Effects of Microfinance Interest Rates on the Performance of Small-Scale Enterprises in Moshi Municipality, Tanzania
Edmund E. Lubinza1, Nyanjige Mayala2, Emmanuel Kileo3
1Edmund E. Lubinza, Department of Economic and Business Studies (DEBS).
2Nyanjige Mayala, Department of Economic and Business Studies (DEBS).
3Emmanuel Kileo, Department of Educational Psychology and Curriculum Studies Mwenge Catholic University (MWECAU), Moshi, Tanzania.
Manuscript received on 17 August 2024 | Revised Manuscript received on 05 September 2024 | Manuscript Accepted on 15 November 2024 | Manuscript published on 30 November 2024 | PP: 25-34 | Volume-4 Issue-2, November 2024 | Retrieval Number: 100.1/ijef.B258904021124 | DOI: 10.54105/ijef.B2589.04021124
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© The Authors. Published by Lattice Science Publication (LSP). This is an open-access article under the CC-BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/)
Abstract: Microfinance has emerged as a potent tool to reduce poverty and promote economic empowerment, especially in developing nations, by providing loans with lower interest rates. This study investigated the effects of microfinance interest rates on the performance of Small-Scale Enterprises (SSEs) in Moshi Municipality, Tanzania. The study was grounded by Wicksell’s Natural Rate of Interest theory, which suggests that an equilibrium interest rate balances savings and investment in an economy. A concurrent research design was employed within a mixed-methods research approach. The target population was 5,570 SSEs, and a sample size of 190 respondents was obtained using a sample size calculator. Data was collected through structured questionnaires and key informant interviews. The validity of the research instruments was conducted through face and content validity. For reliability, a Cronbach’s alpha of 0.83 was obtained, indicating a strong correlation coefficient. Descriptive and inferential statistics, including regression analysis and correlation, were used for the data analysis. Quantitative data were analysed using SPSS, including descriptive statistics and inferential statistics, such as regression and correlation. Meanwhile, qualitative data was analyzed using contextual analysis. Ethical guidelines were strictly adhered to throughout the study, including ensuring participant privacy, protecting them from harm, obtaining informed consent, and following established research protocols. The study found that high interest rates hurt SSE’s performance, with a significant effect on the microfinance institution’s interest rates, as indicated by a p-value of less than 0.05. The study concluded that microfinance interest rates impact the performance of Small and Medium Enterprises (SMEs) in Moshi Municipality. Furthermore, business owners increased prices and faced obstacles in job creation due to MFI interest rates, which increased costs, reduced profitability, and affected their ability to pay loans. In addition, the loan interest rate was statistically significant to SSE performances. The study recommended that policymakers and microfinance institutions review and potentially reduce interest rates to alleviate the financial burden on Small and Medium Enterprises (SMEs), promote business growth, and enhance their profitability. Microfinance institutions should also prioritize transparent communication of interest rates and loan terms while offering flexible loan products.
Keywords: Microfinance Institutions, Interest Rates, Performance of Small-Scale Enterprises, and Small-Scale Enterprises.
Scope of the Article: Corporate Finance