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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
Karlstad University, Faculty of Arts and Social Sciences (starting 2013), Karlstad Business School (from 2013).
2023 (English)Independent thesis Advanced level (degree of Master (One Year)), 10 credits / 15 HE creditsStudent thesisAlternative title
Effekt av volatilitet i räntorna på nödlidande lån i den kommersiella banksektorn i Rwanda : Effekt av volatilitet i räntorna på nödlidande lån i Rwanda (Swedish)
Abstract [en]

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.

Abstract [sv]

Den finansiella sektorn i Rwanda består av två huvudkategorier av finansiella institutioner. Den första kategorin består av bankinstitut som inkluderar affärs- och investeringsbanker, mikrofinansbanker, mikrofinansinstitut och SACCOS. Den andra kategorin består av bankinstitut som täcker försäkringsbolagen, pensionsfonderna, aktiemarknaden och digitala finansiella tjänster. Bankernas ekonomiska lönsamhet beror på storleken och kvaliteten på låneportföljen, som är den huvudsakliga källan till finansiella intäkter. En ökning av låneportföljen är dock förknippad med en ökad risk på lån, mätt genom nödlidande lån (NPL). Den historiska bakgrunden för den rwandiska finansmarknaden har visat att sektorn upplevde högre nödlidande lånekvot under 17 år från 2006 till 2022, men orsaken förblev oidentifierad. En liknande situation hände i Pakistan under de senaste tio åren där Siddiqui et al (2012) genomförde en studie för att bedöma effekten av räntevolatilitet på nödlidande lån under femton år från 1996 till 2012. Jag genomförde en liknande studie om effekten av räntevolatilitet på nödlidande lån i Rwanda men nya typer av räntor inkluderades. Jag lade till ränta på inlåning, diskonteringsränta och interbankränta under sjutton år från 2006 till 2022. När det gäller metodiken tillämpade forskarna i Pakistan en enkel regressionsmodell. För Rwanda inkluderades multipel regressionsanalys, korrelationsanalys och Granger kausalitetstest för att fastställa sambandet och orsakssambandet mellan NPL och räntor. Resultaten bekräftade att diskonteringsräntan har ett signifikant positivt samband med NPL-kvoten medan det finns ett negativt samband med ränta på utlåning. Emellertid är sambandet med inlåningsräntan och interbankräntan inte statistiskt signifikant, och diskonteringsräntan Granger orsakar NPL.

 

Place, publisher, year, edition, pages
2023. , p. 49
National Category
Economics
Identifiers
URN: urn:nbn:se:kau:diva-96867OAI: oai:DiVA.org:kau-96867DiVA, id: diva2:1801773
Subject / course
Economics
Educational program
Master´s Degree Programme (one year) in Economics, 60 hp
Presentation
2023-05-25, https://kau-se.zoom.us/j/67152593866, Karlstad, 13:15 (English)
Supervisors
Examiners
Note

The study of the effect of interest rate volatility on non-performing loans consists of the Rwandan commercial banking sector focusing on overall sector non-performing loan rates variations. Guided by the credit creation theory, this study assessed the impact of average interest rates at national level to commercial banks loan default level from 2006 to 2022. Four interest rates have been a concern for this study: interest on loans (lending rate), interbank market interest rate (interbank rate), discount rate and interest on deposits (deposit rate).

Available from: 2023-10-04 Created: 2023-10-02 Last updated: 2023-10-04Bibliographically approved

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