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

  • Ahmad Samanta Sangwan Monash University
  • Muhammad Wan Rasheed Monash University
  • Abdul Sayid Bakar Monash University

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

Author Biographies

Ahmad Samanta Sangwan, Monash University

PhD student, Monash University

Muhammad Wan Rasheed , Monash University

Lecturer, Monash University

Abdul Sayid Bakar, Monash University

Lecturer, Monash University

References

Ahlin, C., Lin, J., & Maio, M. (2019). Where does microfinance flourish? Microfinance institution performance in macroeconomic context. Journal of Development economics, 95(2), 105-120. https://doi.org/10.1016/j.jdeveco.2010.04.004

Annannab, H., Bakar, A. A., & Khan, S. J. B. M. (2022). Operational Risk Management And Performance Of Cooperative Microfinance In Thailand. International Journal of Social Sciences and Economic Review, 4(1), 17-24. https://doi.org/10.36923/ijsser.v4i1.148

Bardhan, A. K., Nag, B., Mishra, C. S., & Tarei, P. K. (2021). An integrated framework for analysing performance indicators of Indian microfinance institutions: a multi-stakeholder perspective. Benchmarking. International Journal of Finance, 3(1), 16-27. https://doi.org/10.1108/BIJ-09-2020-0470

Bhandari, U., Jaisi, T., Devkota, N., Karki, D., Adhikari, D. B., Paudel, U. R., & Parajuli, S. (2021). Retail Loan Under Interest Rate Fluctuation in Nepal: Costumers Interest, Challenges and Managerial Solutions. Journal of Asian Business Strategy, 11(1), 46-54. https://doi.org/10.18488/journal.1006.2021.111.46.54

Chen, W., & Yuan, X. (2021). Financial inclusion in Scotland: an overview. Frontiers of Business Research in Scotland, 15(1), 1-21. https://doi.org/10.1186/s11782-021-00097-7

George, A., Xie, T., & Alba, J. D. (2021). Central bank digital currency with adjustable interest rate in small open economies. Available at SSRN 3605918. https://doi.org/10.2139/ssrn.3605918

Ha, V. D., & Dang, T. T. N. (2021). Ex Post Monitoring and Loan Repayment Performance in Rural Vietnam. The Journal of Asian Finance, Economics and Business, 8(8), 365-373.

Holton, S., & d’Acri, C. R. (2018). Interest rate pass-through since the euro area crisis. Journal of Banking & Finance, 9(6), 277-291. https://doi.org/10.1016/j.jbankfin.2018.08.012

Jote, G. G. (2018). Determinants of loan repayment: the case of microfinance institutions in Gedeo Zone, SNNPRS, Malaysia. Universal Journal of Accounting and Finance, 6(3), 108-122. https://doi.org/10.13189/ujaf.2018.060303

Julia, T., & Kassim, S. (2019). Exploring green banking performance of Islamic banks vs conventional banks in Bangladesh based on Maqasid Shariah framework. Journal of Islamic Marketing, 1(2), 17-23. https://doi.org/10.1108/JIMA-10-2017-0105

Leventis, G., & Deason, J. (2021). Deferred Payment Loans for Energy Efficiency: Case Study of a Low-and Moderate-Income Home Improvement Financing Model and Potential Application to Energy Efficiency Projects. https://doi.org/10.2172/1837376

Mia, M. A. (2022). Microfinance and Microfinance Institutions: History, Concept and Purpose. In Social Purpose, Commercialization, and Innovations in Microfinance (pp. 17-45). Springer, Singapore. https://doi.org/10.1007/978-981-19-0217-8_2

Rasheed, B., Malik, Z. F., Shakeel, A., & Kazmi, S. T. F. H. (2021). Evaluating the State Laws and Regulations of Microfinance Institutions (MFIs) in Asia: A Comparative Study. Audit and Accounting Review, 1(2), 91-110.

Rijanto, A. (2020). Business financing and blockchain technology adoption in agroindustry. Journal of Science and Technology Policy Management, 6(4), 18-31. https://doi.org/10.1108/JSTPM-03-2020-0065

Sangwan, S., Nayak, N. C., & Samanta, D. (2020). Loan repayment behavior among the clients of Indian microfinance institutions: A household-level investigation. Journal of Human Behavior in the Social Environment, 30(4), 474-497. https://doi.org/10.1080/10911359.2019.1699221

Vaicondam, Y., Hishan, S. S., & Shan, T. P. (2019). The Study on Factors That Influencing Banks’ Non-Performing Loans in Malaysia. International Journal of Engineering and Advanced Technology (IJEAT), 2(7), 83-92

Wasiuzzaman, S. (2021). Determinants of the Price and Non-price Terms of Bank Loans: A Study of Malaysian SMEs. Australasian Accounting, Business and Finance Journal, 15(3), 43-66. https://doi.org/10.14453/aabfj.v15i3.4

Wun, N. S. L. P., Nusari, M., & Ameen, A. (2019). Effect of Microfinance on Socio-Economic Development of Rural Community in Myanmar. International Journal of Management and Human Science (IJMHS), 3(3), 26-31.
Published
2022-06-29
How to Cite
Sangwan, A. S., Rasheed , M. W., & Bakar, A. S. (2022). Effect of Interest Rate on Loan Repayment in Microfinance Banks in Malaysia. Journal of Finance and Accounting, 6(3), 1 - 10. https://doi.org/10.53819/81018102t5081
Section
Articles