Local banks are still focusing on loan recovery, which has seen loan applications drop by 8,000 in the first six months of this year.

This comes at a time when banks are under pressure to reduce non-performing loans which dropped to 6.9 per cent in June from 8.2 per cent in June 2017, according to figures from the National Bank of Rwanda (BNR).

However, as banks focus on improving their balance sheet, the private sector is struggling to access finance which may undermine economic growth in the long term.

Statistics from BNR show that loan applications dropped from 139,000 in the first six months in 2017 to 131,000 applications inin 2017 to 131,000 applications in the same period this year.

However, the economy is yet to be negatively impacted by this trend as it continues to register good performance over the first half of 2018 compared with the same period in 2017, as evidenced by the Composite Index of Economic Activities (CIEA) and total turnovers of industry and services sectors.

In real terms, the CIEA increased by 15.4 per cent from 7.8 per cent in the same period in 2017. The growth in total turnovers during the first half of 2018 stood at 15.7 per cent against 15.5 per cent registered in the same period in 2017, with the services sector gaining by 15.8 per cent and industry sector by 15.4 per cent.

But, should banks continue to withhold lending, it may negatively affect the economy. According to sources within the banking industry, there were fewer borrowers because most of the local lenders deployed tight lending conditions as they concentrated on loan recovery to curb non-performing loans, which were significantly high last year.

“When you look at the overall loan rejection rate estimated at 20.4 per cent in the first half of 2018, the trade industry witnessed the highest rejections, this really implies that if nothing is done the rate may keep dropping,” said a source in the banking sector.

The private sector continues to highlight the high cost of borrowing, which remains relatively high in the market at between 18 per cent and 24 per cent and is a key challenge in loan repayment.

Banks insist that limited access to savings locally forces them to borrow abroad which is costly, a cost that is transferred to borrowers.

For instance, Musa Mahoro a business man dealing in textiles imports from China for wholesale says he is currently struggling to pay back his loan because the cost was too high at 23 per cent.

“I was unable to pay back leading to auctioning of my properties. If I get another loan, the rate will not go below 19 per cent which is still high,” said Mr Mahoro.

According to chief executive officer of Bank of Kigali, Diane Karusisi, banks have limited access to deposits and savings in the country. This partly contributes to high interest rate charged to customers.

“We borrow from international financiers who require us to pay back at high interest rates,” said Ms Karusisi, adding that international financiers give loans at a rate of 11 and 12 per cent for one year.

“This is why you find most banks lending at between 18 and 24 per cent. We have hope that different government programmes, including the National Financial Education Programme will help boost a savings culture. If savings increase banks will be forced to reduce their lending rates,” said Ms Karusisi.

Jean de Dieu Ngendahayo, a financial analyst said fewer loan requests will result in low levels of production, which then keeps interest rates high. He urged the government to put in place measures to increase production of consumer goods to reduce the pressure on market prices.