Determinants of Deposit and Lending Interest Rates in Rwanda: Econometric Approach

Economic history teaches us that Irving Fisher has studied the influence of expected inflation on interest rates. Many researchers have also contributed to this field of study. Many financial controversies and works of literature have analyzed this relationship. In Rwanda's context, few studies have been done in this regard as interest liberalizations are of recent past. In 1995, Rwanda has gained the full financial liberalization which had started in the early 1990s. The objective of this study is to analyze the determinants of bank interest rates. Generally, the commercial banks� lending interest rate is mainly determined, together with the deposit interest rate, by Gross Domestic Product (GDP), Money supply (M2), exchange rate, time, inflation, business environment, and risk. Therefore, this study�s aim is to explore the relationship between macro-economic variables (GDP, M2, and Inflation) with the lending and deposit interest rates of commercial banks in Rwanda. The period 2006-2017 has been considered for the study. Macro-economic variables and lending rate satisfy Dickey-Fuller Test. Later, the dependent variables, lending, and deposit interest rates are regressed with the independent variables. The obtained residuals are again subjected to the Augmented Dickey-Fuller test. The result shows that the residuals are stationary, and the co-integration test proves that during the period of study, there is a significant relationship between the lending interest rate and Rwanda's macro-economic variables. The same was found for the deposit interest rate.