Micro-Finance Institutions decry high interest rates

Micro Finance Institutions (MFIs) have voiced their concerns over high interest rates charged by banks. They say this has worsened loan recovery from their clients. The high interest rates are also blocking a significant portion of private sector members from accessing loans.
Francois Kanimba, Governor Central Bank.
Francois Kanimba, Governor Central Bank.

Micro Finance Institutions (MFIs) have voiced their concerns over high interest rates charged by banks. They say this has worsened loan recovery from their clients.

The high interest rates are also blocking a significant portion of private sector members from accessing loans.

This partially stems from excess liquidity that was recorded in Rwanda’s banking industry in 2007, drying up in 2008, leading to a rise in interest rates earlier this year.  

The stakeholders in the industry also say their clients are increasingly finding it difficult to repay their loans due to a general slow down in economic activities in the country as a result of external shocks of the global financial crisis.

This was said during a workshop organized by the Development Bank of Rwanda (BRD) with their umbrella organization AMIR this week to facilitate their operations.  

“Economic conditions have changed from the time when we gave out loans. Our clients are finding it very difficult to pay back because generally there is no money in the economy,” one of the MFI representatives told the workshop demanding that banks should adjust their interest rates to reflect the changes in the market.

According to Ndahayo Theoneste, the vice chairman of AMIR and Managing Director of Umutanguha Sacco Union, while the impact of the global financial crisis has not been direct, their clients have been affected.

“We can not attribute everything to financial crisis. But we have seen declining liquidity and loan recovery has become a problem,” Ndahayo said.

Ochienghs Peter, Managing Director of Rwanda Micro finance Limited said that interest rates charged by banks are still very high making difficult for them to do business.

Commercial banks are charging interest rates between 17 -19 percent while BRD is charging 6 percent annually respectively.

“This is responsibly high! For us to meet the margin we have to double the interest rate,” Ochienghs said, pointing out that MFIs generally charge between 2-3 percent.

However, the Central Bank says interest rates for MFIs are determined by the market.

“We expect that stiff competition will bring down the interest rates. Right now the competition is not significant and banks are still small,” Francois Kanimba, Governor Central Bank   told Business Times.

Kanimba explained that MFIs also charge high interest rates as the unit cost is very high compared to established commercial banks.

“When you distribute small loans to cover high operating costs you have to charge high,” he said.

MFIs amount of loans in default as a percentage of the total loan portfolio increased by four percent to 12 percent in the first six months of 2009, according to the central bank.

This increase in the delinquency rate is due to the failure of loan holders to honour their debt obligations, hence a significant loss to MFIs.

However, government has put in place a capacity building fund and the refinancing fund to train MFI managers and refinance MFIs’ activities to a tune of Rwf. 1.3 billion.

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