The Commercial Bank of Rwanda (BCR) has said that it has temporarily suspended mortgage financing, citing an internal portfolio gap.

The New Times, this week quoted the bank’s Managing Director, Sanjeev Anand, saying, "We financed mortgage beyond our portfolio ceiling by 50 percent.”

However, if one makes a critical analysis, he/she will notice that the explanation by the bank’s management is not satisfactory.

The bank issued a 10-year corporate bond to raise capital for financing its mortgage business. This bond, which was floated on the Rwanda Over The Counter (OTC) market, last year, has a coupon (interest) rate of nine percent.

In issuing out the bond, BCR was borrowing money from the public to invest in mortgages of 20 years, attracting an interest rate of 14 percent per annum. A straightforward estimate would imply a five percent point gain for the bank.  

Raising investment capital from the public was not a problem at all, but the mismatch risk that was undertaken casts huge doubts about the bank’s ability to repay this debt.

The bank borrowed money for a short period from the public and lent it long term, as mortgage finance, to its customers.

Definitely, the goal of the financing decision is to obtain the resources necessary, to make all the investments that yield a return in excess of the cost of the funds invested.

From the above interest rates, the 14 percent that mortgage borrower will pay to BCR and the nine percent BCR will pay to its creditors (bond holders), it is clear BCR obtained the funds at a lower cost. This reduces the risk.

But, without understanding the funding connection to the investment, one cannot understand the dilemma BCR is facing.  The bank did not match the maturity of the bond with the investment horizon.

This exposes institutional and individual investors that subscribed to the bond to risk since it shows that the bank is likely to default on this public debt.

Anand said: "The current value of mortgages is over Rwf4 billion yet we had a ceiling of Rwf2 billion. This means that we financed them (mortgages) at the expense of other portfolios,”

Earlier information that we got is that the bond was over subscribed, generating in excess of Rwf4 billion.

This shows that the bank’s decision to abandon mortgage financing is because of its previous inadequate fundamental financial analysis, not that it hit a ceiling as management would want us to believe. 

The business of finance is above all about analyzing and managing risk. It is a vital function in an economy and the lack of it is what has exposed our banks to the current liquidity constraints.

In an interview with The New Times’ Business Reporter Eddie Mukaaya, Anand said that his institution is not a mortgage financing institution but a commercial bank!

Yes, it’s not their prime business and one can understand that they ventured into this activity because of the investment gap that existed in the housing industry and also because of the boom in the construction sector at that time. But why did they take on this risk using public money.

Warren Buffett, a famous American businessman once said that, "Risk comes from not knowing what you’re doing.” 

Indeed this has manifested itself in our banking system.

While addressing a news conference last month, BCR Board Chairman, Nkosana Moyo said that the bank’s costs in 2008 rose by 18 percent due to the inadequacies in risk, credit and portfolio management competencies.

The chairman went on to say that the costs rose because of higher expansion expenses incurred throughout the year, as well as many unprofitable products the bank introduced last year. And mortgage financing is one of these products.

Whereas BCR management insists that the project (mortgage) is profitable, the public especially those who bought the bond need to know if their money will be easily repaid.

The writer is a journalist.
Contact: gahamanyi1@gmail.com