The National Bank of Rwanda (BNR) has slashed its Key Repo Rate to 5.5 per cent down from 6 per cent, in a move designed to encourage commercial banks to follow suit and slash interest rates. Central bank governor John Rwangombwa announced the new rate, yesterday, after the bank’s quarterly Financial Stability Committee and Monetary Policy Committee meetings, saying the move seeks to encourage banks to boost lending to the private sector and subsequently spur economic growth.

The Key Repo Rate is the rate at which the central bank lends to commercial banks.

BNR has cut its lending rate four times in less than 12 months and, according to governor Rwangombwa, this is already paying off. The central bank chief said when the repo rate was adjusted from 6.25 per cent to 6 per cent in June this year, it resulted into a 12.3 per cent credit boost to the private sector compared to 8.8 per cent the previous year.

"Outstanding credit to the private sector expanded by 12.3 per cent in November 2017 compared to 8.8 per cent in the same period in 2016, while total new authorised loans grew by 7.7 per cent from 4.5 per cent in the corresponding period last year,” the governor said while presenting the financial stability and monetary statement in Kigali.

"We, therefore, expect the new rate to boost lending to the private sector to about 14 per cent going into 2018,” Rwangonbwa told The New Times yesterday.

Applaud move

Financial sector experts and business leaders say the rate reduction will enhance productivity and "keep the country’s economy buoyant” next year.

Stephen Ruzibiza, the Private Sector Federation (PSF) chief executive officer, expressed optimism about the new repo rate. He challenged commercial banks to follow suit and cut interest rate, as well as increase lending to the business community.

"We are now waiting to see how commercial banks will respond to the central bank move,” he added.

Patrick Nkurunziza, a Kigali-based economist, said the new rate is a "strong signal” for banks to rethink their high interest rates so that loans are "more affordable”. "In brief, we expect banks to equally reduce their rates, thus increasing appetite for credit, which will translate into more profits for the lenders,” he said.

Some banks charge 20 per cent on personal loans of between Rwf2 million and Rwf10 million, which Aline Uwitonze, a businesswoman in Kigali, said is too high. "We, therefore, expect the move to lead to a reduction in rates at which banks lend to the private sector,” she said.

Commercial banks have previously claimed they don’t cut their interest rates following reduction in the repo rate because of "other factors” like borrowing from global financial institutions at high rates.

Financial sector stable

Meanwhile, the financial stability committee observed a positive trend in Rwanda’s financial sector, noting that the sector remains "adequately capitalised, liquid and profitable”.

According to the governor, the capital adequacy ratio for banks was recorded at 22.2 per cent compared to 20.7 per cent the previous quarter, which is well above central bank’s regulatory minimum requirement of 15 per cent. That of microfinance was 36 per cent, up from 33.3 per cent, higher than regulatory minimum requirement of 15 per cent set by BNR.

The sector’s assets increased during the reporting period, with banks recording an annual growth of 17 per cent in September to Rwf2.6 trillion, while the micro-finance sub-sector’s assets were up 9.5 per cent to Rwf242.4 billion.

Equally, the rate of defaulting (bad loans) thanks to the stringent measures employed by sector players against defaulters – is on a downward trend as non performing loans (for banks) inched lower to 7.7 per cent in September, from 8.2 per cent as at June this year. Micro-finance institutions also registered a big drop in bad loans from 12.3 per cent during the previous quarter to 8 per cent in the third quarter,  according to BNR chief economist Prof Thomas Kigabo.Economy resilient

Meanwhile, the central bank is optimistic that the economy will remain resilient, supported by good performance from mainly the agriculture sector and rising international commodity prices. International Monetary Fund and government revised Rwanda’s economic growth projections for this year to 5.2 per cent from the previous 6.2 per cent. The economy grew by 8 per cent last quarter, up from 4 per cent during the second quarter 2017.

Inflation dips

In a related development, Rwanda’s headline inflation reduced to 2.2 per cent in November 2017 year-on-year, from 6.4 per cent during the same period in 2016. The drop was mainly attributed to the subdued demand-side and supply-side pressures, coupled with the stability of the exchange rate, said Rwangombwa.

He said the Rwanda Franc is expected to depreciate by 3.07 per cent in 2017 against the greenback compared to 9.7 per cent observed last year.

The trade deficit reduced by 21.1 per cent in the first eleven months of 2017 compared to the same period in 2016, as a result of the significant increase in formal exports value (by 53.7 per cent) and a decrease in formal imports value (by 1.4 per cent).

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