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THE EFFECT OF INTEREST RATES ON PROFITABILITY OF SMALL AND

MEDIUM ENTERPRISES

A CASE STUDY OF KAWAALA II SACCO, KASUBI BRANCH

BY

MATEEKA HAMIDU

07/U/10189/EXT

SUPERVISED BY

DR. KAMUKAMA NIXON

A RESEARCH REPORT SUBMITTED IN PARTIAL FULFILLMENT OF

THE REQUIREMENT FOR THE AWARD OF DEGREE OF COMMERCE OF

MAKERERE UNIVERSITY

JUNE, 2011

i

DECLARATION

I Mateeka Hamidu, declare that this research report is my own original work and has never

been presented to any institution/ university for award of a degree.

Signature,

………………………….. Date:………………………………

MATEEKA HAMIDU

07/U/10189/EXT

Researcher

i

APPROVAL

This is to certify that Mateeka Hamidu carried out a research study on the effect of interest t

rates on profitability of small and medium enterprises. This research report has been under my

supervision and his work is ready for submission to Makerere University.

Signature,

……………………………. Date:………………………………

DR. KAMUKAMA NIXON

Supervisor

ii

DEDICATION

This work is dedicated to the Almighty Allah the creator who has been my strength, trust and

hope through out this course, my parents, uncles, aunts, brothers, sisters, lecturers, my fellow

students, well wishers who have laid for me an academic foundation that has led me to this

level and finally to all my friends for their motivation and developmental ideas.

iii

ACKNOWLEDGEMENT

First and foremost I thank the Almighty Allah for his love and care without his grace I would

not have completed this course.

My special thanks go to my supervisor Dr. Kamukama Nixon for his guidance and advice on

all the time I approached him. I’m so grateful for his help and encouragement.

I also extent sincere thanks to all my lecturers who contributed to the accomplishment of this

report, and the SMEs owners and managers who took part in this study, and I thank them for

their courage, commitment and pioneering spirit.

Finally, I wish to thank my beloved mother late Nabutono Juliet, my father Mr. Bagada

Hassan, my brothers Dr. Tinkason Ahmed, Mwesigwa Rashid, Tumwiine Ismail, Kwesiga

Ali, Ssentume Joseph, Bagada Ashiraf, Kyaligonza Magidu, Hakim, Mazinga Norbert, Batika

Ibrahim; my uncles; my sisters Karungi Sarah, Rinet M, Mbabazi Faridah, Kabayaga Grace,

Jamilah, Nyangoma Ziyadah, Kusiima Rehema; friends Kabasindi Moreen, Patrick, Ssetuma

Charles, Innocent, Ayesiga Augustine, Mwebesa Emmanuel, Morris, and my course-mates for

their financial and non financial support rendered to me and my friends.

iv

TABLE OF CONTENTS

DECLARATION........................................................................................................................i

APPROVAL..............................................................................................................................ii

DEDICATION.........................................................................................................................iii

ACKNOWLEDGEMENT.......................................................................................................iv

TABLE OF CONTENTS..........................................................................................................v

LIST OF TABLES....................................................................................................................x

LIST OF FIGURES.................................................................................................................xi

LIST OF ABBREVIATIONS................................................................................................xii

ABSTRACT............................................................................................................................xiii

CHAPTER ONE.......................................................................................................................1

1.0 Introduction.........................................................................................................................1

1.1 Background to the study.....................................................................................................1

1.2 Problem Statement..............................................................................................................5

1.3 Purpose of the study............................................................................................................5

1.4 Objectives of the study........................................................................................................6

1.5 Research questions..............................................................................................................6

1.6.0 Scope of the study.............................................................................................................6

v

1.6.1 Study scope.......................................................................................................................6

1.6.2 Time Scope........................................................................................................................6

1.6.3 Geographical study..........................................................................................................7

1.7 Significance of the study.....................................................................................................7

CHAPTER TWO: LITERATURE REVIEW........................................................................8

2.0 Introduction.........................................................................................................................8

2.1.0 Interest Rates....................................................................................................................8

2.1.1 Definition of interest rates...............................................................................................8

2.1.2 Determinants of general structure of interest rates....................................................10

2.1.3 Types of interest rates....................................................................................................11

2.1.4 Theory of term structure of interest rates...................................................................11

2.1.5 How do interest rates change........................................................................................12

2.1.6 Role of interest rates in an economy.............................................................................13

2.1.7.0 Schools of thought regarding the interest rates........................................................13

2.1.7.1 Keynesian School of Thought.....................................................................................13

2.1.7.2 Classical School of Thought.......................................................................................14

2.1.7.3 Fisher’s Theory of Interest Rate................................................................................15

2.1.8.0 Comparison between the Keynesian and Classical School of Thought..................15

2.1.9.0 Reasons why interest rates change............................................................................16

2.1.10 Reasons why interest rates have remained high in Uganda.....................................16vi

2.1.11 Effects of high interest rates in the economy.............................................................17

2.1.12 Decisive measures taken by government to solve the problems of interest rates...18

2.2.0 Profitability of Small and Medium Enterprises..........................................................18

2.2.1 Definition of profitability...............................................................................................18

2.2.2 Factors affecting the level of profitability of the company.........................................20

2.2.3 Theories of profits..........................................................................................................20

2.2.3.1 Professor JB. Clark’s Dynamic Theory (1891)........................................................21

2.2.3.2 Frank Knight’s theory (1957)....................................................................................21

2.2.3.3 Schumpeter Theory of Profits (1984)........................................................................21

2.2.3.4 Accountants Profits.....................................................................................................22

2.2.3.5 Monopoly Profit..........................................................................................................22

2.2.3.6 Gross Profit Margin (GPM).......................................................................................22

2.2.3.7 Net Profit Margin (NPM)...........................................................................................22

2.2.3.8 Operating Profit Margin............................................................................................23

2.2.3.9 Return on Capital Employed (ROCE)......................................................................23

2.2.3.10 Profit volume ratio....................................................................................................23

2.2.4.0 Reasons why profits matter in business....................................................................24

2.2.5.0 General Characteristics of Small and Medium Enterprises (SMEs).....................24

2.2.5.1 Challenges facing Small and Medium Enterprises (SMEs)....................................25

2.2.5.2 Challenges for SMEs in improving their creditworthiness.....................................27

2.3.0 Relationship between interest rates and profitability of SMEs.................................28vii

2.4.0 Conclusion.......................................................................................................................29

CHAPTER THREE: METHODOLOGY.............................................................................30

3.0 Introduction.......................................................................................................................30

3.1.0 Research Design.............................................................................................................30

3.2.0 Study Population............................................................................................................30

3.3.0 Sampling Design.............................................................................................................30

3.3.1 Sampling method............................................................................................................30

3.3.2 Sample size......................................................................................................................31

3.4.0 Sources of Data...............................................................................................................32

3.4.1 Primary source...............................................................................................................32

3.4.2 Secondary sources..........................................................................................................32

3.5.0 Data collection methods.................................................................................................32

3.6.0 Data Processing, Analysis and Presentation................................................................33

3.6.1 Data Processing..............................................................................................................33

3.6.2 Data Analysis..................................................................................................................33

3.6.2 Data Presentation...........................................................................................................33

3.7 Problems encountered by the researcher........................................................................34

CHAPTER FOUR...................................................................................................................35

DATA PRESENTATION, ANALYSIS AND INTERPRETATION OF FINDINGS......35

4.0 Introduction.......................................................................................................................35viii

SECTION A: Findings on General Characteristics of Respondents................................35

SECTION B: Findings on the Interest Rate........................................................................37

4.2.1 The interest rate charged on Small and Medium Enterprises...................................38

SECTION C: Findings on the Profitability of SMEs in Kasubi.........................................43

SECTION D: Findings on the Relationship between the Interest Rate and Profitability

...................................................................................................................................................50

CHAPTER FIVE.....................................................................................................................56

SUMMARY OF FINDINGS, RECOMMENDATIONS AND CONCLUSIONS.............56

5.0 Introduction.......................................................................................................................56

5.1.0 Summary of findings......................................................................................................56

5.1.1 Summary findings on interest rates charged on SMEs at Kawaala II SACCO.......57

5.1.2 Summary findings on the profitability of SMEs in Kasubi........................................57

5.1.3 Summary findings on the relationship between interest rate and profitability of

SMEs........................................................................................................................................57

5.2.0 Recommendations..........................................................................................................58

5.2.1 Recommendations on interest rates..............................................................................58

5.2.2 Recommendations on the profitability of Small and Medium Enterprises..............58

5.2.3 Recommendations on the relationship between interest rates and profitability of

SMEs........................................................................................................................................59

5.3 Conclusions........................................................................................................................60

5.4 Areas of further research.................................................................................................60

REFERENCES........................................................................................................................61ix

APPENDIX A: QUESTIONNAIRE FOR STAFF...............................................................64

APPENDIX B: INTERVIEW GUIDE FOR SMALL AND MEDIUM ENTERPRISES 69

APPENDIX C: INTRODUCTORY LETTER.....................................................................73

LIST OF TABLES

Table 1: Showing the trend of profitability levels in Kawaala II SACCO.................................5

Table 2: Showing interest rates charged on different types of loans at Kawaala II SACCO.....9

Table 3: Showing the number and type of respondents............................................................32

Table 4: Showing the gender of respondents............................................................................35

Table 5: Showing the marital status of the respondents...........................................................36

Table 6: Showing the respondents’ level of education.............................................................37

Table 7: Showing the factors considered before setting the rate of interest for a customer.....38

Table 8: Showing whether the staff of the SACCO expects the interest rate to change...........39

