MPs question why new banking law is silent on interest rates

Parliament yesterday started debate on a draft law that seeks amendment of the current law on banking, with legislators questioning why the Bill remains silent on the need to introduce a cap on interest commercial banks can charge on loans. The amendment’s silence on the freedom enjoyed by commercial banks to charge interest rates as they wish saw MPs revive calls for the Government to intervene to help reduce interest rates on loans. They pitched their ideas to Finance and Economic Planning minister Claver Gatete after he presented the Bill to amend the banking law in Parliament yesterday. “We are still lagging behind when you look at our interest rates. Can we use the opportunity of amending our banking law to do something about our interest rates that remain prohibitively high?” MP Edouard Bamporiki asked the minister. MP Constance Mukayuhi Rwaka seconded the idea, asking the minister to include the debate about capping interest rates among the items to be considered during the review of the law. “We wish that reforms that we make also help reduce the interest rates charged by banks on loans,” she said, explaining that the banking sector needs to play a role in supporting the country’s development. Minister non-committal But Gatete remained non-committal on introducing debates about interest rates under the draft law, explaining that banks charge their interests depending on the cost of borrowing money from their lenders as well as the lack of long-term deposits among their clients in Rwanda. The current law concerning organisation of banking was established in 2008 and the government has proposed amendments to modernise it in line with current banking standards in the world and the East African Community as well as the country’s new commercial laws. During a consultative meeting in the Lower House in February about monetary policy, officials at the National Bank of Rwanda (BNR) argued that banks don’t make much profit given the cost of doing business especially with regard to remaining attractive to investors in the financial sector. Central bank governor John Rwangombwa told MPs at the consultative meeting that the central bank can’t order commercial banks to give loans on a specific interest rate due to the principles of a free market. He instead explained that factors like a strong savings culture and effective repayment of bank loans could help reduce interest rates in the future by making funds less scarce at banks and reducing the perceived risks of lending. Commercial banks in the country charge between 16 and 19 per cent in annual interest rates for loans, while borrowers pay about 24 per cent to get loans from Savings and Credit Cooperatives (Umurenge-SACCOs). Some analysts, including a few MPs, say that the rates are too high to positively drive people’s economic activities and that the central bank should do something to reverse the situation. The current law concerning organisation of banking, whose amendment has been proposed by the Government, regulates the establishment, management and supervision of banks operating within the country. It sets standards and prudential rules to which banks are subject with a view to maintaining a safe and sound banking system in the interest of depositors and other customers of a bank. The provisions of the law will not apply to investment banks licenced under the Capital Market Law in Rwanda, the proposed amendment to the law says. The draft defines a bank as a public company limited by shares or a cooperative licensed by the central bank to undertake activities of accepting deposit and granting loans for its own account and says that development banks are prohibited to collect deposits from the public. Debate on the proposed law will continue at the committee level in the Lower House, which will allow for more inputs and necessary modifications before it is passed into law. editorial@newtimes.co.rw

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MPs question why new banking law is silent on interest rates