Banks should cut interest rates to attract new customers and support growth of the financial sector, Marc Holtzman, the Bank of Kigali (BK) board chairman, has said. He said offering low interest rates will, not only attract more customers, but also strengthen the country’s financial sector.
“I am in favour of offering the best product with the best value and the lowest interest rate that is affordable and satisfies customer needs,” Holtzman said.
He was last week speaking during the presentation of the lender’s financial statement for the second quarter of the year.
Holtzman also challenged financial institutions to be innovative and develop products and services that meet customer needs and enhance financial inclusion.
Borrowers have complained about high interest rates for long, but banks claim they cannot reduce the current rates that average 17 per cent, arguing that they still face a lot of other costs that do not allow for reduction of rates. This is despite the central bank rate staying at a low of the 6.5 per cent for over a year now, a move the National Bank of Rwanda says aims at encouraging banks to lend to the private sector to spur investments and economic activity.
Last year, the central bank maintained an accommodative monetary policy stance aimed at supporting the economy. This boosted funding to the private sector with total loans to the business community growing by 26.7 per cent December 2015 compared to December 2014.
Embracing innovation and digitisation
Meanwhile, Sanjeev Anand, the BPR managing director, said embracing latest innovation and digitisation could help banks to reduce the cost of transaction, enhance efficiency and security.
This, according to Anand, could translate into low interest rates, besides helping banks to tap into the unbanked population and thus boost financial inclusion.
“Connectivity is improving, allowing banks to reach the mass market in rural areas. Therefore, innovation and digitisation is the way to go for financial institutions,” Anand said.
Some bankers say they are not happy when interest rates are high, arguing that this contributes to a high default rate which hurts the industry.
However, some say rates are high because banks acquire capital on the international market, competing with banks from other countries that enjoy high returns on capital compared to those earned in Rwanda’s financial sector.
The increasing competition in the industry has forced banks to innovate and design products and services that meet customer needs to increase client base and remain competitive. For example, agency banking has been rapidly growing with the number of bank agents rising from 844 in December 2012 to 2,555 in December 2015, according to the central bank.
This is partly responsible for the increasing number of bank accounts, which rose from 1.78 million in December 2011 to 2.36 million in December 2015.
The banking sector assets expanded significantly in 2015 with total assets of the industry registering an annual growth rate of 18.3 per cent in December 2015 from (Rwf1.80 trillion in December 2014 to Rwf2.13 trillion).
In a related development, Holtzman said integration of the regional stock markets trading platforms will benefit Rwanda and strengthen the local financial industry besides improving liquidity of the local bourse.