Table 9: Showing how the rate of interest is expected to change.............................................39

Table 10: Showing whether complaints are received about interest rates from their clients. . .41

Table 11: Showing the kind of complaints received on interest rates from their customers....41

Table 12: Showing how the interest rate is charged at Kawaala II SACCO............................42

Table 13: Showing the period spent in business.......................................................................43

Table 14: Showing whether the books of accounts are usually kept for records.....................44

Table 15: Showing profitability is measured by comparing sales turnover and total costs......46

Table 16: Showing whether profits are always measured........................................................47

Table 17: Showing whether the firms (businesses) have been registering profits...................49

Table 18: Showing whether the high interest rate is the root cause for declining profits.........51

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Table 19: Showing whether the SMEs profits have been declining due to high interest rates.52

Table 20: Showing the extent the rate of interest affect the profitability of businesses...........53

Table 21: Showing Pearson Correlation Coefficient between Interest Rates and Profitability54

LIST OF FIGURES

Figure 1: Showing respondents’ expectation(s) on interest rates of Kawaala II SACCO.......40

Figure 2: Showing the kind of complaints received on interest rates from customer...............42

Figure 3: Showing the period spent in business........................................................................44

Figure 4: Showing whether the books of accounts are usually kept for records......................45

Figure 5: Showing profitability is measured by comparing the sales turnover and total costs.47

Figure 6: Showing whether profits are always measured.........................................................48

Figure 7: Showing whether the firms have been registering profits.........................................50

Figure 8: Showing whether the high interest rate is the root cause for declining profits.........52

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LIST OF ABBREVIATIONS

% Percent

& And

/ Divide sign

ARM Adjustable Rate Mortgage

FC Fixed Costs

Freq Frequency

GDP Gross Domestic Product

r Pearson Correlation Coefficient

SACCO Savings and Credit Cooperative Society

SME Small and Medium Enterprise

SMEs Small and Medium Enterprises

SPSS Statistical Package for Social Sciences

TR Total Revenue

VC Variable Costs

ι Nominal Interest Rate

xii

π Profit

Π Rate of Inflation

ABSTRACT

The major purpose of this study was to establish the relationship between interest rates

offered to customers by credit institutions and profitability of Small and Medium Enterprises.

The study was guided by the following objectives; to find out the interest rate charged on

SMEs at Kawaala II SACCO, to find out the profitability of Small and Medium Enterprises in

Kasubi, and to establish the relationship between the interest rate and profitability of SMEs.

The researcher used descriptive research design. The study population comprised of 100

respondents. Purposive random sampling was used to select the respondents from different

departments (small and medium business enterprises) and staff from Kawaala II SACCO. The

sample size constituted of 41 respondents that’s staff from the SACCO (6), small (25) and

medium (10) business enterprises respectively. The researcher used both quantitative and

qualitative data based on primary and secondary sources. Data was collected from different

sources by use of self administered questionnaires and face to face interview guide. The data

was later on analyzed using Statistical Package for Social Sciences (SPSS) and the findings

were presented in tables, charts and graphs for clear analysis and interpretation.

The findings (results) indicated that the average interest rate charged by Kawaala II SACCO

on SMEs ranges between 27% - 36% per annum (Annual Management Report, 2009/10),

most of the businesses (firms) weren’t registering profits (figure 7) and finally, there was a

xiii

very strong relationship between interest rate and profitability of SMEs at r = -0.702 (table

21). This analysis demonstrated that the owner’s contribution to capital to a large extent

determines the weight which the lending institutions attach to granting funds (loans) to SMEs.

The researcher recommended among others that; Kawaala II SACCO should reduce the

interest rate charged on SMEs, the government should set regulations regarding the interest

rate charged, and finally the business owners and managers should work together with tax

authorities in assessing the tax liability, and should merge so as to enjoy economies of scale.

The researcher concluded that besides interest rates, the profits of most businesses in Kasubi

are affected by other factors such as shift competition, high transport costs, high inflation

rates, faulty products, poor financial management, high taxes levied upon them, power

shortages and load-shedding, among others.

xiv

CHAPTER ONE

1.0 Introduction

This chapter includes the following; background to the study, problem statement, purpose of

the study, objectives of the study, research questions, scope of the study which includes the

study scope, time scope and geographical study, and significance of the study.

1.1 Background to the study

According to Keynes (1936), defines interest rate as being a reward for parting with liquidity,

as a measure of the willingness of those who posses money to part with their liquidity control

over it and to him the rate of interest isn’t the “price” which brings into equilibrium the

demand for resources to invest with the readiness to abstain from present consumption. While

the Classical theory regards the interest rate as a factor which brings the demand for

investment and the willingness to save into equilibrium with another, and since investment

represents the demand for investable resources, saving represents the supply, whilst the rate of

interest is the “price” of investment of investable resources at which the two are equated.

Amadeo (2010) said that high interest rates are important because they control the flow of

money in the economy, provide income to lenders, curb inflation, but also slow down the

economy while low interest rates stimulate the economy but could lead to inflation.

Kamulindwa (2005) argued that with liberation of interest rates by the Ugandan government

in November 1992, the level of interest rates is determined by the market forces of demand

and supply, and banks are expected to compete on the interest rates they charge on their loans.

1

However, “real” interest rates have remained high and only the “nominal” interest rates have

reduced significantly.

Interest rate is the fee the borrower pays to the lender in exchange for money. It’s generally

set depending on the risk to the lender (Fontelera, 2007). According to Funkor (2000), the

determinants of interest rates include; inflation rates, exchange rates, credit risk, cost of

intermediation, Treasury bill rates, bank rates, and quantity of money. In U.S, the factors that

influence interest rates are; Federal Reserve, the bond market, and the general economy.

Profitability refers to the amount of profit received relative to the amount invested, often

measured by the rate of profit or the rate of return on investment (Mbogha and Pandey, 2010).

As defined by Pandey (1995), profitability is a function of a variety of factors and can be

affected by the selling price, and this is directly related to profit in that the higher the selling

price given other costs of production are constant, the higher the profits. The determinants of

profitability include; strategic location, sales volume, business size, reputation, amount of

total costs, and competition. Therefore profitability is the ability for a business to earn a return

on investment, proportion of assets used or of sales. In order to determine the level of

profitability, businesses use ratio analysis, cost-benefit analysis, capital budgeting, and

working capital analysis. Pandey (2001) further said that profitability is the measurement of

the overall performance of and effectiveness of the firm. It represents an increase in cash-flow

plus changes in the assets value.

As stated by Keegan (1995), profitability is a critical means to the end of the stakeholder(s).

It’s measured by the degree of cost reduction.

2

According to Kasekende and Opndo (2003), Small and Medium Enterprises (SMEs) are

widely defined in terms of their characteristics which include; the size of capital investment,

the number of employees, the turnover, the management style, the location, and the market

share. The Ugandan government classifies SMEs as business firms employing 5 –50 people

(small scale), and 51-500 people (medium scale) (Bank of Uganda working paper & Uganda

Bureau of Statistics, 2003). It’s estimated that SMEs in Uganda constitute 90% of the private

sector, with 80% being located in urban areas, and are largely involved in trade, agro-

processing, and small manufacturing (Kigozi, 2006). SMEs contribute approximately 75% of

the gross domestic product (GDP) and employ approximately 2.5 million people, signifying

their importance in the economic development of Uganda. SMEs contribute to the GDP,

generate employment, and provide consumer goods, intermediate goods and foodstuffs. For

SMEs to grow and make contributions to the economy which is expected of them, they need

to be performing well in their operations and therefore need to be profitable. While SMEs are

increasely seen as playing a strategic role in the economic growth and development, have

operational and structural challenges, they suffer from liquidity problems arising from late

payments by debtors. Further more, they usually experience difficulties in accessing loans

from the banking sector and other financial intermediaries to finance working capital and to

provide credit for a smooth transition through liquidity cycles.

Shivani & Anita (2007) asserts that 30% to 40% of the SMEs funding comes from

borrowings, therefore the increase in interest rates is bound to affect their profit margins by

about 2% to 3% as noted industry experts. SMEs fear the repeated hike in prime lending rate

3

(PLR) which is likely to impact on their bottom line. Overall, businesses invest less when

interest rates increase since the cost of borrowing money will have increased.

The International Labour Organization (ILO) gives a broad meaning of SMEs which includes

modern industrial firms employing up to 50 employees, family units employing 3 to 4 people,

cottage industries, group companies and small self-employed firms, firms in the formal sector

of the economy (Lassort & Clavier, 1989). In Mauritius, SMEs are defined as manufacturing

enterprises which use production equipments with an aggregate cash-inflow not exceeding ten

million rupees.

Kawaala II SACCO was established in 2006. It’s located along Kasubi- Kawaala road in

Rubaga division, Kampala district. The products and services offered at the SACCO are;

business loans, personal loans, salary loans, group loans, and development loans; current

savings account, savings account, children account, school fees account, and group saving

account. It has different departments like human resource, finance and accounting, and stores

and materials department among others. With the exception of development and salary loans,

which each of them attracts an interest rate of 27% per annum since from the year 2008-2010;

the other types of loans (mentioned above) are offered to clients each at a rate of 36% per

annum (Annual Management Report, 2009/10).

4

1.2 Problem Statement

Overtime small and medium business enterprises have been registering losses and even some

have gone out of business as allegedly said by the majority Small and Medium Enterprise

operators and this can be explained by the trend of profitability levels of Kawaala II SACCO

which is becoming worse as years go by as shown below.

