Commercial banks have started loosening up their reluctance towards lending to the private sector, raising confidence that the real sector is on track to attain this year’s growth targets.

Outstanding credit to the private sector grew at a modest pace of 1.5 percent in May this year with a significant improvement in June, leading to an increase of 3.2 percent compared to end 2009, the Central Bank said.

Lending by commercial banks hit Rwf121.93 billion during the first half of the year compared to Rwf83.8 billion in the same period last year, the Central Bank’s Monetary Policy Committee (MPC) said in its quarterly statement.

"The moderate growth of the outstanding credit to private sector while the volume of new authorized loans significantly increased simply reflect simultaneous efforts by banks in recovering non-performing loans distributed before 2009,” the statement reads.

Statistics suggest that during the end of the second quarter of this year, new authorized loans stood at Rwf69.33 billion, against Rwf52.6 billion authorized during the previous quarter.

Government says the economy will expand more than 7 percent this year on account of a rebound in Agriculture, Service and Industry sectors. Last year economic growth dropped to 6 percent from 11.2 percent in 2008 due to the fall in global demand and tightened credit conditions in the banking system.

Government has been struggling to bring commercial lending rates down in order to stimulate greater credit expansion amid moderate inflation to sustain the expected economic growth rates.

Recently the Central Bank decided to keep its policy rate at 7 percent in an attempt to maintain positive signals in the credit market.

The Bank said the decision was based on the current low inflation trend that is projected to reach 6 percent at end September 2010.

Central Bank has also generally lowered interest rates, with the average repo rate falling to 4.4 percent in March from 5.3 percent in January.

However while generally banks have resumed issuing new credit, lending rates on the market  remain untouched on average soaring between 16  percent and  17 percent. 

According to Maurice Toroitich, the Managing Director of Kenya Commercial Bank Rwanda, while the bank has significantly increased lending to approximately Rwf11 billion as of May compared to Rwf4 billion issued last year, the bank has not adjusted its interest rates.

To begin to fully see the impact of the policy rates, Toroitich said it will take between 9- 12 months cycle to have banks repricing deposits to see a reduction of interest rates.

However Steve Caley, the Managing Director of Fina Bank who also chairs the Banker’s Association says while lending has generally resumed, it is offered selectively.

"Overall gross advances have remained constant. There are not many really bankable projects being offered and those that are need long term finance. Whilst liquidity is better, there is still concern about being able to commit short term funds to long term credit demand,” he told Business Times recently.

Last year contrary to 23 percent growth planned at the beginning of the year, outstanding credit to private sector fell by 1.8 percent as a result of the liquidity crunch experienced between the last quarter 2008 and the second quarter 2009.

Ends