As the Central Bank continues to implement lower key repo rates and government increasing spending, commercial banks are expected to respond by reducing their interest rates, signalling hopes of cheaper bank loans.
Following a credit squeeze throughout last year, the Central Bank made aggressive efforts by slashing its repo rate—at which it lends to commercial banks—to the current level of 7 percent from 9 percent in December 2009 and government has also continued to inject cash into the banking system.
The Managing Director of Ecobank Rwanda, Daniel Sackey, said that one would not have expected to see an immediate drop in lending rates but all banks are now indirectly responding and that clients who submit viable projects are benefiting from lower interest rates compared to the past.
“If you check through all banks between this year and last year, there has been roughly a drop of between 3 to 4 percentage points in lending rates,” Sackey said in interview.
According to the Central Bank, outstanding credit to the private sector contracted by 1.8 percent last year as a consequence of the liquidity problem experienced by the banking system between the last quarter of 2008 and the second quarter of 2009. This was contrary to the 23 percent increase that was planed at the beginning of 2009.
“The outstanding credit to private sector was on a declining trend during the first three quarters of 2009, as it declined successively by 0.5 percent, 3.3 percent and 1.2 percent respectively,” the Central Bank said in the monetary policy statement that was released in February.
Sackey said that though they expect the lending rates to go down, it’s not going to be the same as the Central Bank’s repo-rate because commercial banks have to factor-in the risk margin.
“The Central Bank rate is not the ultimate cost of cost for banks,” “Interest rates are a function of demand and supply. At the end of the day what is important is that now banks are working on deposits that they got from clients.
“Those deposits were taken on a long-term basis of one or two years at rates that were higher. Those deposits are now running their term. Until they run their term, Central Bank will not be able to reduce the cost of lending.”
Inflation and interest rates on government securities have also taken downward trends.
Government spending will increase by 9.0 percent to Rwf984 billion in the Financial Year 2010/11 and Sackey says that based on that, there will be an appropriate response from all the sectors of the economy including commercial banks.
“We expect that going forward if the positive trends in economic conditions continue we are expecting further drops in interest rates.”