Table 1: Showing the trend of profitability levels in Kawaala II SACCO

Financial year Expected profits Actual profits

2008 18 millions 17.5 millions

2009 20.5 millions 18.2 millions

2010 23 millions 18.6 millions

Source: Secondary Data (Annual Management Report, 2009/10).

The above problem can be attributed to the high interest rates charged on SMEs which is on

average ranging from 27% - 36% annually (Annual Management Report 2009/10). Therefore,

it’s upon such adverse differences between expected profits and actual profits (as shown in

the table 1 above) that prompted the researcher to undertake a study in order to establish the

relationship between the interest rates and profitability of Kawaala II SACCO.

1.3 Purpose of the study

The study aimed at establishing the relationship between interest rates offered to customers by

credit institutions and profitability of SMEs.

5

1.4 Objectives of the study

To find out the interest rate charged on SMEs at Kawaala II SACCO.

To find out the profitability of small and medium enterprises in Kasubi.

To establish the relationship between the interest rate and profitability of Small and

Medium Enterprises.

1.5 Research questions

What’s the interest rate charged on SMEs at Kawaala II SACCO?

What’s the profitability of SMEs in Kasubi?

Is there any relationship between the interest rate and profitability of Small and

Medium Enterprises?

1.6.0 Scope of the study

1.6.1 Study scope

The study focused on the extent to which interest rate (mainly the prime lending rate) and the

level of profitability of Kawaala II SACCO in which the profitability level is measured by

comparing the sales-turnover and total costs incurred in different periods.

1.6.2 Time Scope

The study covered a period of three financial years that’s from 2008 to 2010. This period was

considered appropriate for the study because Kawaala II SACCO was experiencing declining

6

trends of the profitability levels as a result of high interest rates charged on its clients/

customers.

1.6.3 Geographical study

The study was conducted at Kawaala II Saving and Credit Co-operative Society (SACCO),

Kasubi branch covering the SMEs in Kasubi – Kawaala road.

1.7 Significance of the study

The findings of the study will specifically help the management of Kawaala II

SACCO to revisit their lending rates and credit policies.

The study will also help the policy makers to formulate ways on how to regulate

interest rates in the economy.

The study will also act as a basis for further research to other researchers in the area of

financial lending institutions.

The study will help the researcher to be awarded the degree of bachelor of commerce

of Makerere University.

7

CHAPTER TWO

LITERATURE REVIEW

2.0 Introduction

This chapter of the study reviews the existing literature on interest rates and profitability of

Small and Medium Enterprises (SMEs).

2.1.0 Interest Rates

2.1.1 Definition of interest rates

As stated by Amonoo et al (2003), interest rate is the premium received by the lender after a

stated period of time. From the borrowers’ point of view, it’s the cost of capital at the time of

obtaining a loan.

As defined by Keynes (1936), interest rate at any time, is a reward for parting with liquidity,

as a measure of the willingness of those who posses money to part with their liquidity control

over it, and to him the rate of interest isn’t the “price” which brings into equilibrium the

demand for resources to invest with the readiness to abstain from present consumption, while

the Classical regard interest rate as a factor which brings the demand for investment and the

willingness to save into equilibrium with another, and since investment represents the demand

for investable resources, saving represents the supply, whilst the rate of interest is the “price”

of investable resources at which the two equated.

8

Wright & Vincenzo (2009) also regards interest rate as the opportunity cost of lending money

or the price of borrowing it and can be thought of as the payment a borrower needs to induce

him, her or it to lend. Interest rate is the cost of borrowing (Hinton & Francis, 2001).

According to Meyers (2009), interest rate is the price paid for the use of loan-able funds.

Different rates of interest are charged for the same sum of loan for the same period of time

because of the fact that some loans involve more risks, more inconvenience, and more

incidental works.

Basing on the above definitions, the researcher asserts that interest rate is a rate which is

charged or paid for the use of money. It’s often expressed as an annual percentage of the

principal amount. It’s computed by dividing the amount of interest by the principal amount.

Table 2: Showing interest rates charged on different types of loans at Kawaala II SACCO

Years

Type of loans

2008 – 2010

Per month Per Annum

Business loan 3% 36%

Personal loan 3% 36%

Salary loan 2.25% 27%

Group loan 3% 36%

Development loan 2.25% 27%

Source: Secondary Data (Annual Management Report, 2009/10).

9

2.1.2 Determinants of general structure of interest rates

According to Lagwankar (2009), the determinants of the general structure of interest rates are;

economic conditions, monetary policy, default risk, marketability or liquidity, tax status, and

credit rating.

While according to Cottareli (1995), the determinants of lending rates are divided into micro

and macroeconomic factors such as; money markets, discount rates and the proportion of bad

loans in a bank portfolio, the analysis of microeconomic level of individual or a particular

group of banks, among others. He further said that the behavior of lending rates varies from

bank to bank across different geographical areas.

As observed by Funkor (2000), the determinants of interest rates are; inflation rate, cost of

intermediation, credit risk, exchange rates, bank rate, and Treasury bill rates. The average

Ugandan business operators in private sector view interest rate as a measure of the price paid

by a borrower to a lender for the use of financial resources for a time interval.

Kamulindwa (2005) said that in a free market economy, interest rates are determined by the

forces of demand and supply. In theory, interest rates on deposits are determined by the

opportunity cost of money while the lending rates are determined by the opportunity cost of

capital.

10

2.1.3 Types of interest rates

Lagwankar (2009) said that there are two types of interest rates as explained below;

i. Pure interest. This is the payment for the use of money as capital when there’s neither

inconvenience risk nor any other management problem.

ii. Gross interest. This is the gross payment which the lender gets from the borrower. It

includes not only net interest but also payment for other elements such as; payment for

risk, payment for inconvenience, payment for management, payment for exclusive use

of money, among others.

2.1.4 Theory of term structure of interest rates

According to Lagwankar (2009), they include the following;

Liquidity preference theory. According to this theory, the lenders prefer short-term

securities over long-term securities, unless the yield on the long-term securities is high

enough to compensate for the greater interest rate risk.

Expectations theory. It states that investors’ expectation alone shape the yield curve.

Its validity depends on the assumption that investors are indifferent to any variation in

risk association with different maturities.

Market segmentation. According to this, interest rates for various maturities are

determined by demand and supply conditions in the relevant segments of the market.

The segmentation theory holds that financial markets are divided into different

11

maturity wise segments, and the rate of interest in each of this segment is determined

by its supply of and demand for funds.

2.1.5 How do interest rates change

According to Carty (2010), interest rates change depending on the type of interest rate as

shown below;

The Federal Funds and Discount Rate. The Federal Reserve Board controls the

movement of the Federal funds Rate and Discount Rate. The Federal Reserve Board

changes these interest rates based on different economic conditions such as; rising

inflation, and monetary policy issues like the value of the dollar against foreign

currencies.

Prime interest rate. Individual banks control the prime interest rate. These interest

rates often vary across the country. Banks generally increase or decrease the prime

rate based on the movement of the Federal Funds Rate.

Fixed Rate Credit Cards. The interest on fixed rate credit cards changes at the

discretion of the card issuer. The major reasons for interest rate change on fixed rate

cards are; missed payments or balances at or near the credit card unit.

Variable Rate Credit Cards. The interest rate on variable credit cards changes with the

movement of the Federal Funds Rate. Generally, if the Federal Funds Rate goes up,

the credit card interest rate also increases, and if it goes down, the credit card interest

rate decreases.

12

Adjustable Rate Mortgages. The interest rates for Adjustable Rate Mortgages (ARMs)

change at the discretion of the lender. Lenders peg the interest of ARMs against the

movement of indices such as; London Inter-bank Offered Rate (LIBOR). Even if these

rates change, the lender can opt not to change the interest on an ARM.

2.1.6 Role of interest rates in an economy

Ayesiga (2010) found out that interest rates are important because they control the flow of

money in an economy, provide income to lenders that’s high interest rates curb inflation, but

also slow down the economy while low interest rates stimulate the economy but may lead to

inflation.

Wright (2009) found out that interest rates and price of borrowing money are crucial

determinants of the assets especially financial instruments like stocks and bonds, and general

macroeconomic conditions including economic growth.

2.1.7.0 Schools of thought regarding the interest rates

2.1.7.1 Keynesian School of Thought

Keynes (1936) believed that the quantity of money plays a key role in determining the rate of

interest. He viewed the equilibrium interest rate as that rate which equates the supply of

money with the demand for money. In a more fundamental sense, the equilibrium rate of

interest is determined by factors affecting the supply of money and money demand. The

modern view of interest rates is based on the imperfect information as explained by (Hoff and

Stieglitz, 1990). He (Keynes) asserted that the interest rates definitely influences marginal

13

propensity to save since savings are linked to the income level, and hence he concluded that

interest rate should be at a point where the demand curve for capital at different interest rates

intersects the savings curve at a fixed income level. He further argued that the interest rates

are set by the choice of portfolio assets. The rate of interest is determined by transactions

between those (selling assets) who feel that asset’s prices are more likely to fall and those

(buying assets) who feel that asset’s prices are likely to rise, and this is identical with the

speculation that interest rates may fall or rise. In addition, he believed that by adjusting the

relative money volume and assets (bonds) in circulation, the authorities could manipulate the

money price and yield of assets. Since the rates could be set by altering the weight of opinion

as whether assets (bonds) prices are more likely to fall or rise. The object is that his analysis

was deficient because it didn’t show how interest rates would be determined in the absence or

uniformity of specific thought as to future assets (bonds) prices was largely ignored.

