The Effect of Loan Interest Rates on Financial Performance of Small-Scale Businesses in Mukono Municipality

Abstract

This study investigated the effect of loan interest rates on the financial performance of small-scale businesses in Mukono Municipality, Mukono district. The study assessed the impact of loan interest rates on the profitability, evaluated how loan interest rates influence the growth and expansion of SSBs. It further investigated the relationship between loan interest rates and the financial stability of Small-Scale business. The study focused on a sample of 80 small-scale enterprises selected through simple random sampling from a population of 100 businesses, including retail shops, hardware shops, groceries, and general merchandise dealers. The research utilized questionnaires for data collection and reveals significant insights into the influence of interest rates. High loan interest rates were found to adversely affect profitability by increasing financial burdens and reducing business performance, conversely, lower interest rates were associated with improved profitability and growth opportunities, supporting the notion that reduced borrowing costs facilitate market expansion. However, the study found a negligible relationship between interest rates and financial stability, indicating that factors beyond interest rates, such as management practices and market conditions, are more influential. The study also found out that the impact of loan interest rates on the profitability of small-scale businesses where high interest rates reduced the profit of business. The study also found out that high-interest rate strain cash flow and financial burden due to the increased costs of paying high interest rates hence reducing the ability of small-scale businesses to invest and expand. The study concluded that the effect of loan interest rates had a negative impact on the financial performance of small-scale businesses. Therefore, the researcher recommended policymakers and financial institution to advocate for lower interest rates in order to lower financial burdens on small scale businesses. Based on these findings, the study recommended promoting lower interest rates for SMEs, facilitating access to affordable financing, and encouraging diversification of financial resources. These measures were suggested to enhance profitability, stimulate growth, and improve financial stability of small-scale businesses in Mukono Municipality .