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Inflation to take toll on banks' profit

Friday February 24 2023
Banks

Lenders have expressed fears that slow recovery of businesses may push of non performing loans. PHOTO | Cyril Ndegeya

By MOSES K. GAHIGI

Local lenders are casting a bearish forecast as they expect reduced margins this year due to the prevailing inflationary pressures and tough economic conditions.

Although the year ended on a relatively bullish note, with many banks turning a profit in the last half of the year, the expectations are low this year as inflationary pressures are not showing any signs of easing.

“We expect low margins this year, the cost of funds has significantly increased, liability clients have increased pricing and the dollar rate has also gone up significantly yet we are not able to increase the cost of our loan products at the moment, so the margins have reduced” said Diane Karusisi, the Bank of Kigali CEO.

The downward trend in their margins started last year but they were saved by the quality of their products.

“Even last year the margins were shrinking but we gained on the quality of our products, even now we are only being saved by the quality of our portfolio from last year,” said Ms Karusisi.

The continued strengthening of the dollar against the franc has meant that the rates at which banks borrow externally has more than doubled, and they continue to suffer exchange losses.

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The Central Bank Governor John Rwangombwa recently ruled out any possibilities of interest rates cuts, blaming this on prevailing tough economic conditions.

Saying given the current situation of the biting inflationary pressures, interest rates are expected to be higher, adding that the good thing is they haven’t yet gone up as of now, but increasing in the coming months can not be ruled out.

He said when the time comes individual banks would determine the interest rates they charge.

“Each bank will look at its pricing model, look at the impact of this high inflation.”

“Depending on the appetite of the boards of these financial institutions one might decide not to increase the interest rates and maybe slightly eat into their profitability as we expect this to smoothen out... Let’s just hope that the increase in interest rates will not be too high,” said Mr Rwangombwa.

Most banks are however yet to increase interest rates-which is one of the factors they say is behind their sluggish growth in terms of margins.

Commercial banks in Rwanda charge 17 percent to 25 percent interest on loans.

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