Conventional economics has it that when the rate of economic growth slows down, the right thing to do is to encourage the private sector to borrow more, invest and stimulate production.

Some of the ways to achieve this is by reducing the central bank’s key repo rate (the rate at which it lends to commercial banks) so that banks reciprocate by lowering interest rates on commercial loans.

Perhaps the most effective tool is to lessen government participation in the financial markets — so that commercial banks do more business with the private sector instead of clamouring for risk-free lending to government through treasury bills and bonds.

When the Minister of Finance and Economic Planning, Claver Gatete, last week returned to the market looking for Rwf 12.5 billion through a three-year treasury bond, there were fears in some circles that this would hurt the private sector that already suffered decline in credit last year, compared to 2012.

Indeed, by the close of the bidding process, commercial banks had sought to take more than half (52.85%) of the Treasury bond, that was oversubscribed by 140%. However, that is farthest that conventional theory can hold.

It has emerged that finance ministry gurus are betting on the same debt to reinvigorate economic growth — that slowed down to 6.4%, 5.7% and 3.9% in the first three quarters of last year — by investing the funds in infrastructure projects. Growth projections for 2014 are between 7.2 and 7.5%.

How will this happen? The rationale is that with more funds available, the government will be able to increase spending. And since the government is naturally the biggest spender in any economy, this will have a multiplier effect on the economy.

"Since the projects will be undertaken by the private sector, this will spur growth through more government spending,” says Gatete. Energy and roads are therefore expected to be the biggest beneficiaries because of their strategic economic importance.

This appears to be the remedy for last year’s troubles when lower government spending and lower credit to the private sector undercut growth in key economic growth drivers such as services sector. The previous year, the economy had grown by 12.2%, the highest in the region.

In 2013, the country’s banking sector — composed of 10 commercial banks, four microfinance banks, one development bank and a cooperative bank — actually suffered a decline in profit of Rwf 4.7billion in profits largely due to mounting bad loans compared to the previous year.

The sector’s total profits tapered from Rwf27.3 billion in December 2012 to Rwf22.6 billion at the end of 2013. According to BNR, non-performing loans ratio (NPL-ratio) had ‘slightly’ increased to 7.0% at the end December 2013 compared to 6.0% at the end December 2012.

But industry players say that this is not something to worry about.

"The health of the banking sector is not measured by profitability alone but there are more important factors like liquidity and solvency (capital adequacy) where the industry performed better last year which indicates that the industry is still very healthy even when compared with the rest of the region,” says Sanjeev Anand, chairman of Rwanda Bankers Association.

He said that profitability was always a question of the corporate landscape, the state of the industry and cost of funds during a particular year.

"The less economic growth last year affected the lending opportunities for banks. The good thing profitability didn’t become negative. It went down but didn’t become negative which is fine,” he said.

But some analysts think that negative growth, although not that huge, needed to be dealt with to ensure robust and healthy banking sector.

Fortunately, BNR seems to be taking measures, this after the governor, John Rwangombwa announced that 2014 will continue focusing on improving the efficiency of banks while at the same time increasing the awareness of the population about their financial rights and obligation.

Banks playing tight

The banks too seem to have started playing tight with their credit given the increasing volume of rejected loans last year. Banks rejected 7.5% of total number of loan applications they received in 2013 compared to only 6.7% in 2012.

The main reasons for loan rejection are failure to prove loan repayment ability; lack of collateral and weak cash-flows; bad credit history; lack of project profitability and low equity/low owner’s contribution.

Quite revealing is the fact that gross loans to the private sector posted a lukewarm growth from Rwf 747 billion at end of December 2012 to Rwf 844 billion by end December 2013 even though deposits posted a strong growth of 20.6% from Rwf 844.0 billion at end of December 2012 to Rwf 1,018 billion by close of 2013.

Another revealing factor is the banking sector’s capital adequacy ratio (CAR) which measures the sector’s capital strength to withstand risks.

Figures indicate that while BNR only requires banks to maintain a minimum regulatory liquidity level of 15%, banks have racked up their capital to 23.1% as of December 2013, also way above the 10% benchmark that the Basel Committee recommends.

The Basel Committee is an authority that formulates broad supervisory standards and guidelines and recommends statements of best practice in banking supervision.

Precisely, Rwandan banks have a huge stockpile of money, but they’re not in a rush to give it away despite an increasing demand for credit from the private sector.

In fact, the sector’s new authorised loans have reduced from RWF 498.9 billion in 2012 to RWF 472.5 billion in 2013 and BNR attributes this reduction to the Banks’ policy of enhancing risk management.

Despite playing tight, banks are investing in expanding their networks around the country and BNR reports that  total banking network increased by 7.5 per cent mainly due to the number of banking agents that increased by 100.9%.