In 2011, Rakesh Bhatnagar and his wife Sudha made a decision to invest in Rwanda mainly because of the country’s ever improving investment climate.

His company, SRB Investments, a paper bag manufacturing firm is among the pioneer factories operating in the Kigali Economic Zone but, the investor is not entirely happy.

"We are chocking on high interest rates, our factory has not made any profits in the last three years,” says the man who has 30 years of experience helping other investors set up factories from scratch in Nigeria, Uganda, , Ethiopia and in Rwanda where he helped set up Safintra, a steel processing company.

But Rakesh’s predicament is well known among both government officials and economists.

From trade and industry minister Francois Kanimba to Valence Kimenyi, an economist with the World Bank; speaker after speaker seemed to indict commercial banks during Thursday’s presentation of the Monetary Policy and Financial Stability Statement by the central bank.

Bankers present were taking the heat just after the central bank Governor, John Rwangombwa, had finished praising them for maintaining a steady flow of credit to the business community.

Rwangombwa presented figures indicating that new authourised loans increased by 47.8 per cent to Rwf 325.7 billion in the first six months of 2014. The increase is a commendable recovery from a 12.4 per cent decline recorded during the same period last year.

Even more impressive is the fact that banks are accepting more long-term loans that now account for 30 per cent of newly dispensed credit. In the past, banks have been accused of shunning long-term borrowers for quick returns from short and medium-term customers.

Figures still show that short-term loans are still popular among banks, accounting for 42 per cent while medium term loans took 28 percent.

So, if credit is that expensive, then who’s borrowing all this money?

According to Rwangombwa, 40.5 per cent of the total loans went to commerce, restaurant and hotels followed by public works and buildings with 21.1 per cent. That makes sense.

For instance, the surging fortunes of Rwanda’s tourism sector have seen expansion in hotels lately. In May, during the African Development Bank annual meetings in Kigali, hotels were overbooked pointing to the need for more rooms.

It would therefore mean that banks have gained the confidence to lend to investors in the hospitality industry in order to tap into that boom.

But not everyone is getting the money. Manufacturers who hold the key to Rwanda’s door of an industry-based economy, are getting the mice’s share of credit at just 13.7 per cent.

Farmers are doing even worse, as banks still think agriculture is too risky to finance. That creates a bit of worry because, as World Bank’s Kimenyi notes, the sector still accounts for 33 per cent of the country’s GDP and employs at least 77 per cent of the population.

"We understand we are targeting to become an industry and service-based economy, but in the meantime, we are still dependant on agriculture and should ensure the sector gets credit to serve its critical role in the economy,” Kimenyi says.

Many agree with Kimenyi, including minister Kanimba and governor Rwangombwa. Unfortunately, there’s very littlethey can do to interest banks to work with entrepreneurs in a sector they regard very risky.

"Banks still regard projects in the sector as very risky,” observed Rwangombwa.

Yes, too risky for the banks but Kimenyi advises government to advance policies that mitigate risks in the sector that is heavily dependent on natural weather patterns.

"We need to increase the amount of land under irrigation so we don’t have to suffer the consequences of inadequate rains,” he said, noting that only about 2.4 per cent of farmland is under irrigation.

But Innocent Musabyimana, the Permanent Secretary of the Ministry of Agriculture, disagrees.

"Land under irrigation is currently 5 per cent,” clarified Musabyimana who however agrees that more efforts are needed to mitigate risks that make financing farming unattractive to banks. He says under the rural development funding, agriculture is a beneficiary and activities include irrigation.

In the current budget for instance, government intends to spend Rwf252.8 billion (14 percent of the total budget) on rural development initiatives of which agriculture development is allocated Rwf 54.3 billion. Part of the money, he says, will be used to fund irrigation projects.

But there were voices in the room calling for promotion of agricultural product insurance to deal with the ever fluctuating prices for agricultural produce. Insurance firms such as UAP say they have several agricultural insurance products but farmers are yet to embrace them.

Exorbitant interest rates

Yet even if farmers presented bankable projects that are less risky, many entrepreneurs say there is urgent need to make credit cheaper to boost economic activity.

Some, such as Rakesh, say they are holding back on new projects and expansion plans for lack of affordable credit.

Safintra Rwanda Ltd is a company that Rakesh helped establish in November 2007, which now serves Rwanda, Burundi and DR Congo with steel and roofing products.

But next to his factory in the economic zone, Safintra is yet to develop its plot three years after it was acquired. In a phone interview with SundayTimes a top company official said they plan to acquire a loan to develop the plot but that the interest rates are prohibitive.

"I don’t know what the government can do to bring the rates down but sure they are very high,” remarked the official.

According to central bank figures, interest rates have increased from 16.9 per cent in December 2013 to 17.5 per cent as of June this year. But investors say the reality on the market is different.

For instance, Rakesh who’s financing a loan that he acquired to develop his plot in the economic zone says he is paying up to 19 per cent interest to service his loan acquired from FINA Bank.

At the back of his paper bag making factory, Rakesh has suspended works on a structure where he intends to put up a box making plant; he says until he starts making some profits from his current factory, he can’t afford to expand his operations.

Under EDPRS II, the government hopes to create more off-farm jobs through, among other ways, developing a robust manufacturing sector. But with challenges like those facing Rakesh’s SRB investments and Sanfintra, that desire might be hindered.

Rakesh’s factory for instance employs 50 Rwandans including a manager he hired Tuesday last week. With lower interest rates on credit, he could finish his expansion project and employ more local hands.

Another EDPRS II target is one that seeks to see outstanding credit to the private sector growing by at least 33 percent annually, but based on the governor’s notes, the current status is just 7.3 percent.

Though that’s an improvement from 5 percent recorded in the same period last year, it’s a far cry from the target.

What are banks saying?

John Bugunya of Bank of Kigali, the country’s leading lender, says it appears banks are being unfairly judged. 

"If the interest rates are high, that means banks are also practicing in a costly environment. Those cost overheads that are exacerbated by the low deposits have to be factored into the final interest rates,” he said.

Bugunya’s observation is backed by BNR which notes that the rigidities in lending rates is due to high operation cost accounting for 72.1 percent of total interest income.

Talking about dwindling interest rates, central bank figures suggest banks should brace for a whole new phenomenon. People seem to no longer need banks to save anymore as electronic mobile money services penetrate even deeper.

For instance the number Rwandans subscribing to Mobile payments have increased to 3.8 million as of June 2014 from 2.04 million in the same period last year. Yet there are only 1.9 million bank accounts in the country.

Moreover, deposit rates have remained almost unchanged in the two periods under comparison, providing little incentive to save. Figures show that those saving with banks are earning an interest of 8.7 percent as of June compared to 8.6 percent in December 2013 which has dropped from 10.6 percent in January 2013.

Deposits grew by a few hundred millions in the six month period from Rwf1.01billion in December to Rwf1.2 billion end June 2014.

So the private sector’s cry over expensive credit seems to be a result of scarce money. Locally, deposits are not growing fast enough as more Rwandans save on the phone. Banks have to find money from outside the economy where they also borrow expensively.