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Relationship between Interest Rates and Loan Default Rates: A Case Study of Commercial Banks in Uganda. Case of Equity Bank Nakulabye Branch

This study aimed at investigating the relationship between interest rates and loan default rates at Equity Bank
Nakulabye, Uganda, with a focus on understanding the influence of socio-economic factors, lending policies, and risk
management practices on borrowers' repayment behavior. The research utilized a combination of primary data
collected from a sample of borrowers and secondary data obtained from the bank's records. Multiple logistic regression
models were applied using SPSS and STATA to analyze the impact of interest rates, borrowers’ socio-economic
factors (including income levels and financial literacy), and lending policies on loan default rates. The regression
results revealed a significant positive relationship between higher interest rates and loan defaults, indicating that an
increase in interest rates led to a higher probability of borrowers defaulting on their loans. Additionally, socio
economic factors such as income levels and financial literacy were found to significantly affect loan repayment
behavior, with higher-income borrowers and those with better financial literacy showing lower default rates. The
effectiveness of current lending policies and risk management practices was also evaluated, and it was found that
robust credit assessments and risk monitoring systems significantly reduced the likelihood of defaults. Based on these
findings, the study concluded that interest rates play a critical role in loan default rates, and borrowers’ financial
literacy and income levels are significant predictors of their ability to repay loans. The study recommended that Equity
Bank Nakulabye consider reducing interest rates, strengthening its financial literacy programs, targeting borrowers
with more stable income sources, and enhancing its risk management practices to mitigate the risk of loan defaults.

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