Local banks are feeling the pinch of an appreciating dollar, which is increasing the cost of financing loans acquired in foreign currency.

However, the higher borrowing costs for banks are likely to lead to higher interest rates for their clients.

The increase in borrowing costs for banks is specifically linked to the recent strong and sustained appreciation of the greenback against the local currency, which has been depreciating.

Between December 2014 and December 23, 2015 the Rwandan franc depreciated by 7.27 per cent against the dollar, according to the central bank.

“It will, without doubt, affect international borrowing,” said Maurice Toroitich, the managing director of KCB Rwanda.

Mr Toroitich explained: “If you borrow money from abroad and convert it into local currency and lend it in local currency, the repayments will come in local currency; if you have to convert those repayments back to foreign currency to repay the loan, banks suffer an exchange loss.”

In January 2015, the central bank quoted the franc at Rwf687/701 per dollar (buying and selling), closing the month lower at Rwf693/707.

In an interview, Naibo Lawson, the chief operating officer of Bank of Kigali, told Rwanda Today the depreciation of the franc coupled with an appreciating dollar makes borrowing abroad a key concern for banks as this increases their borrowing costs.

“Customers think banks want to make a lot of money off the loans, yet these dynamics make these loans expensive for banks,” he said.

However, borrowers are already feeling the pinch of higher interest rates on loans which remain on average between 17 per cent for corporate bodies and 20 per cent for individuals. Higher interest costs make it difficult for borrowers to repay back who end up defaulting.

More than 100 hotels were put up for public auction by commercial banks after their owners failed to pay back their loans, something the hoteliers attributed to high interest rates and short repayment period given.

“Import-based businesses are struggling to acquire foreign exchange at a cheap price” said Mr Toroitich. “Of course because of depreciation it means the cost of importation is high.

“If that cannot be passed onto the consumers, it means the volume of sales will go down. This is affecting the performance of certain businesses in the market and ultimately it will impact on loan repayment.”

However, bank customers have not wavered in seeking bank loans to grow their businesses, in June 2015, total credit by banks increased by 22.3 per cent (Year-on-Year), up from 14.3 per cent in the same period in 2014, most of it going to the private sector by 27 per cent, according to data from the central bank, National Bank of Rwanda (BNR).

Between June 2014 and June 2015, Rwandan franc-domiciled loans increased by 22.2 per cent to Rwf1,263 billion.

As the market continues to wrestle with high interest rates on loans, foreign lenders will not be much of an option for local banks to subdue lending rates since the exchange rates charged on foreign loans continues to be high, driving the cost of local loans even higher.

Local borrowers, especially the private sector, have for a long time decried expensive loans. With the interest rate hovering at 17 per cent and above, it has stifled their business and made it hard for many to pay back the loans, prompting banks to even auction their property.

High exchange rates

BNR and other players have in the past looked at borrowing from foreign institutional investors as an option but, since these loans come in foreign currency, they are also repaid in foreign currencies. This exposes them to the high exchange rates even if they come at low interest rates.

“The high exchange rate charged when paying back loans to international financiers is not helping the interest rate situation,” said Mr Toroitich. “Although banks get these loans at lower interest rates, at the end of the day it becomes expensive.

“Sometimes it even goes higher than it would have been if borrowed locally.”

This has been made worse by the hardening of the dollar in the recent months, where the United States currency continued to batter other currencies. This has widened the depreciation ratio of the Rwandan franc against the dollar.