The central bank says banks will increase lending to the private sector, with growth increasing four fold in the first quarter of 2011 compared to the same period last year, after it eased its monetary policy.
The central bank projects a strong recovery in credit to the economy following slow growth in 2010 after a credit squeeze. Credit to the private sector is expected to grow by 22.4 percent this year, up from 12.7 percent in 2010.
Central bank governor, Francois Kanimba, said outstanding credit to the private sector grew by 4.7 percent between December 2010 and February 2011.
“The volume is still low but if the trend is sustained it’s a good indication that something is happening,” Kanimba said.
While addressing a press conference at central bank headquarters in Kigali on Tuesday, the Governor said that preliminary data for March indicated sustained growth.
The central bank has supported high credit growth by easing its monetary policy. This week the bank decided to maintain its key repo rate at a record low of six percent.
However, central bank statistics suggest that credit to the economy is concentrated in few economic activities, mainly in big companies with Small and Medium Enterprises (SMEs) having limited access to loans.
According to the monetary policy and financial stability statement that was realised recently, 90 percent of the credit distributed to the economy has benefited a few sectors including general trade, manufacturing, construction and the hospitality industry.
Central bank says it will promote policies which tend to increase competition in the banking sector with more focus on improving access to finance by SMEs.
In the first quarter of 2011, banks approved Rwf62 billion worth of new loans compared to Rwf52 billion in same period last year, the central bank says.
Industry experts say that the central bank’s major daunting task is to increase lending to the economy while maintaining low inflation rates if it is to meet its real GDP growth target of seven percent.
Banks are also yet to respond to the central bank’s policy decisions.
Lawson Naibo, the Chief Operations Officer (COO) of Bank of Kigali said that the current economic situation shows that inflation is going up slightly and requires close watch.
“We need to be more careful, watch the situation as it unfolds with credit risk that may arise and impact interest rates,” he said.
He added that BK would watch the market until the second quarter with plans to cut interest rates by the beginning of the third quarter.
BK’s interest rates on short term deposits stand at 10 percent while interest on loans was 17 percent from 14 and 19 percent respectively last year.
Kanimba acknowledged the slow pace by commercial banks to reduce their interest rates but said that in general, the negotiated lending rates banks offer now are better than before, in particular, for corporate customers.
Lower interest rates mean that consumers spend less on interest costs, leaving them with more of their income to save or spend on goods and services.