Interest Rate Policy and Financial Sustainability of Umurenge Sacco as a Microfinance Institution in Rusizi District, Rwanda

ABSTRACT The study focused on “Interest Rate Policy and Financial Sustainability of UMURENGE SACCO as Microfinance Institution in Rwanda”. The purpose of the study was to establish the relationship between interest rate policy and financial sustainability of UMURENGE SACCO. It was guided by the following objectives: to establish relationship of interest rate determination on sustainability of UMURENGE SACCO, to analyse the relationship of interest rate application methods on sustainability of UMURENGE SACCO, to establish relationship between interest rate income collection methods and sustainability of UMURENGE SACCO, and to establish the influence of clients’ response to interest rate policy on the relationship between interest rate policy and sustainability of UMURENGE SACCO. Methodology of the study was the descriptive co-relational research design where Pearson’s linear correlation analysis and linear regression analysis were applied to determine the relationship between interest rate policy and financial sustainability. However, the researcher found out that interest rate determination policy, Interest rate application methods, and the interest income collection methods improved financial sustainability of UMURENGE SACCO in Rwanda. The researcher recommended that UMURENGE SACCO should document the interest rate determination policy which specifies interest rate composition to comprise the administration expense rate, loan loss provision rate, cost of funds rate and capitalization rate to enable charge a sustainable interest rate on MFIs loans for financial sustainability. The researcher also recommended that UMURENGE SACCO should establish the interest rate that meets both UMURENGE SACCO sustainability and clients’ micro enterprise sustainability.

 TABLE OF CONTENTS

DECLARATION

APPROVAL

DEDICATION

ACKNOWLEDGEMENT iv

TABLE OF CONTENTS v

LIST OF TABLES viii

LIST OF FIGURES xii

LIST OF ABBREVIATIONS AND ACRONYMS xiii

ABSTRACT xiv

CHAPTER ONE: INTRODUCTION 1

1.1 Background to the Study 1

1.2 Origin of UMURENGE SACCO in Rwanda 3

1.3 Statement of the Problem 4

1.4 Purpose of the Study s

1.5 Objectives 6

1.6 Conceptual Framework on Interest Rate Policy and Performance 6

1.7 Significance g

CHAPTER TWO: REVIEW OF RELATED LITERATURE 10

2.0 Introduction 10

2.1. Theoretical Review 10

2.2.1. The Welfare Approach and Sustainability of MFIs 11

2.2.2. The Institutional Approach and Financial Sustainability of MFI5 11

2.3. Interest Rate Policy and Sustainability 12

1.3.1. Interest Rate Determination Policy on Sustainability of MFI5 12

2.3.2. Administration Expenses Rate (AE) on Performance/Financial Sustainability 13

2.3.3 Loan Loss Provision Rate and Performance 13

2.3.4 Cost of Funds Rate on Sustainability 14

V

2.3.5 Capitalization Rate and Sustainability 14

2.3.6 Interest Income Collection Methods and Performance 14

2.3.7 Management Efficiency and Performance 15

2.3.8 Interest Rate Application Methods and Sustainability 15

2.4. Performance 16

2.4.1. Cost Coverage 16

2.4.2 Operation Costs 16

CHAPTER THREE: METHODOLOGY 17

3.0 Introduction 17

3.1 Research Design 17

3.2 Research Population and Sample Size 17

3.3 Sampling Procedures 19

3.4 Data Collection Methods 19

3.5 Validity and Reliability of the Instruments 19

3.6 Data Analysis 19

CHAPTER FOUR: DATA PRESENTATION, ANALYSIS AND INTERPRETATION 21

4.0. Introduction 21

4.1. Response Rate 21

4.2. Nominal Data from Study Element 22

4.2.1. Senior Executives, Finance and Branch Managers of MFI5 by Experience 22

4.2.2. Senior Executives, Finance and Branch Managers by Position Held 23

4.3. Findings on Interest Rate Policy and Financial Sustainability 25

4.3.1. Interest Rate Determination Policy and Financial Sustainability 25

4.3.1.1. Descriptive Statistics; Questionnaire on Interest Rate Determination 26

4.3.1.2. Pearson Correlation 29

4.3.1.3. Face-to-Face Interviews with Officials of Apex Institutions and Officials of MFIs

on Interest Rate Determination 30

4.3.2. The Effects of Interest Rate Application Methods on Financial Sustainability 31

4.3.2.1. Descriptive Statistics on Interest Rate Application Methods 31

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4.3.2.2. Pearson Correlation on Interest Rate Application Methods and Financial

Sustainability 35

4.3.2.3. Face to Face Interviews with Officials of Apex Institutions and Officials of MFIs

on Interest Rate Application Methods and Financial Sustainability 36

4.3.2.4. Interviews with Officials of Apex Institutions on Interest Rate Application

Methods 36

4.3.3 Examining Interest Income Collection Methods and Financial Sustainability 36

4.3.3.1. Descriptive Statistics on Interest Income Collection Methods 37

4.3.3.2. Pearson Correlation on Interest Income Collection Methods and Financial

Sustainability 39

4.3.4. Influence of Clients’ Response to Interest Rate Policy on the Relationship between

Interest Rate Policy and Financial Sustainability 40

4.3.4.1 Descriptive Statistics 40

4.3.4.2. Part and Partial Correlation 43

4.3.4.2.1. Part Correlation 44

4.3.4.2.2. Partial Correlation 45

CHAPTER FIVE: SUMMARY, DISCUSSION, CONCLUSION AND RECOMMENDATIONS

50

5.0. Introduction 50

5.1. Summary 50

5.2. Discussion of Findings 51

5.2.1. Interest Rate Determination Policy and Financial Sustainability si

5.2.3. Interest Income Collection Methods and Financial Sustainability 52

5.2.4. Influence of Clients’ Response to the Interest Rate Policy 53

5.3 Conclusions on Research Findings 54

5.4. Recommendations 54

5.5. Recommendations for Further Research

REFERENCES 56