At the reading of this year’s Budget (2009/09), Finance Minister James Musoni said that government will help local banks to secure lines of credit from multilateral financial institutions. Barely five months after Musoni’s budget speech to parliament Bank of Kigali (BK), has signed a loan agreement with the European Investment Bank (EIB).
At the reading of this year’s Budget (2009/09), Finance Minister James Musoni said that government will help local banks to secure lines of credit from multilateral financial institutions.
Barely five months after Musoni’s budget speech to parliament Bank of Kigali (BK), has signed a loan agreement with the European Investment Bank (EIB).
The €5m or Rwf4b line of credit is meant to finance Small and Medium Enterprises (SMES), a segment that hardly gets formal bank financing due to mainly lack of collateral.
Hoping that more banks will access such loans, in addition to government’s cash "stimulus” plan, the waning long-term credit to the private sector will significantly pick up.
It’s expected that banks will be able to channel medium to long-term funding to SMEs with ranging anticipated economic benefits like the generation of additional revenue, the consequential increase of fiscal receipts for Government and the creation of new jobs.
Central Bank governor François Kanimba also expressed optimism, saying that the operation will have a significant positive impact on the beneficiaries.
Indeed these approaches are extremely good, timely and very important for the overall economic growth. But I personally have reservations on the ability of individual banks to manage risk.
For those of you who have not been closely following the trends in our banking industry, liquidity problems in the economy started to unfold last year when institutions like the Social Security Fund of Rwanda, and some large companies started to implement their massive investments.
This caused a decline in deposit funds within banks.
The situation was aggravated by failure of banks to take into account of a number of basic principles of liquidity risk management when liquidity was abundant in the previous years.
It was also worsened by high inflationary pressure realised throughout 2008.
Some factors were uncontrollable by banks but failure to match deposits with loan disbursements, meant that banks were heading for a situation where it was difficult to meet their financial obligations when they fell due.
Banks are usually exposed to risk if the matching of despot commitments with investments (including loans) is handled poorly.
Because interest rates are usually higher for long-term loans, our banks used short-term deposits to lend at higher interest rates. Since they were paying low interest costs to depositors, profit was guaranteed in this situation.
This is risky because depositors will always come for their money before the investment or loan is paid back. And if the market interest rate changes, the bank profit can be adversely affected.
If investment losses become too great, depositors risk losing their money even though they had no say in the granting of funds.
I believe that whatever has been happening in the banking industry is a result of management negligence, and apparently the Central Bank didn’t notice it earlier to make quick intervention.
So, as policies being implemented to ensure the development of the banking sector, which has been registering robust growth in the recent past, strong emphasis on liquidity management is needed.
This requires concerted efforts by banks’ executives and the regulator, National Bank of Rwanda (NBR), through constant assessment of liquidity risk management framework and other supervisory actions.
The writer is a Journalist