2.1.7.2 Classical School of Thought

According to Classical school, the rate of interest is the main determinant of savings and

investment. This school asserted that aggregate investment is inversely related to the interest

rate. This relationship has been observed to be a weak one; that’s, investment tends to be

fairly interest inelastic because it’s influenced by businessmen’s expectations, and the yields

are normally estimated with a particular range, such as 10% to 15%. So if a small increase in

the interest rate occurs, it will not disturb the long-run expansion of the enterprise.

The Neo-classical school maintains that the interest rate is determined by supply (savings) and

demand (marginal efficiency of capital). Autonomous increase in savings reduces the interest

14

rate and the additional cost of capital. Because additional investment contributes to

diminishing returns, this will cause a “switch” from less capital intensive to more capital

intensive methods of production. This phenomenon of re-switching has led to the two

Cambridge’s controversy of capital theory (Hardwick & Lang-mead, 1990).

2.1.7.3 Fisher’s Theory of Interest Rate

Fisher (1930) argued that interest rate equates the nominal interest rate (ι) to the rate of

inflation (Π) and the “real” interest rate (r). The real interest rate r is the interest rate after

adjustment for inflation. It’s the rate that lenders are willing to loan-out their funds. The

relation Fisher postulated between these three rates that’s; (1+i) = (1+r) (1+ Π) = 1 + r + rΠ.

This is equivalent to: i + Π (1 + r). For instance, if Π increases by 1%, the nominal interest

rate increases by 1%. This means that if r and Π are given, then i can be computed. While, if i

and Π are known then r can be calculated and the relationship is: 1+ r = (1+i)/ (1+ Π) or r = (i

- Π)/ (1+ Π). Therefore when Π is small, then r is approximately equal to i –Π, but in

situations involving a high rate of inflation, the more accurate relationship must be taken into

consideration.

2.1.8.0 Comparison between the Keynesian and Classical School of Thought

To Keynes, the rate of interest is what brings savings and investment to be equal whereas the

Classical view means that investment requires a prior pool of savings; for Keynes investment

creates the savings by raising incomes.

15

With the Classical, a high interest rate induces savings but restrains investment while for

Keynes; a high interest rate may reduce savings since it restrains investment.

2.1.9.0 Reasons why interest rates change

According to Sullivan & Sheffrin (2005), the reasons why interest rates change are;

Inflationary expectations, Liquidity preference, deferred consumption, Taxes, Risks of

investment, Alternative investments, Supply and demand for funds, and Political short-term

gain.

2.1.10 Reasons why interest rates have remained high in Uganda

According to Business reviews (2009), the Structural Adjustment Programme (SAP) failure to

address other important aspects of economic development has kept the price of money high

due to;

Continual mismatch between demand deposits and long-term investment requirements

for Sub-Saharan African economies.

Existence of large non-performing asset portfolio in many banks. These loans which

are largely politically motivated, has weakened the core and total capital position of

the banks and associated provisions could only lead to an upward spiral of interest

rates.

The poor fiscal discipline exhibited by most Sub-Saharan governments in failing to

reduce their public sector borrowing requirements, Sub-Saharan governments have set

themselves up as an alternative and more attractive borrowers for commercial banks

16

and as a result “Crowding-out” the private sector from money markets using short-

term instruments such as Treasury bills.

2.1.11 Effects of high interest rates in the economy

According to Loans (2010), the effects of high interest rates are; it increases the cost of

borrowing, it increases mortgage interest payments, it increases incentive to save rather than

spending, it also affects both consumers and firms, increase the value of a dollar due to hot

money flows, Government debt interest payments increase, and it reduces both consumer and

business confidence.

Whereas, according to Keynesian and Classical schools of thought, high interest rates

negatively affect the demand for credit because only limited borrowers with high risky

projects may have their demand satisfied (Stieglitz & Weiss, 1981, Besley, 1994). They

argued that high interest rate encourages adverse selection of loan seekers.

As observed by Cossart (2003), when interest rates increase, borrowing becomes more

expensive, dampening consumer demand for mortgages and other loan products and

negatively affecting residential real estate prices. In addition, rising interest rates also leads to

increased default rates, as holders of adjustable rate debt find themselves faced with higher

payments.

17

2.1.12 Decisive measures taken by government to solve the problems of interest rates

According to the Budget Speech financial year 2007/8, although high lending rates have

become a persistent problem, the government has taken some decisive measures as shown

below;

Government has increased the capitalization of Uganda Development Bank (UDB)

by shillings 20 billions in the 3 years. The lending rates at UDB are lower than those

of commercial banks and are intended to assist small and medium investors to access

medium long-term funds.

Government has committed itself to support “Bonabagagawale” programme, and

Saving and Credit Cooperative Societies (SACCO) in order to reduce their cost of

establishment so that they can lend at lower rates since they now have lower

overhead costs.

Finally, government has lifted the ban on entry into the commercial banking sector in

order to increase competition.

2.2.0 Profitability of Small and Medium Enterprises

2.2.1 Definition of profitability

Profitability is a basic yardstick which the success of a business can be measured. It’s what

remains after all costs of a business have been accounted for and it indicates how well the

business is performing.18

Profitability is a business entity’s ability to generate revenue in excess of the costs incurred in

producing those products. It refers to the amount of profit received in relation to the amount

invested, often measured by the profit or rate of return on investment (Pandey, 1995).

Business profitability is a justification of its good performance and loss is justification of poor

performance. In fact, profits of a business are the end result of operations and an indication of

its good performance (Griffith, 2001).

Masumeno (2001) asserts that the principle motivating factor for any business is profitability.

He noted that although profit maximization isn’t the only motive in business, it’s the most

important. Therefore, there should be adequate return on capital invested if any business is to

be considered good performing.

Herman-son (1987) defines profitability as an organization’s ability to generate income. It is

the ability to earn profits steadily over an extent of time (Stoner, 2006). Bagger (1967) also

defines profitability as an organization’s desired state where turnover is greater than input

costs. Profitability is indicated by the amount of sales revenue, cost control and pricing

decisions. Profit is generally making of gains in a business activity for the benefit of the

owners. The word profit comes from a Latin word which means to “progress”; accounting

profit is the difference between price and cost of bringing to the market whatever is produced.

Profit is also the difference between selling price and production costs incurred in the

production process of goods and services in an organization.

As stated by Alexander & Britton (1994), a profit is an unequivocal measure of operational

efficiency serving a common basis of comparison that can be applied to companies divisions

19

and products. They further assert that a profit is a reward for investment in the firm normally

inform of dividends or capital gains for stakeholders or owners.

Therefore table 1 above shows the trend of the profitability levels of Kawaala II SACCO as

an example of Small and Medium Enterprises (Annual Management Report, 2009/10) in

Kasubi.

2.2.2 Factors affecting the level of profitability of the company

According to Piana (2004) & Loans (2010), the factors affecting the level of profitability of

businesses include; Degree of competition, Nature of the market, the strength of demand, the

state of the economy, Advertising, Availability of substitutes, Cost structure and its general

elasticity of production level are thus relevant to profits, Rising prices of competitors, better

sales condition and skills, if the company is not dynamically efficient, then the costs increase

over time, Price discrimination, and Rising prices of competitors, better sales condition and

skills.

While as stated by Pandey (1995), the factors affecting the level of profitability of a company

are; strategic location, sales volume, business’s size, reputation, amount of total costs,

competition, among others. Variable costs are costs which changes with the increase in

production costs and is inversely related to profitability of a company.

2.2.3 Theories of profits

This is a set of principles and guidelines on which some analysis and assumptions are made in

order to arrive at plausible conclusions, as shown below;

20

2.2.3.1 Professor JB. Clark’s Dynamic Theory (1891)

According to this theory, profit is rebuilt as a regards for dynamic entrepreneurship.

Dynamism could involve harnessing for socio-political dynamics or changes associated with

business changes. Clark’s theory states that firms make profits in a dynamic world which is

characterized by change or increase in factors like production techniques, population, social

political changes, and capital.

As stated by him, entrepreneurs who take advantage of the changing conditions make profits,

and this profit is a reward for dynamic entrepreneurship and short-term phenomenon.

2.2.3.2 Frank Knight’s theory (1957)

This theory looks at the sources of profits as a return to uncertainty bearing, and Knight’s

made a distinction between risk and uncertainty and then determined two types of risks that’s;

calculable risk and non-calculable risk.

2.2.3.3 Schumpeter Theory of Profits (1984)

This theory states that a profit is a reward for innovation. It assumes a state of stationary or

static equilibrium and the situation of perfect competition, and at a point where total revenue

is equal to total costs, there is no profits made. To him, profit can be made by introducing

innovations in manufacturing techniques and methods of supplying the goods and services.

Innovations involves like; opening up of new markets, finding new sources of raw materials,

introducing new methods of production, introduction of new commodities and new quality

goods and services.

21

2.2.3.4 Accountants Profits

To an Accountant, profit represents the excess of revenue over all paid-out costs including

manufacturing and overhead expenses. Thus; Profit = TR – (FC + VC).

2.2.3.5 Monopoly Profit

Monopoly is a market structure where there’s a single seller of a commodity without close

substitutes. Monopoly profits may arise due to many factors like; economies of scale, sale

ownership of certain crucial raw materials, legal sanctions, among others.

2.2.3.6 Gross Profit Margin (GPM)

This ratio reflects the efficiency with which management produces each unit of a product. It

also indicates the average spread between the cost of sales and the sales revenue. It shows the

relationship between production costs and selling price. For instance, a high gross profit

margin relative to the industry average means that the firm is able to produce at a relatively

low cost and hence a sign of good management and the reverse is true for poor management

(Pandey, 2000). Thus; Gross Profit Margin = Gross Profit / Sales Revenue.

