Business people, especially small-and-medium entrepreneurs, and individuals have for long complained about lack of affordable credit in the country. Every other borrower complains about how they are being ‘fleeced’ by the commercial banks. So when central bank cut the key lending rate from 7.5 per cent to 7 per cent in June, most borrowers expected that commercial banks would follow suit and reduce loan charges. It’s been four months since, but banks are yet to reduce their lending rates. The average interest rate is 17.5 per cent.  This inaction has caused a lot of anxiety among borrowers, with some accusing banks of cheating them and making undeserved profits. However, bankers think otherwise, arguing that slashing of the rate by the central bank does not necessarily mean that they have to cut theirs too."The repo rate is an indicator of how the central bank perceives the monetary environment. When they feel that the inflation pressure is low and there is demand for credit, they revise it downwards for banks to increase lending. But this does not necessarily mean commercial banks have to reduce rates because the lending rate is influenced by several factors,” John Bugunya, the Bank of Kigali chief finance officer, explains.High rates; banks defend themselves"Banks look at the cost of deposits, the inflation rate, the risk free rate and the risk profile of the client. Inflation being the indicator of the true value of transaction in the economy is also taken into consideration. When all this factors come into play, you may not necessarily see the banks react as fast,” Bugunya explains.The client’s risk profile or volatility of the venture is a key consideration in determining the interest rates, he adds. "If you are lending to a first time borrower whose deposit is fairly low, and they are investing in a new venture, the rate will be high because of the huge risks it presnts.”According to Pacifique Nkogoli, the Urwego Opportunity Bank credit manager, bank loan rates are yet to hit the ceiling. "We are supervised by the central bank, so we ensure the rates we charge are within bounds,” she says.Borrowers, like Olivier Nkurunziza, a Kigali-based importer of used cars, also complain that banks ask for collateral that is twice as much the loan they want to acquire, saying this is unfair."Banks follow central bank guidelines as far as collateral is concerned. We can only consider a certain percentage of the value of an asset as security. Besides, forced sale value is usually lower than the actual value of the property. Under normal circumstances, the collateral should be re-accessed at least once in three years to consider appreciation or depreciation of the property,” Bugunya points out.Loans to the private sector from commercial banks were Rwf220.5b in first half of this year compared to Rwf251.7b over the same period in 2012. The central bank attributed the drop to efforts aimed at enhancing risk management.  The high interest rates have also caused some bank clients to seek alternative sources of capital to finance their ventures. Delphin Ngamije, the managing director of Duterimbere, a micro-finance institution that works with women, says in the recent times the number of people, who have left banks and registered with MFIs, is growing. "We may not have a definite figure, but the number of requests from people who say they are frustrated by banks is growing. However, these are usually not our target clientele,” she explains."Most of these people are attracted to micro-finance institutions because of low interest rates. We have been charging a 15 per cent interest rate since 2005. This rate attracts those who want capital to fund projects but can’t afford rates charged by banks.” It is also easy to acquire a loan from a micro-finance institution compared to a bank. The processes are few and we do not require costly collateral as ours is more of a social mission than a financial one. We train clients in entrepreneurship and conduct follow ups to ensure value for their money,” Ngamije says.  Bank of Kigali’s Bugunya says the development is not a threat to banks, but a necessary ‘partnership’ that will ensure many people access finance. "It is a good thing that they (micro-finance institutions) are attracting more clientele. Banks working with micro- finance institutions to increase access to finance should be encouraged further since micro-finances have channels to reach people the banks wouldn’t. It is never a competition.”  Some banks and micro-finance institutions also provide alternative access to channels like group loans for groups with small scale ventures."Group loans are ideal for people with similar start up ventures; they come without collateral. Though most people want independence, group projects are good especially for beginners as they are cheaper and easily manageable,” Nkongoli says.Banks under squeeze tooAbdul Nizeyimana, a financial consultant with over 20 years experience as a banker in the region, explains that though the central bank dropped the repo rate to increase borrowing, banks can be hesitant to revise their rates downwards because of contractual obligation with their lenders ."It is almost a case of demand and supply. Banks mostly react to the market as opposed to lending rates, meaning they will not react immediately and cut rates,” he says. "The demand could be higher than they can supply, leading them to borrow from other sources (depositors) who may be expensive. So, the charges remain high until they have new terms with depositors.”Nizeyimana predicted that loan charges would stay unchanged until early next year. "The condition of rates that are not at par with the repo rate will persist until banks have new contracts with their depositors to retain stability in their profitability and they are comfortable with the rate of inflation.”"If banks are wary about inflation rates, they may hold their interest rate to see stability before they can lower them,” he argued. Nizeyimana says it is not all dark because high interest rates lead to better financial behaviour. "With low rates, a large percentage of Rwandans are likely to take up loans to buy items they don’t need or invest in high-risk projects. This is common among small-and-medium enterprises since they will pay less to the banks. So, at some point banks will reduce rates to encourage more of such borrowers as they are more profitable to them,” he points out.What central bank says"After changes in the central bank key lending rate, one should expect to see changes in the Treasury Bills rate, the repo rate, the deposit rate and eventually the commercial banks’ lending rates. And this being an open market, we do not dictate commercial bank’s interest rates,” Vianney Kigabo, the National bank of Rwanda chief economist, explains.