Low inflation leads to interest rates fall in Rwanda

 

South African President Jacob Zuma (left) and President Paul Kagame of Rwanda. FILE

 

By BERNA NAMATA The EastAfrican

In Summary

• With low inflation and increased liquidity in the market as government resumes spending, banks could lower their lending rates.

Rwandan borrowers are likely to benefit from reduced lending rates in coming months, as commercial banks diversify their sources of deposits.

With low inflation and increased liquidity in the market as government resumes spending, banks could lower their lending rates.

 

Rwandan commercial banks currently have higher deposits after aggressively launching branchless or agency banking, and expanding their branch networks to rural areas.

The banks are benefiting from reduced government borrowing from the domestic market, as shown by falling interest rates on Treasury bills to between 5.1 per cent for one-month instruments and 6.5 per cent for maturities of one year, from 12 per cent in April last year.

Recent statistics show that lending rates by commercial banks have remained almost unchanged at 16.83 per cent as of March this year, in comparison to 16.9 per cent in December 2013. Deposit rates dropped significantly from an average of 11.6 per cent in June last year, to 8.58 per cent in March this year.

READ: Rwanda banks faulted for high interest rates

John Rwangombwa, the governor of National Bank of Rwanda (BNR), says lending rates are likely to come down from April as banks now have access to relatively cheaper deposits.

“When you look at the deposit rates, the biggest financing source for the banks has gone down — there is a drop in their cost of financing. Last year they were borrowing expensively to finance their lending — this has gone down,” Mr Rwangombwa told The EastAfrican. 

On Tuesday, the central bank kept its repo rate (lending rate) unchanged at seven per cent since June 2012.

Mr Rwangombwa said the delayed impact of changes in the central bank’s policy, in particular on lending rates, is because banks had a big stock of expensive deposits in their financing.

Credit to the private sector is expected to expand to 15.8 per cent this year, from 12.9 per cent in 2013. Rwanda’s inflation rate was at 3.45 per cent in February.

“There is a general expectation that the lending rates will come down because of the prevailing macro-economic stability. There has been marginal depreciation of the Rwandan franc, a rebound in economic activity and there are signals that inflation will be kept under control,” said Toroitich Maurice, the managing Director of Kenya Commercial Bank Rwanda.

He said his bank plans to revise lending rates downwards from next month. “Generally, the deposit rates are under 10 per cent — we should see the effect in the second half of the year.”