The effect of interest rate volatility on interest income of commercial banks in Rwanda

Interest rates are typically determined by the supply and demand for money in the economy. If at any given interest rate, the demand for funds is higher than supply of funds, interest rates tend to rise and vice versa. In Rwanda Interest rates change in response to a variety of economic events including changes in government policy, crises in domestic and international financial markets and changes in the prospects for long-term economic growth and customer attributes. The interest rates in Rwanda remain high, despite central bank’s efforts to reduce the key repo rate. In spite of volatility of interest rates in commercial banks the interest income keeps increasing. Therefore, researcher intends to assess the effect that the volatility of interest rates has on interest income of commercial banks. To analyze the effect of banks internal factors on interest income from loans in commercial banks in Rwanda, to analyze the effect of external factors on profit from government securities in commercial banks in Rwanda and to examine the relationship between interest rate volatility and interest income of commercial banks in Rwanda. This study was adopted both comparative research design and descriptive research design. Researcher attempt to identify and analyze similarities and differences between I&M bank and Bank of Kigali. For the purpose of this study, a sample size of 229 respondents was determined from total population of 540 employees from BK and I&M banks. Researcher used purposive sampling; the researcher chooses the sample based on who they think would be appropriate for the study. Fist objective Spearman's correlation coefficient, (r=0.914) shows that there is Positive high correlation between internal factors and commercial banks income. Second objective (r=0.741) shows that there is Positive high correlation between external factors and profit from government securities and third objective show that Spearman's correlation coefficient, (r=0.724) shows that there is Positive high correlation between Interest rate volatility and Interest income of banks. ANOVA test show that F-statistics (F=214.145) is far greater than the P-value (0.000) hence a further confirmation that aspects of internal factors and external factors are significantly influential the interest income of two selected commercial banks in Rwanda. The government of Rwanda regulates the banking practice to ensure the consumers are protected from the practices of the banking institutions to promote growth and stability. It is due to the significance of the banks in their financial intermediation that the governments ensure to keep close watch of the financial institutions. Based on the findings in chapter four and conclusions above, the study recommends that commercial banks evaluate their lending rates properly to ensure that they have adequate loan disbursement but also high returns that would improve the interest income of commercial banks.