2.2.3.7 Net Profit Margin (NPM)

This ratio establishes the relationship between net profit and sales revenue and indicates

management’s efficiency in manufacturing, administering and selling the products. This ratio

is the overall measure of the firm’s ability to turn each rupee sales into net profits. Thus;

Net Profit Margin = Profit after Tax / Sales Revenue.

22

2.2.3.8 Operating Profit Margin

This ratio is a measure of overall operating efficiency, incorporating all ordinary expenses and

daily business activities. It also looks at Earnings before Interest and Taxes (EBIT). Thus;

EBIT = Operating Expenses / Sales.

2.2.3.9 Return on Capital Employed (ROCE)

This ratio represents earnings obtained before tax on the capital employed in the organization

(Callaghan, 1994). He stated that “to get a return on capital employed, the organization should

look at the profit margin of the business”.

2.2.3.10 Profit volume ratio

This ratio indicates the rate at which profit is being earned. For instance; a high profit volume

ratio indicates high profitability and a low ratio indicates low profitability in the business. The

profitability of different sections of the business such as sales areas, classes of customers,

product lines, methods of production, among others. In order to improve profit performance,

businesses have to be extremely cost conscious and improve their performance in cost,

through managers making continuous efforts to find out ways and means to control and

reduce costs (Arora, 1998).

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2.2.4.0 Reasons why profits matter in business

According to Payne (2010), profits matters in business as shown below;

- Profits allow for investment. When a company isn’t making money, it’s very difficult

for to invest in non-revenue producing projects that actually help customers.

- Profits ensure stability. Research has proved it that a company that makes profits is

stable, and can be able to pursue innovations and have time to ensure that their

strategies bear fruits.

2.2.5.0 General Characteristics of Small and Medium Enterprises (SMEs)

SMEs are considered to be a key driver of economic growth for many developing countries

and comprise over 90% of all businesses globally (Maurel, 2009; Krake, 2005). Hence SMEs

influence many government’s “economic and developmental strategies (Tang, 2007, NORAD

Report, 2002). Uganda is ranked as second highest in terms of business start-ups in a year but

with one of the highest business failure rate in the world (GEM Report, 2004). With a Gross

Domestic Product (GDP) contribution of 75%. Some of the challenges faced by SMEs in

Uganda are; low productivity and profitability, limited market competitiveness and low

survival (Kigozi & KPMK, 2009).

The economic activities undertaken by the SMEs are; food processing, wood work/ metal

work, electrical/ refrigeration, distilleries/ salt mining, dress-making, oil extraction/ soap

making, motor vehicle part sales, and wholesale and retail general merchandise.

24

According to literature, competitive advantage of SMEs include; high speed of decision

making, short-lines and flexibility, cost, price, specialized products, designs and service, and

personal attention to client needs (Bunnett & Smith, 2002) and small size as an advantage in

awarding contracts (Krake, 2005).

Hong & Jeong (2006) asserts that SMEs don’t have control or influence over the market and

hence they need to adapt a relative approach to market changes. Since SMEs rely on a limited

customer base, they are usually closer to the customers and have the possibility of developing

more potential relations with them.

2.2.5.1 Challenges facing Small and Medium Enterprises (SMEs)

Limited managerial training and experience. The typical owners or managers of small

businesses develop their own approaches to management through a process of trial and

error method, and this has made them to be more opportunistic than strategic in its

concepts (Hill, 1987).

Inadequate education and skill. Research show that majority of the SME operators

aren’t quite well equipped in terms of education and skill (King and McGrath, 2007).

Limited access to credit. This force many SME operators to rely on high cost short-

term finance. This has later on affected technology choice by limiting the number of

alternatives that can be considered (Wanjohi & Mugure, 2008). This can be justified

by national policy and regulatory environment through Structural Adjustment

Programmes (USAID, 1991).

25

Poor infrastructures. In Uganda, the provision of better infrastructures has lagged

being over years. There are poor roads and inadequate electricity supply and hence

Uganda still stands in need of better infrastructures (proceedings of National

Investment Conference, 2003).

Scanty market information. Despite the vast amount of trade-related information

available and the possibility of accessing national and international databases, many

small enterprises continue to rely heavily on private or even physical contacts for

market related information. This is due to inability to interpret the statistical data and

poor connectivity especially in rural areas (Muteti, 2005).

Business environment. Unpredicted government policies coupled with “grand

corruption”, high taxation rates, all continue to pose great threat, not only to the

sustainability of SMEs but also the Kenyan economy that is gaining momentum after

decades of wastage during KANU era.

Technological changes. This is due to the challenge of connecting indigenous small

enterprises with foreign investors and speeding up technology upgrading still persists

(Muteti, 2005). This has left mall small entrepreneurs unfamiliar with new digital

technology.

26

2.2.5.2 Challenges for SMEs in improving their creditworthiness

Kasekende and Opondo (2003) commented that even if with the support from government and

other agencies, SMEs in Uganda have to improve their creditworthiness through;

Improving on their operating efficiencies and capabilities since these impacts on

production costs and profits.

Improving on their financial records and accounting system. Proper records need to be

kept and maintained and the books of accounts have to be clear and should reflect a

realistic picture of their operations and financial conditions. A good system and books

of accounts aren’t only helpful to the banks, they are also crucial in managing and

monitoring business as well as guiding tax authorities.

Improving on their management systems and adopt modern management techniques if

they are to benefit from the opportunities offered by the informal sector.

Networking and building linkages with other entrepreneurs to acquire raw materials or

equipments that they need. The linkage can be an important market outlet, and hence

increasing on their creditworthiness in the eyes of banks.

The government enhancing on their competitiveness through revamping the banking

sector and National Agricultural Advisory Services (NAADS) programme to create a

thriving SME sector (Ladu, 2011).

Ensuring that entrepreneurial ideas are transformed into viable business ventures. A

prominent scholar (Mohammed) once said that “All people are entrepreneurs, but

27

many don’t have the opportunity to find out especially those who lack the courage to

take that first step” (Daily monitor, 2011).

Educating and training SME operators so as to be well informed in terms of skills and

management. Research show that most of those running SMEs should have at least

attained college education level (Wanjohi, 2008). Therefore such people are more

likely to be successful in the SME sector (King, 2002).

The problem of access to information solved dealt with through encouraging the

establishment of documentation centers and information networks to provide

information at an affordable price.

2.3.0 Relationship between interest rates and profitability of SMEs

Shivani (2007) found out that 30% to 40% of the SME funding come from borrowings,

therefore the increase in interest rates is bound to affect SME profit margins by about 2% to

3% as noted by industry expert. SMEs fear the repeated hike in prime lending rate which

impacts on their bottom-line. Overall business end-up investing less when interest rates

increases since the cost of borrowing money rises, and therefore this means that companies

(SMEs) often have to devote more resources which are part of profits to pay interest on their

existing debts, which ultimately lowers the amount available for investment and thus lowering

their potential growth for businesses in the near future.

Sanborn (2011) asserts that in business, interest rates and profits often have a negative

correlation. Low interest rates allow businesses to borrow money cheaply and this result in

them being able to fuel growth inexpensively and thus increasing profits.28

In relation to savings, he asserts that high interest rates make it more expensive to borrow

money since interest paid on savings also rises. Therefore, high interest rates are profitable for

individuals with lots of money in savings.

Green (2008) said that interest rates have a negative impact on companies that carry current

debt load because when interest rate rises, the cost of borrowing money also rises too and

ultimately, the company’s profitability and ability to growth also reduces.

As observed by Hummel (2011), when people lend money, they risk not getting it back and

they give up the ability to spend that money whenever they want; and thus in return for

lending, people expect to receive little extra when the borrowers returns the loan.

2.4.0 Conclusion

In conclusion, as observed by different authors, interest rates are inversely related to the

profitability of Small and Medium Enterprises (SMEs). Therefore the negative effect of

interest rates on profitability of businesses in all sectors is likely to force most of them to

close and those that remain open may continue scaling down their operations if the rate of

interest isn’t revised.

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CHAPTER THREE

METHODOLOGY

3.0 Introduction

This chapter shows the description of research design, study population, sampling design

which comprise of; the sampling method, and sample size, sources of data collection, data

collection methods, data processing, analysis, and presentation, and the problems encountered

by the researcher.

3.1.0 Research Design

The researcher used descriptive research design. This research design was used because the

study involved random sampling of different categories of business people at the same time so

as to describe the variables as they exist.

3.2.0 Study Population

The study population comprised of 100 respondents that’s, staff from Kawaala II SACCO in

the loans department, and Small and Medium business enterprises (SMEs) in Kasubi.

3.3.0 Sampling Design

3.3.1 Sampling method

The researcher used purposive random sampling method to select the respondents from

different departments (small and medium businesses) and staff from Kawaala II Saving and

30

Credit Cooperative Society (SACCO). This helped the researcher to deliberately pick

elements of the population that are relevant to the purpose of the study.

3.3.2 Sample size

Saunders, et al (1997) proposed the following formula for determining the sample size;

Sample size = P * Q * (Z/E) ^2.

Where,

P = Number of target population that conforms to the characteristics of the sample required.

Q = Number of target population that don’t conform to the characteristics of the sample

required.

Z = Confidence level required (for example, 95%).

E = Margin of error (for example, 5%).

Study population = 100 respondents

P = 87/100 = 0.87, Q = 13/100 = 0.13, Z = 0.95, E = 0.05

Sample size = 0.87 * 0.13 * (0.95/0.05)^2 = 40.8 ≈ 41 respondents.

