The number of commercial banks in the country has increased significantly over the past 20 years, from three in 1994 to 10 today.

Despite being an impressive leap and a show of a strong financial sector, banks are still facing low profitability, a turn off for investors and regional banks that may want to enter the market.

Banks’ return on average equity, which measures their profitability, stood at 10.9 per cent over the first nine months of last year, according to National Bank of Rwanda’s (BNR).

This compares to over 25 per cent return on average equity recorded by banks in neighbouring Kenya, Uganda and Tanzania.

Lawson Naibo, the Bank of Kigali chief operating officer, attributes the low sector profitability to continued ‘pressure’ on the banks’ sources of revenues, while financial institutions’ cost structure is the same.

"Unlike in other countries, where, if a client deposits money into their account, there is a small charge, in Rwanda clients are not charged because people do not appreciate banking. So banks don’t charge for some services to attract savers,” he points out.

Naibo notes that most local banks don’t charge for use of Automated Teller Machines (ATMs) contrary to the practice in other countries.

"We don’t charge for all these services because we are still trying to grow the market. Therefore, the return on every Rwf100 a shareholder has invested is still going to be ‘a bit low’. One can’t compare us with banks in East African Community, where penetration levels are high,” Naibo explains.

The 10 commercial banks operating in the country include Bank of Kigali, Banque Populaire du Rwanda, Cogebanque, as well as Kenyan-based bank group subsidiaries, KCB Rwanda, Equity and I&M; Access and Guaranty Trust Bank with parent firms in Nigeria, Togo-headquartered Ecobank and Ugandan-brand Crane Bank.

The banks are competing for the 25 per cent of the banked population, while investments in branch network expansion, including agency banking models, mobile and Internet banking to attract and reach out to the unbanked population in hard-to-reach areas across the country.

"We have to have channels like ATMs, mobile banking and branches which mean that our cost structure is almost the same as in other countries in spite of the ‘pressurised’ revenue sources,” Naibo notes.

Not all is lost

Despite the gloom, banks’ return on average equity has been improving during the past two years, with BNR quoting the figure at 8.3 per cent in September 2013, 7.4 per cent December 2013, which peaked at 10.9 per cent in September last year.

Naibo says the sector is creating efficiencies in the use of the available banking channels to reduce the number of branches, staff and therefore, lower operation costs. This, he adds, could enable them mobilise cheaper deposits, thus improving the industry’s profitability.

He notes that the Credit Reference Bureau has helped banks reduce on the level of non-performing loans: if banks are not losing too much money to bad loans, then they become more profitable without charging high interest rates.

Maurice Toroitich, KCB Bank Rwanda managing director, says the local banking sector is still in the ‘investment stage’. "Banks are still putting up more branches and ATMs, which increase the cost of operations. However, banks will achieve an optimum level of investment at some point and begin to derive output from the investments,” Toroitich explains.

Though he adds that the sector is attractive, saying those seeking to invest in Rwanda would earn low returns but building a business for the future.

"Different investors have different risk appetite. Those who want to get high returns in the short-term may not invest in Rwanda, while those who see the opportunities in the long-run being much better than elsewhere will come,” he argues.

Sector outlook

According to sector analysts, the situation (low returns) could normalise in five years "because many more Rwandans will embrace banking services”. The growth will be driven by the more efficient facilities like ATMs, mobile and Internet banking, which will also therefore entrench a cashless economy culture.

Naibo says the 75 per cent of Rwandans that are under-banked present the banking sector vast opportunities for growth.

"There is a lot of optimism of management of the overall banking costs as a result of the use of technology because the adoption rate of new technology among Rwandans is very favourable. We see huge potential as regards the under-banked and the unbanked population and the move towards technology,” Naibo says.

Rwanda’s banking industry constitutes over 50 per cent of the country’s financial sector. Its total assets grew to Rwf1.8 trillion as of September last year, up from Rwf1.4 trillion over the same period in 2013.

Total customer deposits increased from Rwf960.1 billion to Rwf1.2 trillion during the same period, while total loans grew to Rwf952.1 billion from Rwf813.8 billion. The banks profits increased from Rwf18.4 billion to Rwf24.7 billion during the period.

Central bank governor, John Rwangombwa, projects that the financial sector could grow by 9.2 per cent in 2014 up from eight per cent in 2013, according the bank’s monetary policy and financial stability statement released last month.