THE IMPACT OF INTEREST RATE SPREAD ON PROFITABILITY OF MICRO FINANCES IN NEPAL

Abstract

This study examines the relationship between interest rate spreads and profitability in microfinance institutions (MFIs). It analyzes data from various MFIs to explore the factors that influence interest rate spreads, such as interest rate spread, (IRS) net interest margin, (NIM) credit risk (CR), size (LnTA), capital adequacy (CAR) and deposit growth rate (DGR) are independent variables and return on asset (ROA) and return on equity (ROE). NIM and DGR positively influence ROA significantly (p<0.05), while CR has a significant negative impact (p<0.05). CAR, IRS, and LnTA influence ROA positively but insignificantly (p>0.05). CAR and CR negatively influence ROE significantly (p<0.05), while NIM has a significant positive impact (p<0.05). LnTA, IRS, and DGR positively influence ROE but insignificantly (p>0.05). The findings suggest that higher interest rate spreads initially increase profitability, but can lead to diminishing returns due to higher default rates and customer attrition. On the other hand, lower spreads may improve customer retention but could compromise financial viability if not managed effectively. The study emphasizes the importance of balancing interest rate policies to optimize profitability while also promoting financial inclusion and customer satisfaction. The research provides valuable insights for policymakers and practitioners seeking to enhance the sustainability and impact of MFI