Therefore, the researcher involved 41 respondents from Kasubi. The respondents included

were staff from Kawaala II SACCO in the loans department and owners of Small and

Medium Enterprises, considering time factor constraints among others.

31

Table 3: Showing the number and type of respondents

Category of respondents Number of respondents Percent (%)

Staff from Kawaala II SACCO 6 14.6

Small Business Enterprises 25 61.0

Medium Business Enterprises 10 24.4

Total 41 100

Source: Primary Data.

3.4.0 Sources of Data

3.4.1 Primary source

Data was collected from the respondents in the field, that’s staff from Kawaala II SACCO,

and Small and Medium Enterprises in Kasubi.

3.4.2 Secondary sources

The researcher collected secondary data from the available published records such as

textbooks, journals, magazines, manuals, internet and Makerere University library.

3.5.0 Data collection methods

The researcher used methods that yield maximum response and convenience to the

respondents and these included;

32

i) Questionnaires. The questionnaires were self administered as it helped to

give respondents freedom in answering the questions. This also helped the

researcher to obtain the needed data only.

ii) Face to face interviews. This method was suitable for the respondents’

conditions especially those who didn’t desire the self administered

questionnaires.

3.6.0 Data Processing, Analysis and Presentation

3.6.1 Data Processing

In this case, the researcher processed the data using special computer software called

Statistical Package for Social Sciences (SPSS), and it was also used when entering data in the

computer where it was sorted, cleaned and coded.

3.6.2 Data Analysis

The cleaned data was analyzed using Statistical Package for Social Sciences (SPSS), and it

was used to come up with frequencies and percentages and also make cross tabulations that

helped the researcher to establish the relationship between the variables under study.

3.6.2 Data Presentation

Microsoft word and excel was used in drawing of charts, tables and graphs so as to clearly

present the findings of the study.

33

3.7 Problems encountered by the researcher

Limited access to information. The respondents didn’t reveal some of the vital

information especially relating to finances, revenue, profitability and taxes. The

researcher however received reasonable cooperation in this respect.

Financial problems. These were in terms of typing, photocopying, transport costs,

printing, meals and refreshments, binding, telephone calls, and scanning that presented

a big problem since the researcher isn’t that wealthy. The researcher however tried to

raise sufficient funds from his family members for the exercise.

Inadequate experience. The researcher faced problems in conducting the research due

to insufficient experience.

Time frame in which the researcher was required to produce a final report wasn’t

enough.

34

CHAPTER FOUR

DATA PRESENTATION, ANALYSIS AND INTERPRETATION OF FINDINGS

4.0 Introduction

This chapter presents the findings (results) of the study, its analysis and interpretation

following the research objectives and questions. The findings were used to establish the

impact of interest rates on the profitability of Small and Medium Enterprises. The findings

were presented in tables, graphs and charts. The findings were organized under the headings

of the respondents’ personal data, issues on interest rates, profitability of Small and Medium

Enterprises (SMEs), and the relationship between interest rates and profitability of SMEs in

Kasubi.

SECTION A: FINDINGS ON GENERAL CHARACTERISTICS OF RESPONDENTS

Table 4: Showing the gender of respondents

Gender Frequency Percent (%) Cumulative Percent

Male 24 58.5 58.5

Female 17 41.5 100.0

Total 41 100.0


35

Findings in table 4 above shows that 58.5 % of the respondents were male and 41.5 % were

female, therefore more men are engaged in various business activities than women. This

implies that the men have a lot of domestic financial obligations that they have to fulfill than

women.

Table 5: Showing the marital status of the respondents

Marital status Frequency Percent (%) Cumulative Percent

Married 26 63.4 63.4

Single 15 36.6 100.0

Total 41 100.0


From table 5 above, shows that the majority of the respondents were married that’s 63.4% and

these were followed by the single individuals who represented the smallest percentage of

36.6% of the respondents. This means that the married people tend to be committed with their

jobs than the single people since they need to work and earn income to cater for their

domestic expenditures.

36

Table 6: Showing the respondents’ level of education

Education level Frequency Percent (%) Cumulative Percent

Certificate 14 34.1 34.1

Diploma 17 41.5 75.6

Degree 10 24.4 100.0

Master 0 0.0

Others 0 0.0

Total 41 100.0


Results in table 6 above, show that the most of the respondents that’s 41.5% had attained

diplomas, being followed by 34.1% and 24.4 % who had attained certificates and degrees

respectively, and none of the respondents has acquired a master’s level of education. This

implies that majority of the respondents in Kasubi that are engaged in the business sector at

least know how to read and write their daily business transactions.

SECTION B: FINDINGS ON THE INTEREST RATE

Respondents were asked to state the rate of interest charged on SMEs, the consideration for

setting the rate, whether and how they expect the interest rate to change, whether they receive

complaints about interest rates, how the rate is charged, and how and who determines the rate

of interest and their responses were as shown below.

37

4.2.1 The interest rate charged on Small and Medium Enterprises

The findings indicate that the rate of interest charged by Kawaala II SACCO, Kasubi branch

on the amount of money borrowed by clients ranges between 27% to 36% per annum since

2008 to 2011.

Table 7: Showing the factors considered before setting the rate of interest for a customer

Consideration Bargaining

power of clients

Size of the

loan

Duration of the

loan

Operation costs

Freq % Freq % Freq % Freq %

Strongly agree - - - - 4 66.7 6 100.0

Agree - - - - 2 33.3 - -

Disagree 1 16.7 1 16.7 - - - -

Strongly disagree 5 83.3 5 83.3 - - - -

Not sure - - - - - - - -

Total 6 100.0 6 100.0 6 100.0 6 100.0


From table 7 above, in an interview conducted with the management of Kawaala II SACCO

indicated that 16.7% and 83.3 % of the respondents disagreed and strongly disagreed

respectively that the bargaining power and size of the loan are considered, 66.7% and 33.3%

also strongly agreed and agreed respectively that duration of the loan is considered, and

finally 100% of the respondents strongly agreed that the SACCO’s interest rate is influenced

38

by the operation costs. This means that the management of the SACCO sets the rate of interest

that covers its operating costs.

Table 8: Showing whether the staff of the SACCO expects the interest rate to change

Response Frequency Percent (%) Cumulative Percent

Yes 5 83.3 83.3

No 1 16.7 100.0

Total 6 100.0


Table 8 above, in an interview conducted with management of Kawaala II SACCO, the

majority of the respondents that’s 83.3% agreed that they expect the rate of interest to change

in the near future and these were followed by 16.7% who didn’t expect it to do so. The

highest percentage of the respondent expects to change due to high levels of inflation which

the country is currently facing which has made the cost of doing business to be high, among

others.

Table 9: Showing how the rate of interest is expected to change


Slightly increase 5 83.3 83.3

Slightly decrease 1 16.7 100.0

Total 6 100.0


39

It is evident from table 9 above that the majority of the respondents that’s 83.3% expected the

rate of interest to increase slightly, and these were followed by 16.7% of the respondents who

argued that they expect it to slightly decrease. This implies that there were higher chances that

the rate of interest would increase slightly as supported by 83.3% and this was due to high

inflation levels that were prevailing at that time. The above facts can be presented using the

pie-chart below.

Figure 1: Showing respondents’ expectation(s) on interest rates of Kawaala II SACCO

16.7%

83.3%

Slightly increase

Slightly decrease


40

Table 10: Showing whether complaints are received about interest rates from their

clients or customers


Yes 4 66.7 66.7

No 2 33.3 100.0

Total 6 100.0


From table 10 above, in an interview with management of Kawaala II SACCO, majority of

the respondents that’s 66.7% agreed that they receive complaints about the high interest rates

and they even expect it to increase slightly because the demand for money is high, the cost of

doing business is also high, and the high risks associated with lending. These were followed

by smallest percentage of the respondents that’s 33.3% who disagreed with the above view.

This implies that the SACCO generally charges a risk premium to ensure that its investments

compensates for those clients that may fail to repay back its borrowed funds.

Table 11: Showing the kind of complaints received on interest rates from their customers


High interest rate 5 83.3 83.3

Low interest rate 1 16.7 100.0

Total 6 100.0


41

Finding in table 11 above, shows that the majority of the respondents that’s 83.3% complain

that the SACCO’s interest rate is high, and these were followed by 16.7% of the respondents

who said that the SACCO’s rate of interest is low compared to other credit lending

institutions. This implies that generally customers or clients’ complain due to the fact that the

rate of interest is high for them, and this can be analyzed by the pie-chart shown below.

Figure 2: Showing the kind of complaints received on interest rates from customer

16.7%

83.3%

High interest rate

Low interest rate


Table 12: Showing how the interest rate is charged at Kawaala II SACCO


Reducing balance method 0 0.0 0.0

Flat rate 6 100.0 100.0

Total 6 100.0


42

Table12 above, in an interview conducted with the SACCO’s management, all respondents

that’s 100% said that the method used to charge interest rate is flat rate. This method is based

on the cost of the money borrowed. In addition, the rate of interest is determined during the

annual general meeting which is always held before the start of every financial year.

SECTION C: FINDINGS ON THE PROFITABILITY OF SMEs IN KASUBI

Here respondents were asked to reveal the period spent in business, whether the books of

accounts are kept, whether they compare sales turnover and total costs incurred in order to

measure its profitability, whether profits are always measured, whether the business has been

registering profits, and to state whether they plough back the registered profits into their

Table 13: Showing the period spent in business


Less than 1 year 3 7.3 7.3

1 - 3 years 17 41.5 48.8

Above 3 years 21 51.2 100.0

Total 41 100.0 100.0


Table 13 above, indicates that the majority of respondents that’s 51.2% had spent in business

for a period of three years and above, and these were followed by 41.5% and 7.3% who had

stayed in business for a period of 1-3 years and less than 1 year respectively. This can

analyzed as below.

