The central bank has signaled commercial banks to increase loans issuance to the private sector by revising downwards the key repo rate from 6.25 per cent to 6.0 per cent.
The key repo rate is the maximum rate at which commercial banks invest their money at the Central Bank.
Lowering the rate creates a scenario where commercial banks make more returns lending to the private sector as opposed to the Central Bank.
The rate adjustment follows a similar one in December whereby the rate was revised from 6.5 per cent to 6.25 per cent.
The development was announced, yesterday, by central bank governor John Rwangombwa following the quarterly Financial Stability Committee and Monetary Policy Committee meetings.
Rwangombwa said the committees had found the inflation was dropping and exchange rate pressures easing, hence revising the policy stance.
Central bank chief economist Thomas Kigabo said by bringing down the rate, they are expecting the banks to continue financing the economy but noted that it was dependent on more factors than just key repo rate.
“What we are expecting from the decision to bring down the rate is to further support the financing of economy by the banking sector. We expect banks to give more loans to the private sector.
“This will depend on different factors, however, we will need to have demand for loans, bankable projects. We are seeing positive developments in inflation and exchange rate. So we have room to finance the economy,” Prof Kigabo said.
Bank assets grow
As the central bank moves to push the financial sector to lend more to the private sector, assets in the banking sector grew by 11.3 per cent to reach Rwf2.4 trillion as of March 2017.
The total banking system net profit-after-tax for the first quarter amounted to Rwf9.8 billion, while micro-finance sector profit hit Rwf937 million.
Insurance sector made a profit of Rwf87 billion in the same period.
However, the banking sector also saw an increase in non-performing loans, from 6.2 per cent in March last year, to 8.1 per cent in March 2017, which Rwangombwa attributed to weak credit analysis and monitoring, poor project design and poor implementation.
The sectors most prone to non-performing loans are the manufacturing, hotel industry and retail trade.
Among the major observations by the committees was the significant reduction of the trade deficit by about 22.6 per cent in the first five months of the 2017.
The difference between imports and exports reduced from $749.7 million to $580.6 million in the first five months of 2017 compared to the same period last year.
This was attributed to an increase in formal exports, by 37.2 per cent, and a decrease in imports by 9.2 per cent.
Rwangombwa said that the positive trends in the reduction of the trade deficit had partly facilitated the easing of exchange rate pressures.
The Rwandan Franc had depreciated by 1.15 per cent as of June 22 this year compared to 4.6 per cent over the same period last year.
Inflationary pressures were found to have also eased from 7.7 per cent in the first quarter of the year to 7.3 in April and 6.5 as of May this year.
“The decline in the first five months was reflected in the three major components of the CPI basked; food, housing and transport,” he said.