Effect of interest rates on performance of small and medium enterprises in Kakoba division Mbarara municipality

Abstract

The study was about Effect of Interest Rates on Performance of Small and Medium Scale Enterprises in Kakoba Division Mbarara Municipality. The study was aimed at finding out whether fixed interest rates have any effect on the loan acquired by SMEs, establish the relationship between flexible interest rates and performance of SMEs and also relationship between split interest rates and performance of SMEs. The study adopted a case study design that was descriptive in nature. The study population comprised primarily of small and medium scale enterprise owners. Questionnaire and documentary review were the data collection methods used for the study. Data was analysed quantitatively using SPSS program to generate descriptive statistics and triangulated with secondary data. The findings indicated that there was a relationship between split, flexible and fixed interest rate on SME performance. Among the three types, fixed interest rates were commonly used while split interest rates were the least used interest rates by SME owners. The advantages of acquiring loans have been associated with increasing profitability of the firms that utilize these loans. The disadvantages have been increased business risks in form of high interest rates, reduced liquidity ratios and costs of running the business. The findings revealed that the interest rates on loans have led to improved performance of most SMEs in Kakoba division by enabling the underserved businesses to expand and increase their profits, given that profitability has been the main goal of doing business. The financial institutions should also endeavour to educate the owners of SMEs on the different loan packages and related interest rate types and how these calculated to avoid mismanagement and loan default in the end.