The objective of this study is to establish whether there is a relationship between interest rates and the demand for credit as well as interest rates and loan repayment. The results show an inverse relationship between interest rates and the demand for credit. There is also evidence of an inverse relationship between interest rates and loan repayment.
Simple statistical frequency tables and percentages were used to establish evidence in the relationship of interest rate and demand for loan and loan repayments. The research also revealed that changes in interest rate have some effects on the banks and the economy. They affect the cost of banks borrowed fund and the returns on investment. With a rise in base rate, the cost of banks fund will rise since interest paid on interest bearing account will increase.
Higher interest rate can reduce demand for loans and thereby reduce the bank earnings. This is so because an increase in interest rate may depress some sectors of the economy and causes the market value of the banks fixed interest securities to decline. Higher interest rates will also reduce the value of the asset charged as guarantee for loans. Where the reduction is large, the loans may be placed at risk. And a rise interest rate will also tend to increase the cost of debt servicing to the banks customers which will result in their increased inability to service their loans, thereby compelling the banks to provide for larger bad debts, with implication of reduced profits. A fall in base rates will have the opposite effect on the banks.
Hence, any government fiscal policy of lowering interest rates would increase the demand for credit and loan repayment.