43

Figure 3: Showing the period spent in business

0

10

20

30

40

50

60

Less than 1year 1-3 years Above 3 years


Table 14: Showing whether the books of accounts are usually kept for records


Yes 34 82.9 82.9

No 7 17.1 100.0

Total 41 100.0


Findings in table 14 above reveals that books of accounts are usually kept by businesses for

records since 82.9% of the respondents agreed with it and these were followed by 17.1% who

disagreed for that matter. This implies that most of the businesses operated always keep the

44

records of their businesses such that they can be used for future reference like in determining

its profits, going concern, among others. This can be analyzed in the figure below,

Figure 4: Showing whether the books of accounts are usually kept for records of the business

0

10

20

30

40

50

60

70

80

90

Yes No

Responses

perc

enta

ge


45

Table 15: Showing profitability is measured by comparing sales turnover and total costs


Strongly agree 25 61.0 61.0

Agree 12 29.3 90.3

Disagree 3 7.3 97.6

Strongly disagree 1 2.4 100.0

Not sure 0 0.0

Total 41 100.0


From the above table 15, indicate that the majority of the respondents that’s 61.0% and 29.3%

of the respondents strongly agreed and agreed respectively that the profitability of the

business is measured by comparing the sales turnover and total costs incurred in a given

period of time. While 7.3% and 2.4% of the respondents disagreed and strongly disagreed

respectively with the view that profitability of the business is measured by comparing the

sales turnover and total costs incurred, and 0.0% were not sure with the above views.

Therefore, one can conclude that profitability of the business is determined by comparing the

sales turnover and total costs incurred in a given period of time. The above findings can be

shown in the figure below.

46

Figure 5: Showing profitability is measured by comparing the sales turnover and total

costs incurred in different periods.

010203040506070

Percentage

Stronglyagree

Agree Disagree Stronglydisagree

Responses


Table 16: Showing whether profits are always measured


Yes 30 73.2 73.2

No 11 26.8 100.0

Total 41 100.0


47

In table 16 above, it shown that most of the respondents that’s 73.2% agreed that profits are

always measured, and these were followed by 26.8% who disagreed with the above view

since they don’t keep proper records of their businesses they operate. Generally, majority of

the business operators/ managers normally record their business transactions on a daily basis.

The above can be presented in the figure below.

Figure 6: Showing whether profits are always measured

01020304050607080

Percentages

Yes No

Reseponses


48

Table 17: Showing whether the firms (businesses) have been registering profits


Yes 11 26.8 26.8

No 30 73.2 100.0

Total 41 100.0


It is evident from 17 above that the largest number of respondents that’s 73.2% disagreed with

the view that their firms have been registering profits, and these were followed by 26.8% who

agreed that their firms have been registering profits. The largest group said that the profits

aren’t registered due to high interest rates charged on borrowed capital, high transport costs,

faulty products, high inflation rates, power shortage and load shading, high rental charges and

shift competition. Therefore one can conclude that most of the firms (businesses) have not

been able to register profits, and can be shown in the figure below.

49

Figure 7: Showing whether the firms have been registering profits

26.8%

73.2%

YesNo


SECTION D: FINDINGS ON THE RELATIONSHIP BETWEEN THE INTEREST

RATE AND PROFITABILITY OF SMEs

In order to establish the relationship between interest rates and profitability of SMEs,

respondents were asked to state whether rate of interest affect the profitability of their

businesses, and the extent to which the rate affects profitability as presented below.

50

Table 18: Showing whether the high interest rate is the root cause for declining profits



Agree 22 53.7 92.7

Disagree 2 4.9 97.6


Not sure 0 0.0

Total 41 100.0


Results in table 18 above shows that majority of that respondents that is 53.7% and 39.0% of

the respondents agreed and strongly agreed respectively that the high interest rate (36% per

annum) is the root cause for declining profits of their businesses in Kasubi. While 4.9% and

2.4% of the respondents disagreed and strongly disagreed respectively with the view that the

high interest rate is the root cause for declining profits of their businesses in Kasubi, and they

argued that declining profits are also due to high taxes, high transport costs, low purchasing of

the customers, high rental charges, and shift competition, among others. The above arguments

can be presented in the figure below.

51

Figure 8: Showing whether the high interest rate is the root cause for declining profits.

0

10

20

30

40

50

60

Stronglyagree

Agree Disagree StronglydisagreeResponses

Percentages


Table 19: Showing whether the SMEs profits have been declining due to high interest rates charged on borrowed money

from Kawaala II SACCO



Agree 13 31.7 73.2

Disagree 7 17.1 90.3


Not sure 3 7.3 100.0

Total 41 100.0


52

Results in table 19 above show that the majority of the respondents that’s 41.5% and 31.7%

strongly agreed and agreed respectively that the SMEs’ profits have been declining due to

high interest rates charged on borrowed from Kawaala II SACCO, and 7.3% were not sure

with the above view because they had never borrowed funds from the SACCO. While these

were followed by 17.1% and 2.4% disagreed and strongly disagreed with the responses that

the businesses profits have been declining due to high interest rates charged on borrowed

from the SACCO, since they are affected by other factors like; high rental charged levied on

them, high taxes, bad debts, among others.

Table 20: Showing the extent the rate of interest affect the profitability of businesses


Large extent 20 48.8 48.8

Moderately 16 39.0 87.8

Small extent 5 12.2 100.0

Not sure 0 0.0

Total 41 100.0


Findings in the table 20 above reveals that the majority of the respondents that’s 48.8% regard

the rate of interest to affect the profitability of their businesses to a large extent, followed by

39.0% who said that the interest rate affects the profitability of their businesses to moderately,

and 12.2% said that it affects the profitability of their businesses to a smaller extent. The

argument forwarded by the majority of the respondents was that the interest which is paid

53

back together with the principal amount, if not paid, that portion would contribute to the

profits being registered or realized in a given period to a greater extent. The findings above

can be presented in the figure below,

Table 21: Showing Pearson Correlation Coefficient between Interest Rates and Profitability of SMEs

Interest

Rates

Profitability

of SMEs

Interest Rates Pearson Correlation

Sig. (2-tailed)

N

1.000

.

41

- .702**

000

41

Profitability of SMEs Pearson Correlation

Sig. (2-tailed)

N

-.702**

000

41

1.000

.

41

** Correlation is significant at the 0.05 level (2-tailed).

Using the rating level of;

0 to -+0.3= Weak Relationship

-+0.4 to -+0.6= Moderate/ Average Relationship

-+0.7 to -+0.9= Very Strong Relationship

54

Table 21 indicates that there is a very strong negative relationship between Interest Rates and

Profitability of Small and Medium Enterprises at r= -0.702 and at level of significance 0.05,

this implies that the higher the rate of interest, the lower the profits being registered hence

deteriorating profits of the business. This analysis demonstrates that the owner’s contribution

to capital to a large extent determines the weight which the lending institutions attach to

granting funds (loans) to Small and Medium Enterprises (SMEs). The above relationship

agrees with the conclusion made by the researcher in the literature review (chapter two)

above.

55

CHAPTER FIVE

SUMMARY OF FINDINGS, RECOMMENDATIONS AND CONCLUSIONS

5.0 Introduction

This chapter presents the summary of findings, recommendations and draws conclusions in

accordance with the objectives of the study. The study was carried out with three major

objectives that’s; to find out the interest rate charged on SMEs at Kawaala II SACCO, to find

out the profitability of SMEs in Kasubi, and to establish the relationship between the interest

rate and profitability of Small and Medium Enterprises.

5.1.0 Summary of findings

It was found out that the major business activities of SMEs in Kasubi are; super-markets,

restaurant, bookshops, mobile money (electronic money transfer), carpentry, metal

fabrication, petrol stations, dealers in phone accessories, bakery, butcheries, poultry keeping,

saloons, welding, selling agricultural produce, trading in general merchandise, schools,

secretarial services, milling, clinics, pharmacies, hardwares, credit financial institutions,

market vending, and dealers in second hand clothes.

The effects of charging a high rate of interest are; the borrowers will end-up defaulting,

reduces the registered profits due to high cost of borrowing, lack of development and growth

of businesses, prolonged pay back period, discourages clients/ customers from borrowing

loans from such credit financial institutions, the borrowers will resort to other financial

institutions whose interest rates are relatively lower, among others.

56

5.1.1 Summary findings on interest rates charged on SMEs at Kawaala II SACCO

The findings revealed that the interest rate ranges between 27 percent to 36% per annum and

it’s charged on a flat rate (table 12). The SACCO considers bargaining power of clients, size

of the loan, duration of the loan, and operation costs (table 7). The SACCO also receives

complaints about high interest rates (table 10). The interest rate is expected to increase

slightly as it was stated by 83.3% of the respondents interviewed (figure 1), and finally it’s

determined during the annual general meeting.

5.1.2 Summary findings on the profitability of SMEs in Kasubi

61.0% and 29.3% of the respondents strongly agreed and agreed that they measure the

profitability of their businesses by comparing sales turn-over and total costs incurred in a

particular period of time (figure 5). 73.2% of the respondents revealed that their businesses

haven’t been registering profits (table 17). It was found out that apart from interest rates, high

taxes levied upon them, shift competition, high rental charges, pricing of products, power

shortages and load-shedding, poor financial management, high transport costs, were among

the other factors that account for declining profits of their business ventures despite the fact

that proper books of accounts are usually kept (figure 4).

