The central bank has over the past two years revised downwards its key repo rate, giving hope to customers of borrowing at lower rates. However, the wait for lower interest rates continues as banks are yet to cut their rates, a situation that has confused many clients.

"If the central bank has been reducing the repo rate, why can’t the commercial banks follow suit and cut interest rates?” many always ask.

Key repo rate is the rate at which the central bank lends money to commercial banks. The National Bank of Rwanda (BNR) cut the key lending rate from 7.5 per cent in 2013 to 7 per cent in the first half of last year, and then to the current 6.5 per cent, a move it said sought to encourage banks to lend to the private sector at lower rates.

However, this has not been the case with lending rates fluctuating from an average of 17.5 per cent in June last year to 16.7 per cent in November last year, and then upwards to 17.6 per cent (as quoted by BNR on Tuesday). 

But this could go up to 21 or so per cent, especially for unsecured loans.

Financial experts attribute this to various reasons, explaining that a lower repo rate does not necessarily mean banks would cut loan rates (at least not immediately).

In an interview with Business Times, Maurice Toroitich, the managing director of KCB Bank Rwanda, said there is always a misconception among borrowers concerning the repo rate and its influence on loan rates.

"The policy rate is an indication of where the interest rates should be going, but doesn’t necessarily set the price of how banks should be lending money,” he explains.

He says market dynamics, which are purely based on demand and supply forces, are the major determinants of interest rates.

"There is always a time lag between when the central bank announces the new policy rate and when the market adjusts to it,” says Toroitich.

He notes that banks take deposits from customers at certain rates for a certain period of time, say a year, meaning they can only adjust interest rates downwards after the period has lapsed.

Sanjeev Anand, the I&M Bank Rwanda managing director, says banks may have taken deposits at 10 or 11 per cent last year in June, which were going to last until June this year…so the interest rates will go down, but gradually,” says.

Eric Rutabana, the country manager of Business Partners International, a private investment firm for mostly small and medium enterprises, observes that reduction in the repo rate has not had any impact on loan rates because "the major determinants of commercial banks lending rates is the cost at which they get deposits, and the level of non-performing loans”.

"Trustworthy borrowers are made to pay high interests rates because of loan defaulters who force banks to try and cover the gap. So, unless the rate of bad loans goes down, we clients will have no choice but borrow money at high rates,” he says.

With the setting up of the Credit Reference Bureau, which compiles data on borrowers, banks will hopefully weed out bad borrowers and reward good customers with lower interest rates.

Rakesh Bhatnagar, the proprietor of SRB Investments, a paper bag manufacturing firm, says interest rates of about 20 per cent do not favour local investors, especially as they compete with foreign companies that are able to borrow cheaply from their home countries.

"We are competing with imports from China and elsewhere across the world. In China, for example, the interest rate could be at around 6-7 per cent,” he says.

He argues that banks’ margin on the interest rates should not be more than two per cent over the rate at which they borrow from the central bank.

Aimable Nkuranga, the country manager of Credit Reference Bureau (CRB), said customers can use good borrowing history to negotiate better interest rates for loans. The Credit Reference Bureau facilitates financial institutions to exchange information on borrowers, whether they regularly pay or made delays in loan repayment.

"Banks have what they call the base rate, and a risk margin, which they add to the base rate. Good clients should be able to negotiate basing on their risk margin,” he explained.

He added that creditworthy clients can also base on their CRB information to negotiate for less collateral since they have a good track record of using credit facilities.

John Rwangombwa, the National Bank of Rwanda governor, said during last month’s monetary policy statement meeting that risks associated with individual borrowers were still high compared to corporate clients. He said this is why interest rates go to over 19 per cent for individual borrowers, while the corporate clients can borrow at as low as 15 per cent per annual.

"We are trying to educate people to know how to exercise their rights while negotiating for loans,” he said.

Rwangombwa reiterated the need for borrowers to start using their good credit history from the CRB to negotiate better loan rates.

Bank clients’ views...

Moses Mbonigaba, trader

Because of the high interest rates, one has to weigh their options, especially how you will repay the loan, before going to any financial institution to acquire a loan. If possible, I think it would be a good idea to harmonise interest rates on loans, like it is being done with oil prices.

Asmat Cyusa, student

I understand the only way banks make money is through the interest we pay them. Otherwise, if a borrower uses the loan for the right purpose, I think they cannot feel the pressure of the interest levied on it..

Leticia Mugenyi, hairdresser

The interest rates are not low but I think the experts at the central bank came up with the repo rate after seeing that it would help the borrowers. But, at the end of the day, it’s upon the banks and other lenders to make their clients comfortable.

Shamsa Umutoniwase, businesswoman

I have no problem with the rates… I don’t think they are high because banks design their products to suit the borrowers’ needs. However, if they were much lower than they are presently, more people would take loans from financial institutions to undertake development projects.