The current high interest rates commercial banks charge on loans to individuals and businesses will soon start going down as banks accumulate larger cash reserves in their coffers.

There has been a public outcry among borrowers and in particular the business community over the high cost of borrowing when interest rates on commercial loans rose from 16.5 per cent to 17.7 per cent in the past 12 months ending June 2013.

The rise in lending rates was attributed to increase in government domestic borrowing through treasury bills whose net effect is a decline in bank deposits as would be depositors invest their money in treasury bills. On the other hand, banks too prefer lending to government through buying of treasury bills because there is almost no risk of default by the state.

In a recent turn of events, the central bank says that government has caped its internal borrowing after hitting its limit with the successful issuing of the $400 million Euro bond in April this year.

Last month, the central bank also reduced its benchmark rate (the repo) to 7 per cent from 7.5 per cent in a move that was intended to send a signal to commercial banks to lower their rates and increase lending to the private sector.

Officials of Bank of Kigali (BK), the biggest lender in the country, have confirmed that cash availability in banks is improving and interest rates on loans would soon start going down if the banks continue accumulating more deposits.

"At present the liquidity situation has been improving compared to last quarter of 2012 and we expect that lending rates will start to come down. If the liquidity situation continues to improve the lending rates will start coming down possibly in the next quarter or so,” BK said in an email sent by the company secretary and head of corporate affairs, Shivon Byamukama in response to our queries.

According to the Governor of the National Bank of Rwanda, John Rwangombwa, the reduction in the repo rate has already had an impact on the treasury bill rates – falling from 12.4 per cent to 10.4 per cent. Although the cut had not yet triggered similar reduction in lending rates by commercial banks, Rwangombwa says he also expected the lending rates to start going down in the near future. 

"The reduction of the repo rate by BNR is meant to make it unattractive for banks to place their funds with BNR thereby increasing banks’ lending to the market. In case there is a lot of liquidity and banking lending opportunities are not as many, then banks will reduce the rates to attract people who want to borrow,” BK added.

Some players in the banking sector, however, said that there are other factors that could not allow immediate fall in lending rates as soon as the repo rate went down. One such a factor is the low deposits held by the banking sector against high demand for loans to finance projects.

"There is a lot of demand for credit to finance projects. Banks may not have all the necessary funds to fund all the pipeline projects and therefore the repo rate reduction may not immediately result in bank rate reduction,” our source said.

The demand for loans continues to outweigh supply even as banks recorded a 11.5 per cent increase in deposits to Rwf940.7 billion between December 2012 and June this year.

According to the central bank, there are signs that banks started approving more loans to the private sector during the second quarter of this year – an indication of improving liquidity situation.

The slight recovery saw banks lend Rwf122.9 billion to the private sector, up from Rwf97.6 billion in quarter one with most of the credit going to commerce and hotels (48.8 per cent), mortgage (19.8 per cent) and manufacturing at 6.7 per cent.  

By the close of business on December 30, 2012, commercial bank loans to the private sector had hit a record Rwf747.3 billion, having risen by 35.6 per cent in 2012.