Banks operating in the country have defended themselves against what they say are ‘unfair’ allegations that they charge exorbitant interest rates on their loan products. Addressing concerns that banks have inflexible and high loan interest rates, city bankers said the rates are influenced by structural aspects of the market, such as a poor savings culture, and not exploitive tendencies.

Going by the recently-released central bank monetary policy and financial stability statement, the average lending interest rates of banks stood at 17.03 per cent as of December 2015. This compares to the previous year when the average lending rate was at 17.66 per cent.

Despite this, a large section of borrowers accuse banks of charging high interest rates, a situation that has caused many would-be borrowers to shy away from applying for loans.

However, approved loans in 2015 went up to Rwf742.2 billion from Rwf 653 billion in the previous year.

Speaking during the presentation of the monetary policy and financial stability statement last week, Lawson Naibo, the chief operating officer of Bank of Kigali, said the current interest rates are greatly influenced by structural challenges in the market that are also common in the East African region and other emerging markets.

The poor savings culture in the country that lead banks to source funds from other sources outside the country, which mostly give them a short period to repay the money, Naibo said drives up the cost of loans across the board.

"If you look at the issue of interest rates, there is a structural challenge that banks face. It is a common challenge in East Africa and other emerging markets. We are not saving enough, when we are looking at a mortgage, we are giving you a mortgage of 15 years, but we are using funds that have been given to us by depositors for only one year,” he explained.

He said to remedy the challenge is for Rwandans to save more with local banks to reduce the funds sourced externally at a high cost.

"The challenge for everyone of us here, who wants low interest and mortgage rates, is to save. Anyone who has got a child needs to open a savings account, anybody in school should open a savings account, too. By saving more, you will be able to reduce the interest rate,” Naibo said.

Giving insights to the state of affairs, Konde Bugingo, the BRD Commercial Bank chief, said the challenges in domestic mobilsation of funds made it more difficult to price long-term products, such as mortgages, which go for 10 or 20 years.

To provide some long-term products such as mortgages, Bugingo said, banks borrow from development finance institutions (DFIs) which are alternative financial institution, including microfinance institutions, community development financial institutions, and revolving loan funds. These institutions play a crucial role in providing credit in the form of high risk loans, and equity positions. The cost of credit when banks source for funds externally is influenced by factors, such as the swap rate to convert the fund to local currency, bankers say.

Alex Kanyankole, the Development Bank of Rwanda chief executive officer, said the cost of products, such as mortgages, is also driven up by the lack of initiatives like housing finance societies and companies. Their introduction, he said, would ease access to funds for housing.

He said if local insurance firms and pension funds were availing such funds, this would also help push down loan rates.

Other initiatives mentioned that could lead to a drop in rates include the digitisation of the economy through adoption of a cashless economy. This, experts say, could help reduce rates, arguing that the current cost of the liquidity contributes to the current high rates.

The question is, however, what banks are doing to promote savings in the country besides waiting for people to open accounts. Less than 50 per cent of the Rwandan population are banked in the formal financial sector.

Government targets to have at least 80 per cent by 2017 and encourage cashless transactions in the economy.

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