Influence of interest rates and performance of lending institution in Africa. A Critical Literature Review

Abstract

Purpose:  Financial performance is a key determinant of assessing organization success. The financial performance is geared toward determining whether the firms have generated enough income for maximizing shareholder’s wealth as opposed to the mere maximization of the firm’s net profit. The overall objective of this study was to examine influence of interest rates and performance of lending institution in Africa. A critical literature review Methodology: The paper used a desk study review methodology where relevant empirical literature was reviewed to identify main themes and to extract knowledge gaps. Findings: The study also concluded that interest rates on loans and advances became significant in affecting performance in terms of profits before tax and exceptional items (PBTEI) and also returns on equity (ROE). This conforms to the study by Kibuthu (2005) that those who borrow from lending institutions are sensitive to interest on loans, borrow more when rates are low and favourable allowing banks to make more in profits. Unique Contribution to Theory, Policy and Practice: The study recommends that since majority of African banks continued making huge income from loans then the information on total cost of loans to the borrowers should be made very clear on all platforms that hold this information. Diversification to other non- interest revenue sources is a way to reduce banks’ overreliance on interest income.