The impact of bank loan interest rates on road construction industry in sri lanka

Abstract

The road construction industry is a very important industry for the country’s economic development. It provides main infrastructure to the economic activities. Cost of road projects are expensive compared to other type of construction. Therefor the debt money has been a reliable and main source of finance for the road construction industry. The interest against the debt money is the cost of the debt facility. There is a high intendancy to fluctuate the rate of interest in Sri Lanka finance sector, which creates a financial risk against the local road construction industry. This study has aimed to identify the impacts of interest rate of bank loans on road construction industry in Sri Lanka. The descriptive study was carried out through a preliminary survey, questionnaire survey and semi structured interviews among the practitioners of the industry. The data was analyzed using percentages on frequencies, relative importance index, correlation analysis and regression analysis. MINITAB EXPRESS (statistical software) was used to formulate the statistical analysis. Literature has been carried out to identify the direct and indirect impacts of fluctuations of rate of interest bank loans on road construction industry. With the available research studies, there are six factors identified which determine the behavior patterns of the interest rate. i.e.: government policies, demand and supply of funds, inflation, expectations, competition and uncertainty. The identified regions that have a direct impact of rate of interest on road construction industry are financial decisions, investment decisions, dividend payments, bottom earnings, investment bearings and opportunity cost. As per the literature there were six barriers identified as direct impacts on road projects. There are payment delays, cash flow issues, financial resources, interest claims, lack of number of bidders and high project cost. The effect of rate of interest on inputs of road projects is recognized as the indirect impact. As per the research findings the common inputs of a road project are bitumen (18.89%), equipment (14.49%), Fuel (12.32%), A.B.C. (11.19%), Metal (6.13%) and earth (4.88 %). It was proved that there is strong and linear relationship between fluctuations of interest rate and price level of bitumen, A.B.C., metal and earth. Therefor practitioners are recommended to take necessary measures to consider the financial risk of debt financing in developing capital structure for road construction project.