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.
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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).
23
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.
29
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
Source: Primary Data.
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
Source: Primary Data.
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
Source: Primary Data.
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
Source: Primary Data.
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
Source: Primary Data.
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
Response Frequency Percent (%) Cumulative Percent
Slightly increase 5 83.3 83.3
Slightly decrease 1 16.7 100.0
Total 6 100.0
Source: Primary Data.
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
Source: Primary Data.
40
Table 10: Showing whether complaints are received about interest rates from their
clients or customers
Response Frequency Percent (%) Cumulative Percent
Yes 4 66.7 66.7
No 2 33.3 100.0
Total 6 100.0
Source: Primary Data.
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
Response Frequency Percent (%) Cumulative Percent
High interest rate 5 83.3 83.3
Low interest rate 1 16.7 100.0
Total 6 100.0
Source: Primary Data.
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
Source: Primary Data.
Table 12: Showing how the interest rate is charged at Kawaala II SACCO
Response Frequency Percent (%) Cumulative Percent
Reducing balance method 0 0.0 0.0
Flat rate 6 100.0 100.0
Total 6 100.0
Source: Primary Data.
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
Response Frequency Percent (%) Cumulative Percent
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
Source: Primary Data.
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
Source: Primary Data.
Table 14: Showing whether the books of accounts are usually kept for records
Response Frequency Percent (%) Cumulative Percent
Yes 34 82.9 82.9
No 7 17.1 100.0
Total 41 100.0
Source: Primary Data.
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
Source: Primary Data.
45
Table 15: Showing profitability is measured by comparing sales turnover and total costs
Response Frequency Percent (%) Cumulative Percent
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
Source: Primary Data.
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
Source: Primary Data.
Table 16: Showing whether profits are always measured
Response Frequency Percent (%) Cumulative Percent
Yes 30 73.2 73.2
No 11 26.8 100.0
Total 41 100.0
Source: Primary Data.
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
Source: Primary Data.
48
Table 17: Showing whether the firms (businesses) have been registering profits
Response Frequency Percent (%) Cumulative Percent
Yes 11 26.8 26.8
No 30 73.2 100.0
Total 41 100.0
Source: Primary Data.
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
Source: Primary Data.
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
Response Frequency Percent (%) Cumulative Percent
Strongly agree 16 39.0 39.0
Agree 22 53.7 92.7
Disagree 2 4.9 97.6
Strongly disagree 1 2.4 100.0
Not sure 0 0.0
Total 41 100.0
Source: Primary Data.
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
Source: Primary Data.
Table 19: Showing whether the SMEs profits have been declining due to high interest rates charged on borrowed money
from Kawaala II SACCO
Response Frequency Percent (%) Cumulative Percent
Strongly agree 17 41.5 41.5
Agree 13 31.7 73.2
Disagree 7 17.1 90.3
Strongly disagree 1 2.4 92.7
Not sure 3 7.3 100.0
Total 41 100.0
Source: Primary Data.
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
Response Frequency Percent (%) Cumulative Percent
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
Source: Primary Data.
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.
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63
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?
a) Strongly agree b) Agree c) Disagree
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?
a) Strongly agree b) Agree c) Disagree
d) Strongly disagree e) Not sure
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?
a) Strongly agree b) Agree c) Disagree
d) Strongly disagree e) Not sure
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
74