The National Bank of Rwanda (BNR) has maintained its key repo rate at 6.5 per cent in order to continue economic financing.

Speaking during BNR’s quarterly monetary policy and financial stability statement, yesterday, central bank governor John Rwangombwa said the accommodative monetary policy, implemented since 2013, led to the increase in private sector financing by the banking sector.

This, he said, facilitated economic growth by 7.6 per cent during the first quarter of the year, up from 6.5 per cent in the same period last year.

"Outstanding credit to the private sector grew by 25.3 per cent year-on-year in May 2015 compared to 15.8 per cent in the corresponding period last year, while new authorised loans increased by 10.6 per cent in May this year,” Rwangombwa said.

However, he noted that the cost of borrowing was still high in the market, with bank interest rates averaging 17.5 per cent.

While the banks had previously attributed the high cost of borrowing to the high cost of client deposits as indicated by bank deposit rates taken before the central bank lowered its key repo rate in 2013, Rwangombwa said deposit rates had generally fallen, but rather banks were making larger provisions for bad debts.

Improved loans performance

BNR quoted the sector’s non-performing loans ratio at 6.3 per cent in March, down from 6.7 per cent at the same time last year. However, this is still above the five per cent regulatory requirement.

This means that borrowers will have to wait longer for interest rates to fall.

Weighing in his take on lowering the cost of borrowing, Maurice Toroitich, the managing director of KCB Bank Rwanda, told The New Times that for banks to lend they must accept a level of risk from clients, otherwise many would miss out on accessing credit if there were stricter terms.

He also noted that the key repo rate mainly had an influence on the short term rates like the interbank rate (rate charged on short-term loans made between banks) but not a direct influence on the deposit and lending rates which are more long-term and contractual between a client and their bank.

"People need to understand that the key repo rate is a policy rate meant to show where the direction of lending rates should be heading. Otherwise, interest rates are influenced by market factors of demand and supply,” he explained.

"If a client deposits money in the bank at say 10 per cent per year, I will have to wait for that year to end before I can lend at a lower rate.”

Sanjeev Anand, the managing director of I&M Bank Rwanda and chairperson of the Rwanda Banker’s Association, shared a similar opinion with Toroitich, saying that interest rates depend on banks’ cost of acquiring funds to lend.

He added that there was a mismatch in the banking landscape in Rwanda with commercial banks, usually meant to issue short term credit, having almost two thirds of their loan portfolios as medium to long term loans.

In such a case, he said, banks were finding themselves using their capital and sourcing credit from abroad which are usually in dollars and expensive when swapped or hedged to the Rwandan franc.

"This can take the cost to over 10 per cent,” he said.

Anand said it was not in their interest to have high interest rates in order to increase their profitability since it would discourage financing and increase loan default rates.

editorial@newtimes.co.rw