INFLUENCE OF FINANCE COSTS ON INTEREST RATES LEVEL OF MICROFINANCE BANKS IN RWANDA: A CASE OF KICUKIRO DISTRICT

Abstract

This study aims to discern the specific cost components and their respective influences on interest rate determination within the microfinance banking sector, shedding light on strategies for maintaining financial sustainability while ensuring affordability for borrowers. With a particular emphasis on the Kicukiro District case study, this research aims to examine and evaluate the impact of cost structure on the interest rate level of Rwandan microfinance institutions. In particular, the study's objectives are to ascertain the impact of financing costs on the interest rate levels of microfinance institutions in Kicukiro District. Understanding the influence of cost structure on interest rate levels in microfinance banks is crucial for policymakers, regulators, and practitioners to promote sustainable financial inclusion. This study focuses on the intricate relationship between operational costs, funding sources, and regulatory environments, informing strategies to balance affordability for borrowers while ensuring the viability of microfinance institutions. Free Cash Flow Theory, served as theoretical foundations for the research. The study gathered primary quantitative data using structured questionnaires by utilizing a descriptive cross-sectional survey and explanatory research methodology. For this project, 66 people were employed by Kicukiro District Microfinance. The study aimed to reach 66 staff members in total, with 5 members of management and 20 employees each from the finance, operations, and credit departments. Census technique was used. The research made use of both original and secondary sources of information. The study used a structured questionnaire to gather primary data. Utilizing SPSS version 21, the data was examined for both descriptive and inferential statistics. The data was presented using descriptive statistics, tables, graphs, charts, and percentage analysis. In addition, the link between several proxies of cost structure and interest rate levels of MFIs in Rwanda was explained using quantitative data analyzed using a linear regression model that has been constructed and tested. To test the data, descriptive statistics like mean and standard deviation were employed. The hypothesis was evaluated at a 5% significance level, and the cause-effect link between variables was established using the Ordinary Least Square technique. The findings indicate that variables have statistically significant effects on interest rates. Specifically, finance costs (β = 0.578, p < 0.001)) demonstrate significant positive relationships with interest rates, suggesting that higher cash holding costs and credit administration costs are associated with higher interest rates. In conclusion, the study underscores the significant influence of cash holding costs on interest rate levels in microfinance banks within Kicukiro District, Rwanda. It is recommended to conduct comprehensive analyses of various cost components, including finance costs, credit administration costs, loan default costs, and cash holding costs, to understand their specific impacts on interest rates in microfinance banks in Kicukiro District. Implementing efficient cost management strategies and exploring innovative financial models and technological solutions can help mitigate the impact of these costs and enable microfinance institutions to offer more competitive interest rates while maintaining financial sustainability.