ANALYSIS : Commercial Banks resume lending with interest rates unchanged

A few weeks into the second quarter of this year, commercial banks are still reluctant to lower interest rates despite the Central Bank’s intervention, Business Times has learnt. National Bank of Rwanda in March this year slashed the rate at which it lends to commercial banks. The key repo rate was slashed by 50 basis points to 7 percent. Central Bank has also generally lowered interest rates, with the average repo rate falling to 4.4 percent in March from 5.3percent in January. On the inter-bank market where banks exchange different currencies, starting from end January this year the rate is below the floor of the inter-bank corridor set, moving around 5.2 percent. While generally banks have resumed lending with increasing with 14.6 percent in the first quarter of this year, rates have remained on average soaring between 17 percent and 22percent. Despite the high charges, credit to the economy has been increasing with total loans hitting approximately Rwf100 billion as of last month. This is compared to the total of Rwf198 billion issued the whole of last year. “There is more liquidity in the system. We expect this year to be much better because last year the economy was affected by inflation and the crisis” Central Bank’s Deputy Governor, Claver Gatete told Business Times last week. This follows implementation of different measures by the Central Bank and government since mid last year, allowing banks to rebuild significantly their liquidity conditions and lending capacity. This reduction in the cost of funds for commercial banks is expected to be transmitted in credit markets by lowering bank’s lending rates. An independent survey done by Business Times shows that bank’s have not slashed their lending rates giving borrowers no option. Since last year banks only attempted to slash interest rates once during December that saw the lending rate reach 15 percent , but have since been hiked to as high as 22 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. “I would not say that the Central Bank low interest phenomenon has begun to have any effect in the banking industry. Our interest rates are still the same; this is determined by the market; the demand for liquidity in the market is there but also the supply is limited,” he told Business Times last week. Toroitich observed that while lowering of interest rates by the Central Bank signals that market rates should also change, it will take time for the market to respond to policy rates. “At the beginning of the year as bankers we took deposits for twelve months for 13 percent and 15 percent in some cases and these are sitting until they mature; there is a maturity lag,” he said. 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 according to Lawson Naibo Bank of Kigali’s Chief of Operations Officer, while lending “is not a problem” the Central Bank’s policy rates can not be a sole determinant for low interest rates. “When determining the pricing we are talking about the actual cost of funds, the risk of default, you find that this market has relatively higher cost of default, this also impacts on the cost of lending,” he said. As of December last year the ratio of defaulters (Non-Performing Loans) within the banking sector stood at 11percent way above the 7 percent threshold set by the Central Bank. “If the other fundamentals have not changed; there will be very little impact. If we could see a reduction in the default rate this could significantly impact on the lending rates,” Naibo said. In March this year, the bank’s loan book hit Rwf84billion as opposed to Rwf71billion recorded in the same period last year. Ends