BUSINESS FINANCE

Question one

Interest Rates over the Millennia

Historical interest rates are fascinating, perhaps because they look so similar to todays interest rates. Nowadays, typical interest rates range from 2% to 20% (depending on other factors). For over 2,500 years, from about the thirtieth century B.C.E. to the sixth century B.C.E., normal interest rates in Sumer and Babylonia hovered around 1025% per annum, though 20% was the legal maximum. In ancient Greece, interest rates in the sixth century B.C.E. were about 1618%, dropping steadily to about 8% by the turn of the millennium. Interest rates in ancient Egypt tended to be about 1012%.

In ancient Rome, interest rates started at about 8% in the fifth century B.C.E. but began to increase to about 12% by the third century A.C.E. (a time of great upheaval). When lending resumed in the late Middle Ages (twelfth century), personal loans in England fetched about 50% per annum, though they tended to hover between 1020% in the rest of Europe. By the Renaissance, commercial loan rates had fallen to 515% in Italy, the Netherlands, and France. By the seventeenth century, even English interest rates had dropped to 610% in the first half, and to 3 6% in the second half. Mortgage rates tended to be lower yet. Most of the American Revolution was financed with French and Dutch loans at interest rates of 45%.

Required

1. Explain the key lesson(s) about interest rates that can be learnt from the case above and relate it to the Kenyan context focusing on the last three decades. (20 marks)