High Lending Interest Rates and Their Impact on SMEs in Sierra Leone: Perceptions from Lenders | Chapter 1 | New Advances in Business, Management and Economics Vol. 8

 

Commercial banks play a very significant role in the growth of most economies, particularly in low and middle-income economies with a large portion of Small and Medium Enterprises (SMEs) in the informal sector and largely the private sector with big corporations that require commercial loans to fund high capital-intensive projects. Interest rate is one of the essential conditions in the lending decision procedure of commercial banks. The lending interest rate is a fraction of the loan sum that the lender charges for loaning money. The aim of the study is to understand the effect of high lending interest rates on the economy of Sierra Leone. This study, through longitudinal or time-series data collected and primary data gathered through a semi-structured interview with respondents from a sample of commercial banks and microfinance institutions, discovered that borrowers are saddled with the cost of interest rates. The study further found out that the loan interest rates in Sierra Leone are not only high but are exacerbated by the rate of inflation and the downward turn of the economy, coupled with interest rate volatility. This study employed both quantitative and qualitative analysis. The quantitative analysis used descriptive analysis to evaluate the impact of high-interest rates on borrowing. The Qualitative analysis examines and analyses existing literature on loan policy frameworks by commercial banks and microfinance institutions. The study concluded that a Central bank must ensure its fiscal responsibilities of running the economy are upheld to ensure economic growth and the livelihood of the people. Therefore, as part of its responsibilities, a Central bank should ensure that interest rates on loans are flexible and payable to encourage business and discourage bad debts, which in turn has negative effects on commercial banks and microfinance institutions. Hence, this study recommends that the Central Bank should, through its monetary policy, influence the fixing of interest rates by commercial banks and microfinance institutions by insisting on its reserve requirements as well as buying and selling risk-free treasury and government securities to affect the deposits the commercial banks have at the Central Bank.

 

Author (s) Details

Joseph Davies
School of Postgraduate Studies, Ernest Bai Koroma University of Science and Technology (EBKUST), Magburaka Town, Sierra Leone.

 

Mohamed Osman Turay
Economics Department, University of Makeni (UNIMAK), Makeni Town, Sierra Leone.

 

Samuel Koroma
Commercial Management and Entrepreneurship, Freetown Polytechnic College, Kissy Campus, Freetown, Sierra Leone.

 

 

Please see the book here:- https://doi.org/10.9734/bpi/nabme/v8/1602