THE EFFECT OF INTEREST RATE ON MICROFINANCE INSTITUTIONS IN UGANDA: CASE STUDY OF PRIDE MICROFINANCE- KABALAGALA BRANCH

ABSTRACT The study is an exploratory research design which sought to determine the factors relied upon by microfinance institutions while charging interest; finding out the effect of interest on the performance of microfinance institutions and suggesting possible alternatives to control this effect. The study relied on qualitative and quantitative methods of data collection and analysis and data was gathered from PRIDE Microfinance in Kabalagala. The study also relied on secondary data upon which information related to the specific aims of the study was reviewed. Pride relies on different factors to determine its interest rate. It considers the requirements of the law, the institutional development needs, cost of operation, expected proii t. need and convenience of borrower and exceptional knowledge. The study also established that. the performance of Pride Micro finance was affected in such a way that clients resort to borrowing from various sources, high level of defaulting, strict law impositions, operate upon abstract market structures and suffocated means of expansion. It was suggested that microfinance institutions can improve on their performance by devising pro-poor micro credit services which are effective, providing conventional knowledge, widening outreach, ceiling interest rate charges, and through negative taxes for interest charged. It is concluded that the mam source of income for microfinance institutions is inte:·est and because of this the institutions are less willing to advise the clients to act rationally. but at the end of it all, the performance of the institution is also affected. Individuals therefore are provided with loans that they do not qualify to be given, for this the institutions need to be regulated on their interest motive, or else their financial performance continues to be sluggish. The study recommends that microfinance institutions undertake an advisory role before providing loans. need for roadmaps to be presented for particular business plans, educating people to learn how to borrow; meeting demands of borrowers, promoting consumer development programmes and maintaining interest rates charges as tax free.