate while repayment status is
high. There were differences between the category of the respondents and the repayment status.
More males repay their loans as compared to females and groups. Also, there are differences
between the employment status of the respondents and the repayment status. More males repay
their loans as compared to females and groups. Moreover, there were insignificant differences
between the employment status of the respondents and the repayment status. More males repay
their loans as compared to females and groups. Moreover, credit facility with high interest rate
is 1.020 times more likely to default in paying back the credit facility as compared to
respondents who obtained their credit facility as a moderate or low interest rate. Increasing
interest rate was associated with low or default in repayment of credit facility. In addition,
higher amount of facility is 1.042 times more likely to pay back the credit facility as compared
to respondents who obtained lower amount of facility. However, this relationship was
statistically not significant. Interest rate affects loan period positively. Also, a strong positive
correlation between interest rate and loan period. Lastly, interest rate affects amount of facility
negatively.
Based on the outcome of the study, the following suggestions are put forward for
consideration; the management of the Atiwa rural bank should put up measures to able to track
and retrieve all small amount of facility or loans given to clients. The management of the Atiwa
Rural Bank PLC should target more salaried workers and loans used for emergency services
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such as medical bills, school fees among others in order to reduce NPL. Lastly, the management
of the Atiwa Rural Bank PLC should improve upon the mechanisms implemented regarding
giving of group loans and repayment issues.
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Copyright holders:
Raymond Obeng Boateng, Albert Mensah, Daniel Osei, Abdul Wahab Atta Bashiru,
Oscar Agyemang Opoku (2024)
First publication right:
Injurity - Interdiciplinary Journal and Humanity
This article is licensed under a Creative Commons Attribution-ShareAlike 4.0
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