The economy is expected to post a higher growth rate than earlier projected when full 2014 figures are released next month, but commercial banks have come under pressure to lower lending rates to sustain the momentum beyond 2015.

These were the key highlights from yesterday’s presentation of the Monetary Policy and Financial Stability Statement by central bank governor John Rwangombwa.

The government growth rate projection is 6 per cent.

However, Rwangombwa said based on performance of the first three quarters of 2014, growth will surpass projections, setting a firm foundation for a faster rate this year.

The economy grew by 7.5 per cent in the first three months of last year, slowed to 6.1 per cent between April and June and picked up again at 7.8 per cent from July to September.

This was a remarkable rebound from the 2013 slowdown of 4.6 per cent—the lowest in a decade.

Policymakers are targeting average growth of 11.5 per cent by 2020. 

Rwangombwa said last year’s growth was fuelled by good performance in the service sector that grew by 10 per cent, agriculture by 6 per cent and industry 4 per cent.

"Good performance in the service and industry sectors was supported by the accommodative monetary policy implemented by the National Bank of Rwanda (BNR) last year to support the economic recovery through financing of the economy by the banking sector,” the BNR governor said.

New authorised loans increased by 38.2 per cent to Rwf652.9 billion from a 5.3 per cent decline posted in 2013 when banks lent out Rwf472.5 billion to the private sector.

Lending to private sector contributed to stronger consumption and investment, leading to increase in aggregate demand, he said.

High lending rates

This year, growth is projected at 6.8 per cent but experts yesterday raised concerns regarding high commercial bank lending rates that average 17.2 per cent.

UN Resident Coordinator Lamin M. Manneh said high interest rates, while attributed to high risks, can, on the contrary, fuel high default rates.

"Risks arise from poor repayment of loans but this can be caused by the same high lending rates; these need to be addressed for sustainable growth,” Manneh said.

Trade and Industry minister Francois Kanimba echoed similar concerns, saying high lending rates could be a result of inefficiency in the banking sector that has not generated competitive products.

In his presentation, Rwangombwa had urged borrowers to put banks under pressure and refuse to do business at high interest rates.

"Over time, we have noticed that many borrowers feel they are being done a favour when banks accept their loan requests. This is absurd. We encourage you to use your credit history to borrow at lower rates,” Rwangombwa said.

He asked bank executives present, Sanjeev Anand of I&M Bank and Bank of Kigali’s James Gatera, to explain why lending rates remain high.

Anand, who is also the chairperson of the bankers’ association, said: "First, interest rates vary among banks. At I&M, I can confirm that we are lending below the sector average; however, speaking for the sector as a whole, every bank is under pressure to ease the rates.”

Anand said some commercial banks still have a burden of working with high cost funds that they borrowed externally because of the low deposits locally, adding that the issues will be out of the system by the end of the second quarter.

In response, Rwangombwa said high cost funds ceased to be an issue since at least mid last year, for most banks and urged banks to address other factors that could be behind the phenomenon.

2014 loan dynamics

In 2014, the banks received loan application for Rwf790.40 billion but accepted Rwf652.9 billion. This represented a rejection rate of 17.4 per cent, up from 13.2 per cent in 2013.

The main sectors with high rejection rate last year were mining, where 68 per cent of all the sector’s loan applications were rejected, followed by agriculture, fisheries and livestock with 58 per cent rejections.

Banks also turned down 25 per cent of the loan applications from the mortgage industry; 18 per cent from the commercial and hotel sector, and 15 per cent from the service sector.

"The key reasons for rejection were poor repayment capacity due to lack of project profitability, lack of collateral, outstanding loans in various banks as well as poor credit history,” Rwangombwa said.

Commerce and hotel, and public works dominated the share of all loan approvals in 2014 with 41.62 per cent and 21.09 per cent, respectively.

But 2014 also saw a slight increase in competition among banks with the share of the biggest three financial institutions in terms of loans, deposits, and total assets reducing from 52 per cent, 55 per cent and 57 per cent, respectively, to 45 per cent, 47 per cent and 46 per cent, in that order.

Banks remained well liquidated over the past year, and the number of non-performing loans also reduced to 6.0 per cent from 6.9 per cent in 2013.

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