Longer term saving mobilization to curtail high interest rates
Mobilizing for long term savings is likely to back up commercial banks to have liquidity for a longer period at low deposit rates of which they can also lend to the private sector atlow interest rates.
Francois Kanimba, Minister of Trade and Industry says that boosting long term saving mobilization instruments such as the insurance and the pension sectors would help the commercial banks have long term credit that they can lend to businesses.
“ We are quite still very far in terms of mobilizing for long term savings instruments , I think there is need to improve on these,” said Kanimba
For example the pension sector which is vital in increasing domestic long term saving covers only Less than 7 percent of the population while the insurance sector is struggling to entice more people to take up products.
But Kanimba is optimistic that the new pension law is likely to liberalise the sector which will bring in more private investors handling different pension schemes thus increase its penetration and boost long term savings.
“We also have to look at increasing financial savings from people as one way of also ensuring that the our financial Institutions have enough liquidity to lend to businesses,” he added.
As long as commercial banks, experts argue get cash at low deposit rates and for a long term would help them lend to the private sector for a longer which eases bot the repayment as well as interest rates.
According to Central bank the average deposit rate which is the interest rate paid by financial institutions to deposit account holders stands at 7.3 percent while the lending rate which the borrower pays the financial institution stands at 17.4 percent.
The implies that for banks to remain profitable, they have to raise the interest rates higher to get the interest to pay to the depositor as well as avert the risks of defaulting from borrowers and also operational costs.
“As some people don’t pay unfortunately it increases the cost of doing business,” James Gatera, Chief Executive Officer Bank of Kigali said
This comes at the time when the private sector is complaining of high interest rates that make it hard for them-private sector to access credit to boost their businesses.
In a bid to boost lending to the private sector, the Central bank lowered its Key repo rate to 6.5 in the first six months of the year up from 7.5 last year.