The Impacts of Net Interest Rate Fluctuation on Commercial Banks’ Profitability: A Case of National Microfinance Bank

Ngasa B. Ng’humbu
Institute of Accountancy Arusha (IAA), Tanzania
Email: ngasa.nghumbu@iaa.ac.tz

Abstract: This study investigates the impact of interest rate variations on the profitability metrics of the National Microfinance Bank (NMB) during the period from 2015 to 2024, employing pivotal financial paradigms such as Market Power Theory, the Modigliani-Miller Theorem, and the Efficient Market Hypothesis. The primary focus is directed towards the trajectory of the Net Interest Margin (NIM) and its correlation with profitability indicators such as Return on Assets (ROA) and Return on Equity (ROE). Utilizing correlation and regression analytic methods, the study meticulously monitors significant variations in NIM across the specified timeframe, accentuating a notable anomaly in 2018 and a trend of stability observable from 2023 to 2024, which may indicate a potential consolidation phase. The correlations derived yielded coefficients of r = 45.56% between ROE and NIM and r = 49.55% between ROA and NIM, demonstrating moderate positive correlations that attain statistical significance, thereby suggesting that these associations are improbable to arise by mere chance. The linear regression models elucidate a direct correlation whereby increases in NIM are associated with enhancements in both ROE and ROA. This finding posits that adept management of net interest margins is essential for the augmentation of banking performance. Such findings accentuate the imperative for financial managers and policymakers to refine asset pricing and risk management strategies aimed at optimizing NIM, ultimately enhancing ROA and ROE, thus improving overall banking performance. The insights derived from this research can contribute significantly to informed strategic decision-making within the financial sector.