Private sector raises alarm – Trade minister urges central bank governor to address high loan interest rates

By The Inspirer

The Minister of Trade and Industry, Prudence Sebahizi, has called on relevant authorities to review loan interest rates, as the private sector continues to decry their high costs, making it difficult for businesses to invest and generate profits through borrowed capital.

High interest rates on loans remain a pressing concern, with many arguing that they hinder economic growth by making credit unaffordable, leading to financial strain and asset losses for borrowers who fail to repay.

Currently, interest rates on construction loans across commercial banks range from 14% to 18.5%, with some institutions charging as high as 19%. Personal consumer loans can go up to 24.15% in certain banks, while business loans carry rates between 12% and 19%.

During an event hosted by the National Bank of Rwanda (BNR) to present an overview of the financial sector and monetary policy, Minister Sebahizi highlighted the challenges posed by high lending rates.

“The cost of capital in Rwanda remains a concern despite the stability of our financial sector. The private sector continues to express frustration, stating that the high cost of loans restricts their ability to invest and generate returns,” he said.

He further noted that financial institutions are expanding and reporting high profits. “We must explore ways to address financial accessibility, particularly in key sectors like agriculture,” he added.

Central Bank Governor Acknowledges the Challenge

BNR Governor Soraya Hakuziyaremye acknowledged that loan interest rates remain high and stated that the best way to address the issue is by analyzing the sources of funds used by banks and financial institutions.

She pointed out that Rwanda still struggles with a low savings rate, which affects lending costs. For example, deposit rates increased from 10.3% to 17.3% between 2010 and 2015, but later dropped slightly to 16%.

“In reality, we cannot solve this issue by focusing only on banks. We need to develop our capital markets to create more long-term financing options beyond traditional bank loans,” she emphasized.

Currently, banks dominate Rwanda’s financial sector, accounting for 67% of total financial assets. Pension funds hold 15.9%, insurance companies 8.9%, and microfinance institutions 6.9%. Other financial service providers, including forex bureaus and non-deposit-taking lenders, account for 1.8%.

The total assets of Rwanda’s financial sector grew from RWF 11 trillion in 2023 to RWF 13 trillion in 2024. New loans issued in 2024 increased by 16.3%, with the majority going to the construction sector.

Key Factors Influencing Loan Interest Rates

Several factors determine the interest rates imposed on loans:

1. Cost of Funds: Financial institutions acquire capital from various sources, including deposits from customers. Some banks offer deposit interest rates of 7%, 8%, or even 10%. Institutions may also borrow from each other or from investors seeking returns.
2. Operating Costs: This includes employee salaries, customer service expenses, technology investments, office rent, and other operational expenditures that ensure smooth service delivery.
3. Risk of Default: Banks account for potential losses from borrowers who fail to repay loans. The higher the default risk, the higher the interest rate charged to compensate for potential losses.
4. Profit Margin: Financial institutions set interest rates to achieve a desired level of profitability on the loans they issue.

As Rwanda’s private sector continues to advocate for lower loan costs, policymakers and financial institutions face growing pressure to find sustainable solutions that enhance access to affordable credit while maintaining financial sector stability.