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
