Effects of Microfinance Interest Rates on the Performance of Small-Scale Enterprises in Moshi Municipality, Tanzania
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Abstract
Microfinance has emerged as a potent tool to reduce poverty and promote economic empowerment, especially in developing nations, by providing loans with lower interest rates. This study investigated the effects of microfinance interest rates on the performance of Small-Scale Enterprises (SSEs) in Moshi Municipality, Tanzania. The study was grounded by Wicksell's Natural Rate of Interest theory, which suggests an equilibrium interest rate balances savings and investment in an economy. A concurrent research design was used under a mixed research approach. The target population was 5,570 SSEs, and a sample size of 190 respondents was obtained using a sample size calculator. Data was collected through structured questionnaires and key informant interviews. The validity of the research instruments was conducted through face and content validity. For reliability, a Cronbach's alpha of 0.83 correlation coefficient was obtained. Descriptive and inferential statistics, including regression analysis and correlation, were used for the data analysis. Quantitative data were analyzed using SPSS, descriptive statistics, and inferential statistics, which included regression and correlation. Meanwhile, qualitative data was analyzed using contextual analysis. Ethical guidelines were adhered to throughout the study, including ensuring privacy, protection from harm, informed consent, and adhering to research guidelines. The study found that high interest rates negatively affected SSE's performance, with a significant effect on the microfinance institution's interest rates on SSE's performance at a p-value of less than 0.05. The study concluded that microfinance interest rates affect the performance of SSEs in Moshi Municipality. Furthermore, business owners increased prices and faced obstacles in job creation due to MFI interest rates, which increased costs, reduced profitability, and affected their ability to pay loans. In addition, the loan interest rate was statistically significant to SSE performances. The study recommended that policymakers and microfinance institutions review and potentially reduce interest rates to alleviate the financial burden of SSEs, promote business growth, and enhance profitability. Microfinance institutions should also prioritize transparent communication of interest rates and loan terms while offering flexible loan products.
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