Rwandan borrowers could benefit from reduced lending rates in coming months, as commercial banks diversify their sources of deposits.

With low inflation and increased liquidity in the market as government resumes spending, banks could lower their lending rates.

Rwanda’s inflation continues to be low and stable, decelerating to 1.9 per cent in May from 2.7 per cent in April 2014 and 2.43 per cent in January 2014.

READ: Low inflation leads to interest rates fall in Rwanda

Last week, the National Bank of Rwanda (BNR) lowered its key repo rate to 6.5 per cent from 7 per cent — the first reduction since June 2013 — to encourage banks to lend to the private sector to stimulate economic growth in the country.

The banks are likely to respond to reduced government borrowing from the domestic market, and interest rates on Treasury bills have fallen to between 5.1 per cent for one-month instruments and 6.5 per cent for maturities of one year, from a high of 12 per cent in April last year.

John Rwangombwa, the governor of BNR, said lending rates are likely to come down in the next quarter of the year as banks now have access to relatively cheaper deposits.

“They have been able to accumulate cheaper deposits while their portfolio is greatly improved, so we expect to see the cost of their provisioning going down,” said Mr Rwangombwa, adding that this is likely to see them lower their interest rates.

“If you look at their provisioning, it had gone up by almost 30 per cent; these costs are transferred to their interest rates,” said Mr Rwangombwa.

However, fresh data released by BNR shows that industry lending rates declined marginally from 17.6 per cent in June last year to 17.1 per cent in May this year, despite the central bank reducing its policy rates to increase liquidity and create room for banks to lend to the private sector.

Interest expenses for banks increased between March 2013 and March this year by 44.7 per cent.

Mr Rwangombwa said the delayed impact of the changes in the central bank’s policy, in particular on lending rates, is because banks had a large stock of expensive deposits in their portfolios.

Deposit rates have dropped significantly from an average of 11.6 per cent in June last year, to the current average of 8.58 per cent.

READ: Rwandan central bank now moves to cushion depositors

In addition, the banking sector’s loan default rates, shown as the non-performing loans (NPLs) ratio, has improved slightly to 6.7 per cent as of March this year, in comparison to 6.9 per cent as of December last year.

In the first five months of this year, new authorised loans increased by 46 per cent compared with a contraction of 13.7 per cent in the same period last year, amounting to Rwf269.8 billion compared with Rwf185.1 billion.

The outstanding credit to the private sector increased by eight per cent between December 2013 and May 2014 compared with four per cent in the same period of 2013.

Industry analysts say there is a general expectation that the lending rates will come down because of the prevailing macroeconomic stability. There has been marginal depreciation of the Rwandan franc, a rebound in economic activity and there are signals that inflation will be kept under control.