Key determinants of loan decision making among customers in gandaki province

Abstract

This study explores the determinants of borrower choice behavior for loan in Gandaki Province, Nepal, focusing on the role service quality, interest rate, and loan terms play in influencing borrower choice and preference. The rapid expansion of Nepal's banking sector has developed more competition among financial institutions, thus prompting an awareness of determinants of customers' attitude and borrowing behavior. To this end, the present study aims to explore how both economic and psychological factors guide loan decision-making and how banks can leverage these insights in order to improve provision and satisfaction of services. The research is grounded on established rational choice theory, providing strong theoretical underpinning for an examination of rational and psychological aspects of borrowing among consumers. The research adopts a quantitative method with the application of a systematic questionnaire to bank customers in Gandaki Province. The instrument measured key constructs of service quality, interest rate, loan installment structure, loan covenants, and loan products. The total number of 500 valid responses was analyzed using descriptive and inferential statistics. Multiple regression and correlation tests were done to establish the direction and magnitude of the relationships between the variables of the study. The results reveal that interest rate and service quality strongly influence loan decision, while loan covenants moderate and significantly influence it. With banks opening up in increasingly competitive financial markets, building credibility by delivering consistent services and ethical pricing is crucial. The study points out that customer-oriented loan terms and fair interest rate policies could enhance trust and satisfaction, and ultimately lead to banks and borrowers sharing improved relationships. The results of this study have policy and practical implications for policymakers and financial managers in developing lending strategies that balance profitability and customer values. In emphasizing service quality and fairness in a financial transaction, Nepalese banks can improve customer retention and promote an inclusive and sustainable credit system.