The micro-finance sector has achieved tremendous growth over the past few years, with the number of players increasing to close to 100 MFIs presently. The growth is however being threatened by the rising rate of non-performing loans (NPLs).

Bad loans rose slightly to 7 per cent last year from 6.8 per cent in 2013, according to figures from the central bank. A study conducted by the Association of Microfinance Institutions in Rwanda (AMIR) indicates that gaps and weakness in the legal regime and loan recovery systems are the main reasons for the increasing level of bad loans.

The survey also cited high interest rates as one of the other huge contributors to increase in bad loans across the microfinance industry.

The study was conducted between April and May, 2015 in all provinces of the country and covered 96 micro-finance institutions, and 74 top sector managers were interviewed, according to Peter Rwema, AMIR executive secretary. 

Rwema cited inexperienced personnel and weak monitoring and supervisory mechanisms as some of the other challenges threatening the growth of the sector.

The research was generally aimed at finding the causes of non-performing loans to be able to find lasting solutions to the problem.

AMIR swings into action

The revelations have forced AMIR to act immediately and find solutions to the problems identified by the study. Rwema said the association is already preparing position and concept papers basing on the findings and will soon hold discussions with concerned institutions in a bid to find lasting remedies.

"The next step is to use the survey findings to engage the relevant institutions to ensure that proper action is taken to support the industry,” Rwema told Business Times.

He said AMIR will start lobbying institutions like Rwanda Development Board, the Parliament, central bank and the market players to find mechanisms on how they can strengthen the laws and guidelines governing the sector.

According to Rita Ngarambe, managing director AMIR Consult, the business arm of the association, engaging these institutions and policy-makers is essential to finding a sustainable solution to the challenge of bad loans in the sector.

"Non-performing loans do not only adversely affect the performance of financial institutions, but they also have other far reaching implications on the economy of the country. This is because other potential borrowers may fail to access credit since some of the funds they could have borrowed are still tied up in bad loans,” Ngarambe said.

Other encumbrances

The study indicates that registration fees for collateral at RDB of up to Rwf20,000, and Rwf1,500 contract notification charges a page were hurting MFIs.

The situation, according to the report, is compounded by limited number of Commercial Courts to handle cases related bad loans, and Rwf50,000 judicial fees that small loan defaulters pay, among others.

Commenting on the study findings, Theonest Ndayaho, managing director, Umutanguha Microfinance, called for decentralisation of registration of collateral to district level. 

"Collateral registration fees should not be uniform, but charged according to the loan size,” he added.

Most MFIs reported difficulties in recovering loans due to a weak legal and recovery procedures, adding that hiring lawyers to help in loan recovery makes it worse as they charge over Rwf500,000 per case, which at times is higher than the loan to be recovered.

MFIs want Commercial Court services decentralised to the district level, adding that small loans of below Rwf3 million should be handled by ‘Abunzi’,    while court fees should levied according to the size of loans.

AMIR also found that the Business Development Fund (BDF) sometimes delays reimbursing MFIs, thus contributing to NPLs especially those related to solidarity groups for health insurance (Ibimina bya Mutuelle de Santé).

Players want strong collaboration between local authorities and SACCOs to organise health insurance solidarity groups "Ibimina bya Mutuelle de Santé” and set up an appropriate recovery strategy.

Credit reference bureau

It was also revealed that many MFIs are not sharing information on time with TransUnion Rwanda, a leading global credit and information management provider, saying the firm’s charges are high at up to $50 (about Rwf36,500) per month to access its database, and lack of Internet.

Solutions

However experts believe that applying stringent recovery system, as well as conducting close follow-ups and regular visits could reduce the problem.

Others are advising customers regularly and conducting inspections to ensure clients have business experience before getting loans.

"Also setting up credit committees with qualified staff will go along way in helping ease the problem.

"Borrowers tend to misuse loan money or use the cash for unplanned business ventures, which in most cases fail. At the end, they are unable to repay the loan,” Claudine Nsegimana, the COOPEC Inkunga Sacco chief, said

According to statistics from the National Bank of Rwanda (BNR), micro-finance sector asset grew by 23.8 per cent, from Rwf128.7 billion in December 2013 to Rwf159.3 billion in December 2014. The performance was largely driven by loans which increased by 22.4 per cent.

Government is targeting to increase access to financial services from current 42 per cent to 80 per cent under second Economic Development and Poverty Reduction Strategy (EDPRS II).