The cost of borrowing will remain relatively high unless Rwandans learn to keep billions of francs stashed away in homes with commercial banks, the central bank has warned.

John Rwangombwa, the governor of the National Bank of Rwanda (BNR), said that even after lowering the key repo rate to boost lending to the private sector, interest rates on commercial loans had not reduced significantly because customers deposits—the main source of cheaper funds for commercial banks—remain low.

Last June, BNR relaxed its monetary policy by lowering the repo (the rate at which it lends to commercial banks) from 7.5 to 7 per cent hoping to stimulate credit to the private sector and boost slowing economic growth but the move fell short. Real Gross Domestic Product (GDP) growth had slowed down from 6.4 per cent in the first quarter to 5.7 per cent and the 3.9 per cent in the second and third quarters of 2013.

"We [at BNR] arrived at that decision after realising that the economy had grown at a slower pace in the first three quarters of last year compared to 2012 as a result of reduced government spending and lower lending to the private sector,” he said. He was presenting the semi-annual Monetary Policy and Financial Stability Statement yesterday.

Rwangombwa said that as a result of that decision, short-term interest rates have been declining since June last year which has led to short term liquidity in the economy. However, the average commercial bank lending rate fell marginally to 16.9 per cent from 17.2 per cent.

The treasury bills rate fell to 5.6 per cent as of December last year from 10.8 per cent in June last year while the repo and interbank interest rates fell to 3.9 per cent and 5.6 per cent respectively from 6.7 per cent and 9.6 per cent in the same period.

The governor said that rigidity in lending rates is due to the high operating costs representing 76.7 per cent of the total interest income on average during the last year and high provisions for bad loans. Non-performing loans rose from 6 per cent in December 2012 to 7.0 per cent in December 2013, against the BNR’s regulatory benchmark of 5 percent.

He added that last year commercial banks deposit rates fell from the highest level of 11.8 per cent in January to 8.6per cent in December. More sources of funding for projects that required long-term financing would be available to banks if Rwandans would make more deposits.

Figures released by the governor however show modest increase in bank deposits from about 783bn in December 2012, to 913.3 billion as of December 2013—a 16.7 per cent increase.

However, new authorised loans by banks fell to Rwf 472.5bn from Rwf 498.8bn recorded in 2012, a slowdown explained by slower increase in government current expenditure and banks’ policy to enhance their risk management following the high increase in credit distribution registered in 2012.

James Gatera, chief executive officer of Bank of Kigali said that the public needed not to always complain about high interest rates but rather deposit more. "People must know that as banks, we are in business just like any other company. If the public wants to consume and make no savings, how else will the economy raise capital?” he said.