High cost of credit takes toll of businesses in Rwanda

Saturday March 7 2015

A Bank Populaire du Rwanda stand at a trade fair in Kigali. Banks in Rwanda charge interest as high as 20 per cent, pushing up cost of operations. PHOTO | FILE

A Bank Populaire du Rwanda stand at a trade fair in Kigali. Banks in Rwanda charge interest as high as 20 per cent, pushing up cost of operations. PHOTO | FILE 

By BERNA NAMATA, The EastAfrican

The high cost of credit that has seen most businesses pay up to 20 per cent interest rates to banks, is weighing down on the private sector in Rwanda.

Despite credit to the sector expanding by 19.6 per cent last year, the government now faces a daunting task of crafting new measures to rein in runaway business expenses.

The loan rejection rate has climbed to 17.4 per cent against 13.2 per cent and 8.8 per cent recorded in 2013 and 2012 respectively.

This has been blamed on poor loan repayment due to lack of profitability, lack of collateral, outstanding loans in various banks and bad credit histories.

All this, compounded by limited access to finance, particularly for investors in the mining and agriculture sectors, has resulted in a loan rejection rate of 68 per cent and 58 per cent respectively last year, according to data released by the National Bank of Rwanda.

Small market

“Banks charge high interest rates, which make it impossible to grow business in a small market like Rwanda. High interest leaves no room for profitability because the cost of doing business is high yet the purchasing power is still low. You simply end up making money for the bank,” a businessman who runs a restaurant and a guest house in Kigali said.

“Businesses are forced to close shop while almost every month banks are advertising and auctioning people’s property because they have failed to repay a loan,” he added.

Industry lending rates declined marginally from 17.3 per cent in 2013 to 17.2 per cent in December 2014, despite the central bank reducing its policy rates to increase liquidity and create room for banks to lend to the private sector. The central bank has kept its repo rate unchanged at 6.5 per cent since June last year.

Deposit interest rates on average reduced 8.2 per cent last year from 9.9 per cent in 2013.

But banks argue that market dynamics — demand and supply — are the major determinants of interest rates and not the central bank’s policy rate.

The banks blame low levels of savings, which limits their source of deposits.

Rwanda’s national savings were estimated at 6.8 per cent of gross domestic product last year, down from 9.5 per cent of GDP in 2013. This is below the government’s target of 30 per cent of public savings for 2017-18.

This puts Rwanda below other East African countries such as Kenya, Tanzania and Uganda where national savings are relatively higher. For instance, Kenya’s national savings are 11 per cent of GDP and the figure is 15.5 per cent and 18.2 per cent for Uganda and Tanzania respectively.

Central bank Governor John Rwangombwa said weak responsiveness of the lending rate to the change in the key repo rate is due to among other factors, high operating costs in the banking sector and high provisions for bad loans. 

The non-performing loans ratio declined to 6.0 per cent last year compared with 6.9 per cent in December 2013.

“The behaviour of borrowers such as lack of information on loan conditions and a culture of not bargaining with banks has contributed to the rigidities in lending rates charged by banks,” Mr Rwangombwa said, adding that the central bank cannot impose or control interest rates charged by banks.

But analysts are now cautioning that the high cost of finance faced by mainly local enterprises is undermining private sector investment and job creation.

While Rwanda has done well in improving the policy environment for businesses, the high cost of doing business remains a major constraint to the country’s economic aspirations.

Rwanda has sustained high growth of over 6 per cent over the past decade, driven by public sector investment.