Interest Rate and Profitabilty of Small and Medium Enterprises in Kabale Municipality, Kabale District Uganda
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Date
2025-10-06
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Uganda Christian University
Abstract
The purpose of the study was aimed at assessing the effect of interest rate charged by
commercial institutions on profitability and growth of SMEs in Kabale municipality
Kabale District, Uganda. The specific objectives of this study were; to examine the effect
of commercial bank lending rates on the net profit margin of small and medium enterprises in Kabale Municipality, to assess the relationship between the Central Bank Rate and the
return on assets of small and medium enterprises in Kabale Municipality and to analyze
the effects of short-term and long-term interest rates on the return on equity of small and
medium enterprises in Kabale Municipality. A sample size of 80 respondents from the
selected small-scale enterprises in Kabale Municipality, Kabale district. Based on the study
findings, the following conclusions were drawn in line with the research objectives; The
majority of respondents indicated that the cost of borrowing limits their profit potential,
the findings revealed that 45% of the respondents linked the Central Bank Rate (CBR) to
increased commercial lending rates, which indirectly reduce the return on assets (ROA) for
SMEs and the respondents reported that high short-term interest rates reduce return on
equity (ROE) due to higher financial obligations. Based on the above conclusions, the
following recommendations were made; Commercial banks should consider introducing
SME-specific loan products with lower interest rates, the Bank of Uganda should adopt a
more flexible monetary policy that balances inflation control with economic growth
objectives. Lower and more stable CBR levels will help commercial banks offer loans at
competitive rates. Monetary policy should be inclusive to support SME productivity.
Description
UNDER GRADUATE RESEARCH