Rwanda’s banking industry has seen consistent growth in profits over the past decade. This mirrors the positive trend in the country's overall economic performance, according to a recent report by the Rwanda Bankers&039; Association (RBA).
Rwanda’s banking industry has seen its net profit soar, rising from Rwf71 billion in 2014 to over Rwf250 billion by September 2023. The strong growth is attributed to both stable net interest margins and a consistent increase in loans issued (advances).
Net interest margins, which measures the difference between interest income generated and the interest expense paid out by banks, have been stable in the 8-10 per cent rage in the period under review.
However, yields on advances – interest charged on loans – have over the past decade been on a declining trend from 17.3 per cent in March 2014 to 11.4 per cent in September 2023.
"Banks have managed to sustain their net interest income through effective risk management and a strategic shift towards less risky assets,” Tony Francis Ntore, RBA’s CEO, told The New Times.
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Apart from a cautious approach that banks have had towards lending and effective risk management, Ntore also attributed the positive trend in banking to operational efficiency and sound regulatory support, which has supported Rwanda’s overall economic performance.
As a result, the banking industry has seen other key metrics perform better.
The average return on equity, which measures how much profit a company generates from each dollar of shareholder equity, has been stable in the range of 10-15 per cent during the period 2014-2020. It spiked at 21.5 per cent by September 2023.
For the past decade, Rwandan banks earned a steady 1.7 per cent to 2.3 per cent profit on average from their assets. This profitability jumped significantly to 4.7 per cent by September 2023.
Kevin Karobia, Senior Research Investment Analyst at BK Capital, observed that the positive outlook over the past decade could be explained by the industry’s ability to manage its various costs.
"Banks have managed to rein in their costs and bring down their cost-to-income ratio, and thus driving bottom line growth,” he said, referring to the industry’s capacity to reduce expenses and increase profit.
Banking industry players partly attributed the profitability to growing payments and remittance flows into the country.
"Apart from lending, which is the core business of banks, payments and remittances have contributed to the industry&039;s profitability,” said Carine Umutoni, Managing Director at Ecobank Rwanda.
Umutoni highlighted the fact that remittance flows surpassed foreign direct investment (FDI) flows into the country last year, goes along to show the role that banks play in facilitating the remittance flows.
Shocks
The Covid-19 pandemic in 2020 dealt a blow to the banking sector in Rwanda, significantly impacting their sustainability and profitability. Though banks have since remarkably recovered, risks still remain.
The question is, are banks prepared for any sudden shocks?
"Rwandan banks have beefed up their capital reserves, which ensures that they can keep going in case of shocks. The banks also have strong capital adequacy ratios at 21% far above the industry’s 15% regulatory limit and acting as a safeguard in times of shocks,” Karobia noted.
Despite the pandemic shocks and trade disruptions, the asset quality of the banks has remained strong, showing the sector’s resilience.
The assets of the banking industry in Rwanda as a share of gross domestic product (GDP) are ahead of those of Uganda, Tanzania and Nigeria but are less than those of Kenya and South Africa.
Rwanda’s banking industry assets as a share of GDP stood at over 36 per cent by the end of 2023 from 20.9 per cent in 2014.
"Banks are also strongly liquid and well capitalised, which are the two metrics by which we measure strength,” Umutoni noted.
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Industry Outlook
Ntore expressed optimism about the industry’s future prospects, saying that he anticipates steady growth in lending, increased adoption of digital banking services, and a continued emphasis on financial stability and inclusion.
"The positive prospects of the industry have made it attractive to external players who are either seeking to make an entry into the market or intermediate through existing players,” he said.
This, he added, will continue to shape market competition dynamics that are core for innovation and that the overall benefits to the economy are anticipated to continue increasing.