Chief executives of commercial banks who attended last week’s reading of the monetary policy and financial stability statement strongly defended the high interest rates on credit and asked borrowers to appreciate that Rwanda’s rates are the lowest and most stable in East Africa.
Spirited and often dramatic protests against high interest rates have become an expected fixture on the menu whenever the central bank Governor presents the monetary and financial stability statement, and it was the case last Thursday.
Authorised loans to the private sector increased to Rwf360.8 billion in the first six months of 2015 from Rwf325.7 billion during the same period last year, but it’s feared that the high interest rates at which people are borrowing could trigger high default rates.
At past events, it has been Trade minister Francois Kanimba at the vanguard, advocating for the private sector against commercial banks’ alleged refusal to respond to central bank’s decision to keep the same key repo rate that has remained unchanged, at 6.5 per cent, since June last year.
But Kanimba was absent on Thursday and several Members of Parliament took his position and questioned commercial banks’ failure to lower lending rates that Governor John Rwangombwa said averaged 17.26 per cent across the industry in the first six months of 2015.
Although the rates were lower compared to the average of 17.5 per cent in the same period last year across the industry, legislators and members of the private sector put up a spirited argument demanding that the Governor does something to tame banks.
Rwangombwa pointed out that BNR has kept its key repo (the central bank's policy rate) unchanged at 6.5 per cent since June last year, from 7 per cent earlier, to encourage lenders to slash their rates too.
And like he often does, the Governor shifted the burden of further explanation to commercial bank representatives who were in attendance.
Bank of Kigali managing director James Gatera took to the floor, but ducked responsibility and instead invited another banker, Morris Toroitich, the managing director of KCB Rwanda, whom he introduced as the new chairman of the bankers’ association and requested him to justify the lending rates on behalf of the industry.
Rates region’s lowest
Toroitich started off tactfully, first conceding and acknowledging the problem before he delved into a ten minute argument that bordered a lecture on banking dynamics, in defence of the industry.
Toroitich told a packed Serena conference hall that no commercial bank CEO is happy when interest rates are high because they contribute to a high default rate which hurts the industry’s profits.
“While interest rates are high in Rwanda, we should appreciate the fact that they are some of the lowest in the region, and speaking from my seven-year experience here, they are also the most stable and that is something positive to put in context,” he said.
Toroitich argued that banks should not be put on the spot because they are competing for capital on the international market with banks in other countries that enjoy high returns on capital compared to those earned in Rwanda’s financial sector.
“Capital has the same colour, whether in Rwanda or Timbuktu, and investors everywhere expect a good return on their money but we are talking about a return to capital of 13 per cent here compared to over 20 per cent elsewhere in the region,” the banker argued.
In other words, the low profitability in Rwanda’s banking sector partly explains the high interest rates charged on credit, going by Toroitich’s submission.
“We are faced with an overwhelming demand for credit but for us to attract enough capital to satisfy that demand, we must be able to demonstrate that the banking business in Rwanda is giving a fair return to owners of capital,” he explained.
The central bank tended to agree with the bankers that indeed, at 13 per cent, returns to capital are still very low to compete favourably for liquid with the likes of Uganda and Kenya where returns are well over 20 per cent.
Banks source an estimated over 20 per cent of their capital from outside Rwanda but this liquidity, according to Toroitich, is affected by exchange rate related costs which also have to be factored into the final cost of credit.
Domestic savings in Rwanda are generally low and deposits are short term in nature to allow banks to support long term lending; as a result, although central bank only requires banks to maintain a liquidity level of 15 per cent, the industry liquidity adequacy ratio is above 20 per cent.
Between January and June 2015, banks increased their deposit rates to 8.80 per cent from 8.60 per cent in a bid to encourage more people to save, but analysts say as long as deposits remain short term, they can’t serve the huge demand for long term capital.
Toroitich also explained that most banks are currently going through an investment phase, expanding branches, investing in human capital and advancing new forms of banking technology, a cost that somehow gets factored into the final lending rates on credit.
High risk of lending
In conclusion, Toroitich shocked his audience when he noted that with all factors considered, the prevailing interest rates on credit in Rwanda are still low compared to the high risk of lending that banks have to contend with.
“The interest rate of 17 per cent is still very low given the reality of things; in fact, most banks are operating at a cost/income ration of above 70 per cent, which is not sustainable,” he said.
When he was done speaking, Bank of Kigali’s Gatera added his voice and validated points made by his counterpart, saying that borrowers simply have to be patient with the current industry dynamics and hope for things to get better.
“You can check elsewhere, but you will find that we still have the lowest rates,” said Gatera.
Between January and June 2015, banks received a total of over 128,000 loan applications, worth Rwf450.9 billion, of which about 20 per cent applications, accounting for some Rwf90.2 billion, were rejected.
The sector with the highest rejection rate, according to BNR statistics, was that of mining with a rejection of 33.3 per cent followed by non-classified activities with 30.7 per cent rejection.
Weak cash flows, inadequate collateral, bad credit history, bad business plans and questionable credit worthiness of shareholders were among the reasons given by banks for rejecting loan applications.
The Northern Province took the lion’s share with 37.7 per cent of all loans disbursed in the first half of the year, followed by Kigali city with 27.1 per cent.
By June, at least 122,000 people had accessed loans from financial institutions compared to 11,0482 in the same period last year.
In terms of access to loans by gender, the number of women borrowers declined to 41,756 from 43,488 in the same period last year compared to 80,249 men who borrowed money by June, a 16.5 per cent increment from 66.994 per cent in the same period last year.