An examination of interest rate adjustment impacts on credit demand in banking: a case study of Fortis Microfinance Bank
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Background of the Study
Interest rate adjustments are a primary lever through which banks influence credit demand. Fortis Microfinance Bank has adopted a dynamic approach to interest rate management, regularly adjusting rates to respond to market conditions and regulatory directives. Such adjustments directly affect borrowing costs and, consequently, the demand for credit among consumers and businesses (Okafor, 2023). By maintaining a delicate balance between competitive rates and sustainable profitability, the bank seeks to stimulate credit growth while managing risk exposure.
The bank’s interest rate policies are communicated through multiple channels, ensuring that customers are well informed about rate changes and the factors driving these adjustments. This transparency not only builds trust but also enables borrowers to make informed decisions regarding loan applications and refinancing options (Adebayo, 2024). Empirical evidence suggests that clear and timely interest rate adjustments can boost credit demand by lowering borrowing costs during periods of favorable economic conditions, while moderate increases may help temper demand and prevent excessive risk-taking (Ibrahim, 2025).
However, the impact of interest rate adjustments on credit demand is complex and influenced by various external factors, such as macroeconomic conditions, inflation, and market competition. Additionally, the responsiveness of customers to rate changes may vary, with some segments being more sensitive than others. This study examines how interest rate adjustments at Fortis Microfinance Bank affect credit demand, considering both the direct impact on borrowing costs and the indirect effects on consumer confidence and market behavior.
Statement of the Problem
Although Fortis Microfinance Bank regularly adjusts its interest rates to manage credit demand, the bank faces challenges in accurately predicting the effects of these changes on loan uptake. One major problem is the lag between rate adjustments and observable changes in credit demand, which can be influenced by factors such as economic uncertainty and consumer sentiment (Okafor, 2023). Inaccurate forecasting of customer response to interest rate changes may lead to suboptimal pricing strategies that either under-stimulate or overheat credit demand.
Moreover, external factors such as inflation, regulatory shifts, and competitive pressures from other financial institutions complicate the relationship between interest rate adjustments and credit demand. These variables can cause variations in borrower behavior that are not directly linked to rate changes, creating a gap between policy actions and market outcomes (Adebayo, 2024). Furthermore, inconsistent communication of rate adjustments can lead to confusion among potential borrowers, thereby diminishing the intended stimulative effect on credit demand (Ibrahim, 2025).
This study seeks to examine the specific factors that influence the impact of interest rate adjustments on credit demand at Fortis Microfinance Bank. By analyzing loan application data, customer feedback, and market trends, the research aims to identify the key challenges in aligning interest rate policies with credit demand and to propose strategies for improving forecasting accuracy and communication effectiveness.
Objectives of the Study
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To evaluate the impact of interest rate adjustments on credit demand at Fortis Microfinance Bank.
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To identify external and internal factors that influence the responsiveness of credit demand to rate changes.
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To recommend strategies for enhancing forecasting and communication of interest rate policies.
Research Questions
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How do interest rate adjustments affect credit demand at Fortis Microfinance Bank?
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What external and internal factors influence borrower responsiveness to rate changes?
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What strategies can improve the effectiveness of interest rate communication and forecasting?
Research Hypotheses
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H₁: Interest rate adjustments significantly impact credit demand at Fortis Microfinance Bank.
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H₂: External economic factors and communication gaps negatively influence the responsiveness of credit demand.
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H₃: Improved forecasting and communication strategies enhance the effect of rate adjustments on credit demand.
Scope and Limitations of the Study
This study focuses on Fortis Microfinance Bank’s credit portfolio and interest rate policies over the past two years, using loan application data, customer surveys, and market analyses. Limitations include the influence of uncontrollable macroeconomic variables and potential delays in policy impact.
Definitions of Terms
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Interest Rate Adjustments: Changes in the cost of borrowing as determined by the bank’s pricing policies.
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Credit Demand: The willingness of consumers and businesses to borrow funds.
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Consumer Sentiment: The overall attitude of customers toward the economic environment and financial products.
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