Effect of Interest Rate on Loan Repayment in Microfinance Banks in Malaysia

Abstract

Microfinance banks create employment by giving credit and other financial services, mainly to low-income earners. Thus, the study sought to examine the effect of interest rates on loan repayment in microfinance banks in Malaysia. The study adopted the descriptive research design. The target population included 29 microfinance banks in Kuala Lumpur. The collection of the data was done using a secondary data collection template. The analysis of the data was done using descriptive and inferential statistics. The correlation results indicate that the interest rate is negatively and significantly related to loan repayment (r=-.409, p=.000). According to the regression results, it was discovered that interest rate is negatively and significantly related to loan repayment (β=-0.525, p=0.015). The changes in interest rates have a substantial influence on loan repayment; when the banks charge more, the repayment will be low. Some loans do not perform as anticipated due to inadequate repayment rates, leading to non-performing loans. The study concluded that interest rate is negatively and significantly related to loan repayment. A reduced interest rate will boost loan repayment, and affordable funds concern is essential. One of the most crucial causes of poor bank performance and collapse is high-interest rates, limited quantity offered, absence of entrepreneurship skills and high taxes. The study recommended that financial institution managers need to make the interest rates affordable. The banking institution should extend the repayment period from one year to a minimum of two years or extend weekly deposits to monthly deposits to enhance the payback percentage. Microfinance institutions should scrutinize clients who borrow extensively before the loan is provided. Keywords: Interest rate, loan repayment, microfinance bank, Malaysia