Effect of interest rates volatility on non-performing loan level in commercial banking sector in Rwanda : Effect of interest rates volatility on non-performing loan in Rwanda

Sammanfattning: The financial sector in Rwanda is composed of two major categories of financial institutions. The first category consists of banking institutions that include commercial and investment banks, microfinance banks, microfinance institutions and SACCOS. The second category is composed of on-banking institutions that covers the insurance companies, pension funds, stock market and digital financial services companies. The financial profitability of the banks results from the size and quality of the loan portfolio, which is the main source of financial revenues. However, an increase in loan portfolio is associated with an increase in risk on loans measured through the non-performing loan (NPL) ratio. The historical background of the Rwandan financial market has shown that the sector experienced a higher non-performing loan ratio over 17 years from 2006 to 2022 but the cause remained unidentified. Similar situation happened in Pakistan in the last ten years where Siddiqui et al (2012) conducted a study to assess the impact of interest rate volatility on non-performing loans over fifteen years from 1996 to 2012. I conducted a similar study on the effect of interest rate volatility on non-performing loans in Rwanda but new types of interests were included. I added interest on deposit, discount rate and inter-bank rate over seventeen years starting from 2006 up to 2022. Concerning the methodology, in Pakistan the researchers applied a simple regression model. For Rwanda, multiple regression analysis, correlation analysis and Granger causality test were included to determine the relationship and causality between NPL and interest rates. The results confirmed that the discount rate has a significant positive relationship with NPL ratio while there is a negative relationship with interest on lending. However, the relationship between deposit rate and inter-bank rate is not statistically significant, and the discount rate Granger causes the NPL.