The central bank has resolved to work more closely with financial institutions besides strengthening further its monitoring and supervision roles to help stem growing rate of bad loans in the sector. Both banks and microfinance institutions (MFIs) experienced growth in non-performing loans (NPLs) for the year ended September, 2016.

John Rwangombwa, the governor of the National Bank of Rwanda (BNR), said the action will reduce the credit risk faced by banks and MFIs and "ensure commercial banks and MFIs always make adequate provisions of impaired assets as required by the law”.

"This will help enhance internal credit analysis and strengthen monitoring processes done by financial institutions countrywide,” the governor said while addressing reporters after BNR’s quarterly financial stability committee and monetary policy committee meetings on Wednesday.

Rwangombwa said non–performing loans among banks rose by over one percentage point, from 6.3 per cent in September, 2015 to 7.5 per cent in September this year. The microfinance industry recorded an increase of 8.2 per cent in bad loans, up from 7.8 per cent over the reporting period. He said the central bank will strengthen monitoring to ensure banks and MFIs tighten loan application assessment procedures to reduce risk of defaulters and remain competitive.

Early this year, Rwanda’s microfinance sector stepped up efforts to reduce the increasing number of bad loans, but experts say MFIs will need to do much more to reverse the trend.

Commenting on the issue of growing bad loans among MFIs, John Peter Rwema, the Association of Microfinance Institutions in Rwanda (AMIR) chief, said the association is working with members to streamline loan processing procedures to minimise risk.

"The association has also hired debt collectors to track and recover outstanding loans as well as educate clients on loan management,” he said yesterday.

"We are also working with the World Bank team and other institutions, including the Rwanda Institute of Co-operatives, Entrepreneurship and Microfinance to build the capacity of sector players to enhance efficiency, especially in loan recovery and monitoring procedures,” he added.

Meanwhile, BNR noted the two sectors continued to grow throughout the year despite marginal growth in bad loans.

The banking sector registered 9.8 per cent annual growth rate and its total assets rose to Rwf2.2 trillion. On the other hand, total assets of MFIs were at Rwf221 billion by September, representing 13.5 per cent growth.

According to the central bank, the sector is financially sound to withstand any economic shocks going into 2017.

"The sector has now sufficient capital and liquidity buffers to withstand global economic vagaries,” Rwangobwa noted.

Rwangombwa said the capital adequacy ratio of banks, the international standard that measures a bank’s risk of insolvency from excessive losses, stood at 22.5 per cent in September compared 24.2 per cent during the same period last year.

The sector’s capital adequacy ratio is currently above the central bank’s regulatory minimum requirement of 15 per cent.