When banks lend people money, the borrowers usually pay back the principle plus interest. While that has been the trend for centuries, some of the world’s greatest economies are turning this traditional practice on its head and instead rewarding borrowers, but then charging depositors who have huge deposits on their accounts in what has been termed as negative interest on loans.

The banks are not spared either for not lending to people and pay heavily for depositing money in the central banks. According to Maurice Toroitich, the Manager of KCB Bank Rwanda and the chairman of the Rwanda Bankers Association, this practice is becoming increasingly popular, and is being applied in economies that are declining or those where there is essentially no growth.

Toroitich explains that the negative interest rates aim at discouraging people from keeping ‘idle money’ and this forces many that would otherwise want to hold onto cash to spend it.

"It encourages doing business… money has to change hands by all means,” says Toroitich. He adds that developing economies have not experienced such a situation, noting that the practice is common in Scandinavian countries. "Other countries are considering it because their economies have gone into recession,” he says.

He says such developing economies find it easy to offer negative interest rates because they have huge savings and hold a lot of money in the economy.

"So, it makes sense for banks to give people such incentives,” he adds.

The idea of negative interest rates begun as a theory but now is growing in the global banking sector. In 2014, the European Central Bank set negative interest rates. The idea has also been adopted in countries such as Sweden, Switzerland, Hungary and, recently, Japan. Demark had its negative interest rates as early 2012, and in Germany insurers offering life insurance but with low-term liabilities are affected by such rates.

The US is also weighing the possibility of such an arrangement despite opposition from some policy-makers. Pushing interest rates below zero

Ordinarily, central banks lower the repo rate to encourage commercial banks to cut interest rates. However, other factors sometimes come into play making it hard for banks to lower interest rates.

"The central bank rate is not the only determinant factor of the interest rates charged by the commercial banks; there are many other factors that are always at play, hindering a downward review of interest rates on loans,” says Jean Bosco Iyacu, the technical manager at Access to Finance Rwanda.

He says issues like profit margins, rift margins, and sources of funding also influence the interest rate banks charge on various loan products.

However, some developed countries have been pushing rates, even below zero per cent, encouraging commercial banks to lend more to the private sector.

"Banks that have many depositors do not have a problem achieving this… So, it requires us to first improve our savings culture. However, applying negative interest rates in Rwanda and developing countries generally could also fail in situations where there are few borrowers. Besides, it may not necessarily stimulate growth,” Iyacu adds. Borrowers gaining from banks

As banks resort to these desperate measures that force people to spend, borrowers enjoy the privilege of being rewarded for taking loans. For instance, if an interest rate of negative 20 per cent is charged on Rwf100,000 loan, the borrower would be paid an incentive of Rwf20,000 by the bank, on every Rwf100,000 borrowed.

But such huge figures are not at play when it comes to negative interest rates and most of them rarely exceed negative one per cent. According to Moffat Mwangi, the head of mortgage financing and product development at Bank of Kigali, European economies have the capacity to support these rates "because they have for long planned for such but it could take African economies decades to achieve the same”.

"Generally, interest rates have been low in Europe for a long time. When they talk of interest of 0.5 per cent, it means any credit given to them is actually a baggage. Any one from the developing world banking money with these countries also meet and benefit from these interest rates for both currencies and for banking with them,” says Mwangi.

Negative interest rates also affect the bond markets; and in the eurozone, their acquisition is more about controlling inflation within the economies, experts say.

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