INTEREST RATE IS DETERMINED BY

i) Size of the loan: Deposits above certain amounts into the bank might attract higher interest rates than smaller deposits. Consequently, large borrowers would be charged higher interest rates than small borrowers.

ii) Risks: Higher risk borrowers must pay higher rates on their borrowing to compensate lenders for greater risks involved.

iii) The need to make a profit in re-lending: e.g banks borrow for depositors and charge higher interest (profit margin) when they lend to borrowers.

iv) Duration of the lending

The L.T. loans will earn a higher rate of interest than shorter term loans due to the maturity risk premium.

v) International interest rates: This vary from one country to another due to differing rates of inflation and government policies on interest rates and foreign currency exchange rates.

vi) Different types of financial assets:

Building societies must offer higher yields to depositors to attract them using bonds which have high rate of return.