Will commercial banks respond to BNR's low Repo signal?

On Wednesday the National Bank of Rwanda (BNR) announced it was maintaining its key Repo rate at 6.5 per cent to encourage commercial banks to lend more to the private sector and promote more investment.
Rwangombwa (2nd L) chats with Bank of Kigali CEO, James Gatera (2nd R). Commercial banks have not been able to significantly reduce lending rates. (Timothy Kisambira)
Rwangombwa (2nd L) chats with Bank of Kigali CEO, James Gatera (2nd R). Commercial banks have not been able to significantly reduce lending rates. (Timothy Kisambira)

On Wednesday the National Bank of Rwanda (BNR) announced it was maintaining its key Repo rate at 6.5 per cent to encourage commercial banks to lend more to the private sector and promote more investment.

But how did members of the private sector receive the news? Do BNR’s decisions actually impact on their intended beneficiaries? The answer is yes and no depending on the context.

For starters, the Repo rate is the fee at which the central bank of a country, in this case, BNR, lends money to commercial banks, in the event of any shortfall of funds.

The central bank has been on a chopping trend since 2013 cutting its key Repo from 7.5 per cent then to 7 per cent before it was slashed to 6.5 per cent in June last year where it has since then been retained.

According to central bank officials, this descent in the Repo rate has paid off with fresh statistics showing an increase in volumes of new authorized loans to private sector from commercial banks.

For instance, in 2014, new loans to the private sector increased by 38.2 per cent which was a recovery from the 5.3 per cent decline registered in 2013.

However, that’s one side of the coin. Volumes of loan assets have increased, no doubt, the change is visible. But what concerns borrowers in the private sector is the high cost at which they have had to borrow the loans.

The lamentations are yet to cease about the commercial banks’ lending rates that have stubbornly stayed largely unchanged which compounds the cost overheads for production among local firms.

On several occasions, Central Bank Governor John Rwangombwa has been asked why his Repo rate signals haven’t been picked up by commercial banks in form of reduced lending rates but it’s a question that he has always preferred to donate to the bankers to explain.

The Sunday Times did the same and sought out a banker, George Odhiambo of Kenya Commercial Bank (KCB), Rwanda, for his opinion. Odhiambo said there are several other factors besides the Repo rate that inform the behavior of the banking industry.

“That’s why many people will tell you that banks are not responding to central bank Repo rate reductions, that’s true but there are constraints that banks have to deal with and many of these are known to the central bank itself,” said Odhiambo.

Among the market forces at play, Odhiambo points out that banks are enduring high cost of operations from trading with expensive money and that there’s also an imbalance between demand and supply for the money.

In other words, there’s hunger for credit from the private sector but low local deposits/savings mean that banks have no money to lend so they seek it out.

Well, that’s very accurate because as of end December 2014, the solvency ratios for  banks and microfinance was adequate, standing at 24.2 per cent and 33.1 per cent respectively , well above the central bank’s regulatory threshold of 15 per cent.

But the Non-Performing Loan ratio (NPL ratio) for banks shifted only slightly from 6.3 per cent by end September 2014 to 6.0 per cent by end December 2014, this is still above the central bank’s desired minimum of 5 per cent.

“So the risk of lending is also high,” Odhiambo opined.

That would also explain why banks are keeping more money in their vaults that the central bank wants them to keep. They are cautious.

Long term

Fortunately, for some enlightened players in the private sector, these are elements they seem to quite understand.

Take for instance Suchir Bhatnagar, General Manager of SRB Investments, paper bag manufacturing firm. He said the last time he asked banks why lending rates are not going down, they answered that they too were borrowing expensively.

“I was told for instance that RSSB was lending banks money at 15 per cent which results in high interest for the final borrower,” said Bhatnagar.

The last time Bhatnagar’s company borrowed, they settled for 19 per cent interest way above the average of 17.2 per cent that central bank quotes as the industry average.

Bart Gasana, the Director of Premier Group makes similar observations saying so as long the largest chunk of banks’ money is borrowed externally; a low central bank key Repo can’t be expected to work wonders.

“You and I know that it has never worked. Commercial banks never really respond to central bank’s signals and that’s partly why the cost of borrowing is still high, hovering between 17.5 and 20 per cent,” said Gasana.

Gasana says what government and other stakeholders need to do is build capacity of Small and Medium Enterprises (SMEs) to enable them mobilize money from the stock market as an alternative to borrowing from constrained banks.

“Otherwise banks won’t run out of excuses, we need to have alternatives for cheaper money either through stocks or equity funds, that’s the plausible way out,” he said.

Pierre Kamere Munyura, the Managing Director of Mibirizi Coffee agrees, noting that while BNR’s signals mean well, he doesn’t expect them to yield instantaneous results.

“We can only wait and see. Of course that’s what everyone wants, lower interest rates because as things stand currently, high rates mean high production costs which means high prices for local products which limits competitiveness,” he said.

Munyura’s analysis of high cost of production weighing down on local firms’ competitiveness is already taking its toll on firms like Mount Meru Soyco limited (MMSL).

MMSL is Rwanda’s only manufacturer of cooking oil but it has been forced to reduce prices of its products by Rwf200 recently, because of cheaper imported oil on the market.

True, there’s a general global commodity price decline but firms with higher costs of production such as high lending rates on credit find themselves without room to respond to those changes.

It shows when their expensive products are placed next to cheap imports displayed on supermarket shelves where consumers look out for the most inexpensive.

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