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Interest Rate (Caps) and Sustainability of Microfinance Institutions in Zambia

Author

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  • Christopher Ngolwe Kambole
  • Abdul Latif Alhassan

    (Graduate School of Business, University of Cape Town)

Abstract

This paper examined the non-linear relationship between interest rate and operational sustainability of Microfinance Institutions (MFIs) in Zambia during a period of interest rate cap. Using aggregate quarterly financial statements data from March 2006 to December 2017, the Autoregressive Distributed Lags technique was employed to examine cointegration and adjustments to long-run equilibrium properties of the data. The results suggest a downward trend for yield on gross portfolio while lowest operational self-sustainability was recorded during the interest rate cap period. Overall, the paper documented evidence that MFIs in Zambia are operationally sustainable. The results also show an inverted U-shaped relationship between interest rate and operational sustainability in the long-run. This suggests the existence of a threshold interest rate beyond which it induces decline in sustainability of MFIs. The results of this study call for policy makers to avoid imposing interest rate ceilings in order to enable MFIs generate adequate revenue to cover their costs but promote alternative measures to stimulate lower interest rates.

Suggested Citation

  • Christopher Ngolwe Kambole & Abdul Latif Alhassan, 2018. "Interest Rate (Caps) and Sustainability of Microfinance Institutions in Zambia," The African Finance Journal, Africagrowth Institute, vol. 20(2), pages 66-90.
    • Handle: RePEc:afj:journl:v:20:y:2018:i:2:p:66-90
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    Keywords

    Microfinance Institutions; Interest Rate Ceiling; Operational Sustainability; Zambia;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
    • N27 - Economic History - - Financial Markets and Institutions - - - Africa; Oceania

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