The Impact of Interest Rate Fluctuations on Loan Repayment: A Case Study of Union Bank
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Background of the Study
Interest rates play a pivotal role in the banking sector, influencing loan affordability and repayment behaviors. In Nigeria, the frequent fluctuations in interest rates, driven by macroeconomic instability, create challenges for borrowers and banks alike. Union Bank, one of Nigeria’s oldest financial institutions, has witnessed significant variations in loan repayment patterns due to these fluctuations.
Oladipo et al. (2024) suggest that higher interest rates increase the financial burden on borrowers, leading to higher default risks. Conversely, lower rates can encourage borrowing but may also reduce the bank’s profit margins. Understanding the interplay between interest rate fluctuations and loan repayment is critical for devising effective risk management strategies.
This study examines how interest rate fluctuations affect loan repayment behaviors at Union Bank, providing insights for both policymakers and financial institutions.
Statement of the Problem
Interest rate volatility poses a significant challenge for Nigerian banks, affecting loan repayment and overall financial stability. Borrowers often struggle to meet repayment obligations during periods of high interest rates, resulting in increased default rates. For Union Bank, these challenges threaten profitability and customer relationships.
Despite extensive research on interest rate dynamics, limited attention has been given to their specific impact on loan repayment in the Nigerian banking sector. This study addresses this gap by focusing on Union Bank as a case study.
Objectives of the Study
1. To analyze the relationship between interest rate fluctuations and loan repayment behaviors at Union Bank.
2. To assess the impact of high-interest rates on loan defaults.
3. To recommend strategies for mitigating the effects of interest rate volatility on repayment.
Research Questions
1. What is the relationship between interest rate fluctuations and loan repayment behaviors at Union Bank?
2. How do high-interest rates affect loan defaults?
3. What strategies can mitigate the effects of interest rate volatility on repayment?
Research Hypotheses
1. H₀: Interest rate fluctuations do not significantly affect loan repayment behaviors at Union Bank.
2. H₀: High-interest rates do not significantly increase loan defaults.
3. H₀: Mitigation strategies do not significantly reduce the effects of interest rate volatility on repayment.
Scope and Limitations of the Study
The study focuses on Union Bank’s loan portfolio, analyzing repayment patterns in relation to interest rate changes. Limitations include limited access to historical interest rate data and external economic factors influencing repayment.
Definitions of Terms
• Interest Rate Fluctuations: Changes in the interest rates set by financial institutions or regulatory bodies.
• Loan Repayment: The process of paying back borrowed funds, typically with interest.
• Default Risk: The likelihood of a borrower failing to meet repayment obligations.
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