Understanding interest rate risk in the Rwandan Financial System

Abstract

This paper aims at examining the effect that the volatility in interest rates (hereafter called interest rate risk) has on the net worth of banks in Rwanda. The study used the static panel data model, specifically the fixed effect model, to estimate the effect of interest rate risk in the banking sector with data from 10 licensed commercial banks with available data from 2012Q1 until 2019Q2. The findings suggest that most commercial banks were most sensitive to the changes in the deposit rate. Specifically, an increase of 1 percent in the deposit rate induced a decline in net worth equivalent to 1.1 percent. Financial regulators can use this approach to monitor the build-up of interest risks and ensure timely actions to safeguard the financial system's stability.