5.1.3 Summary findings on the relationship between interest rate and profitability of

SMEs

It was found out that the SMEs profits have been declining due to high interest rates charged

on borrowed money from Kawaala II SACCO as 41.5% and 31.7% of the respondents

57

strongly agreed and agreed about it (table 19), and figure 9 shows that 48.8 % of the

respondents agreed that it’s to a larger extent that interest rates affects profits of their business

ventures.

5.2.0 Recommendations

5.2.1 Recommendations on interest rates

Kawaala II SACCO should reduce the interest rates charged on SMEs since they trade in

products with low profit margins and market share and this will make the business owners and

managers able to repay less amounts on the principal amount borrowed.

The government should impose strict regulations on financial lending institutions about the

interest rates charged on SMEs since they are referred to as “backbone of economic growth”.

The government should also come-up with insurance schemes to reduce on the risk(s) that

lenders face in granting out loans so that they can be induced to offer credit at a reduced rate.

The government should provide more capital to SACCOs so that they can easily be able to

cover their operational costs thus increasing their earnings which are inform of profits.

5.2.2 Recommendations on the profitability of Small and Medium Enterprises

The business owners should borrow funds from credit institutions whose interest rates are

relatively lower compared to others.

58

The local governments in conjunction with the business owners should be involved in tax

assessment; business people should also be knowledgeable about the investment code and tax

regulations, and pay taxes in time to ease the burden.

The business owners and managers of SMEs should conduct some market studies so that the

quality of the good produced and/ services offered match with customers/ clients expectations.

The problem regarding with the pricing of goods, the state should intervene in setting up of a

uniform price for common and similar products.

The business owners and operating managers should cut overheads by automating its

operating activities such as accounting, reporting, ordering, emailing, customer service sales

among others. They can also cut their variable expenses by negotiating with suppliers, re-

designing (re-engineering) the products that are being produced. In addition, they can increase

productivity by training its workers; experimenting with new idea, new types of products and

new processes; increase prices, number of customers, usage rates, and decrease costs

(yojpotter, 2005).

5.2.3 Recommendations on the relationship between interest rates and profitability of

SMEs

The researcher recommended that Kawaala II SACCO with the help of government

intervention should reduce on interest rates and this will reduce the cost of borrowing and

hence improve on the profits registered by SMEs as well as increasing on the SACCO’s sales

since its loans will be more attractive to clients or customers.

59

5.3 Conclusions

From the study findings in chapter four above, it revealed that there is a strong relationship

between interest rates and profitability of small and medium enterprises at Pearson correlation

coefficient (r) of -0.702 and at level of significance 0.05. This implies that the higher the rate

of interest charged on borrowed funds (36% per annum), the lower the profits registered by

the owners of small and medium business enterprises in Kasubi, since the borrowers are

required to repay back a big portion of interest on top of the principal amount which could

have acted as profits. And therefore the owners of Kawaala II SACCO should take an

initiative of reducing their rate of interest charged on borrowed funds through the government

setting the maximum rate above which the credit financial institutions can’t go beyond so as

to enable business borrowers earn a profit out of their business activities undertaken.

In addition, besides interest rates, the profits of most businesses in Kasubi are affected by

other factors such as; shift competition, high transport costs, high inflation rates, faulty

products, poor financial management, high taxes levied upon them, power shortages and load-

shedding, among others.

5.4 Areas of further research

The impact of interest rates on loan repayment by SMEs.

The effect of cost reduction on revenue generation.

The impact of financial management on profitability levels of business enterprises.

The effect of inventory management on profitability levels of a company.

60

The impact of cash management on profitability of SMEs.

REFERENCES

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28, 2011, from http://useconomy.about.com/od/interestrateindicators/p/interest-rate.htm

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Credit and Loan Repayment by the Poor and SMEs in Ghana. Ghana: University of

Cape Town.

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Sons.

Arora, M.N. (2006). A Textbook of Cost and Management Accounting. New Delhi: Vikas.

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Hill: Ryerson Higher Education.

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Boon, E.K. (1989). Women in SMEs: An African Example. Courier, 4(115), 74-76.

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63

http://www.flatworldknowledge.com/note/29171

http://www.business-standard.com/india

APPENDIX A

QUESTIONNAIRE FOR STAFF

Dear participants,

Am a student of Makerere University carrying out research on the effect of interest rates on

profitability of small and medium enterprises. I kindly request you to fill this questionnaire.

The individual responses will be treated with utmost confidentiality and will be used for

academic purposes only for fulfillment of my research project. Your assistance will be of a

crucial value in the success of this study.

SECTION A: PERSONAL DATA

Please tick where appropriate.

1. Gender of the respondent.

a) Male b) Female

2. Marital status.

a) Married b) Single

3. Respondents level of education.

a) Certificate b) Diploma c) Degree

d) Masters e) Others

64

SECTION B: INTEREST RATES

4. What is the interest rate charged at Kawaala II SACCO for;

Small Business Enterprises……………………………………

Medium Business Enterprises ………………………………….

5. Kawaala II SACCO sets a rate for its customers after considering the following

factors;

Consideration Strongly Agree Agree Disagree Strongly Disagree

a) Bargaining power

b) Size of the loan

c) Duration of the loan

d) Operation costs

6. Do you expect the interest rate to change?

a) Yes b) No

7. If yes, how do you expect it to change?

a) Slightly increase b) Slightly decrease

8. Give a reason(s) for your answer in seven above?

65

………………………………………………………………………………………

9. Do you receive complaints about interest rates from your customers or clients?

a) Yes b) No

10. If yes, what kind of complaints do you receive on interest rate?

a) High interest rate b) Low interest rate

c) Others specify…...……………………………………………………………….

11. How is the interest rate charged?

a) Reducing balance method b) Flat rate

c) Others specify.………………………………………………………………….

12. Who determine the interest rate to be charged for the customer(s)?

………………………………………………………………………………………

SECTION C: PROFITABILITY OF SMES

This section intends to examine the profits of Kawaala II SACCO. Please tick

appropriately;

13. Profitability is a critical issue in your organization?

66

a) Strongly agree b) Agree c) Disagree

c) Strongly Disagree d) Not sure

14. The books of accounts are usually kept for records of the business?

a) Yes b) No

15. What is your perception on the profitability of Kawaala II SACCO?

a) Too high b) High c) Low

16. Can you please suggest the possible ways of improving on the profitability of the

business?

………………………………………………………………………………………..

…………………………………………………………………………………………..

…………………………………………………………………………………………

…

SECTION D: RELATIONSHIP BETWEEN INTEREST RATES AND

PROFITABILITY OF THE BUSINESSES (SMEs)

1. High interest rate charged is the root cause for declining profits?


67

d) Strongly disagree e) Not sure

2. Does the rate of interest affect the profitability of your business?

a) Yes b) No

3. If yes, to what extent?

a) Larger extent b) Moderately

c) Small extent d) Not sure

4. Briefly, what is your view about interest rates at Kawaala II SACCO?

………………………………………………………………………………………...

…………………………………………………………………………………………...

…………………………………………………………………………………………

…………………………………………………………………………………………

…………………………………………………………………………………………

…………………………………………………………………………………………

…...

THANK YOU SO MUCH FOR YOUR COOPERATION

68

APPENDIX B

INTERVIEW GUIDE FOR SMALL AND MEDIUM ENTERPRISES

Dear participants,

Am a student of Makerere University carrying out research on the effect of interest rates on

profitability of small and medium enterprises. I kindly request you to fill this questionnaire.

The individual responses will be treated with utmost confidentiality and will be used for

academic purposes only for fulfillment of my research project.

SECTION A: PERSONAL DATA

Please tick where appropriate.

1. Gender of the respondent.

a) Male b) Female

2. Marital status.

a) Married b) Single

3. Respondents level of education.

a) Certificate b) Diploma c) Degree d) Master

69

e) Others

SECTION B: PROFITABILITY OF SMALL AND MEDIUM ENTERPRISES

4. What type of business activity do you engage in?

………………………………………………………………………………………

5. For how long have you been carrying out this business activity?

a) Less than 1 year b) 1 – 3years c) Above 3 years

6. The books of accounts are usually kept for records of the business?

a) Yes b) No

7. Profits are always measured?

a) Yes b) No

8. Profits have been declining due to high interest rates charged on borrowed money?



9. Profitability is measured by comparing the sales-turnover and total costs incurred in

different periods.

a) Yes b) No

70

10. The firm always ploughs back the registered profits (returns) into the business?



11. The firm(s) has been registering profit?

a) Yes b) No

SECTION C: RELATIONSHIP BETWEEN INTEREST RATES AND

PROFITABILITY OF SMES

12. At what interest rate did you borrow?

………………………………………………………………………………………

13. How do you rate the interest rate charged at Kawaala II SACCO?

a) Very high b) High c) low d) Very low

14. Does the rate of interest affect the profits of your business?

a) Yes b) No

15. If yes, to what extent does the rate of interest affects the profit of your business?

71

a) Larger extent b) Moderately c) Smaller extent d) Not sure

16. What is the likely outcome if the SACCO continues charging that rate on business?

………………………………………………………………………………………...

…………………………………………………………………………………………

…………………………………………………………………………………………

…………………………………………………………………………………………

…

17. In your opinion, what should be done on interest rates?

…………………………………………………………………………………………

…………………………………………………………………………………………

…………………………………………………………………………………………

…………………………………………………………………………………………

…………………………………………………………………………………………...

THANK YOU SO MUCH FOR YOUR COOPERATION

72

APPENDIX C

INTRODUCTORY LETTER

73

college of business and management … · web viewfrom table 10 above, in an interview with...

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