The impact of interest rate on loan repayment and demand for credit : a case study for the Swaziland Development Finance Corporation (FINCORP).

Abstract

Interest rate is the premium that a borrower pays to a lender, usually expressed as a percentage of the amount granted or principal. Interest rates, higher interest rates to be specific, are often associated with low demand or appetite for credit. Moreover, it is also believed to negatively affect loan repayment amongst borrowers. The aim of the study was to determine whether the interest rate leads to low demand for credit amongst FINCORP clients. Stratified random sampling method was used to select 89 active clients for this study. Data were collected through a self-administered questionnaire. Results revealed that interest rates charged at FINCORP is not a challenge for customers, represented by almost 50% of respondents. Another 82% of respondents stated that loan repayment was smooth. Regression analysis found that interest rates and non-performing loans (NPLs) were negatively related to demand for credit. Furthermore, repayment ability was positively related to demand for credit. Despite the significant contribution of the loan facility from FINCORP, the loan duration for most products is too short, and thus results in poor loan repayments. It is also recommended that the interest rate should not be generalized across the clients; loyal clients with FINCORP should be rewarded with somewhat low interest rates. FINCORP has the potential to change the credit lending landscape amongst SMEs in Swaziland through its wide range of loan products.