While the overall banking sector performance has continued registering positive growth, results from the last 5 years show that bad debts has stood out like a sore thumb among the operators.

The bad debts also known as Non-Performing Loans (NPLs) currently stands at $60 million against a gross credit value estimated at $450 million by the ten licensed players.

Analysts contend that tackling the bad debts will require concerted action by various stakeholders within the banking industry.

Statistics from the Central Bank indicates that the average industry net bad debt position has been witnessing a steady decline over the last 10 years.

From a high of 30.7 percent in 2000 it dropped to 23 percent in 2005 and ultimately reduced to 14.3 percent in 2007. By December 2009 it stood at 12.8 percent.

During the release of the latest Monetary Policy and Financial Stability Statement Central Bank Governor François Kanimba said that even though the target in 2009 was to reduce the percentage to 7, the net position of the bad debts stood at 11 percent.

Kanimba told Business Times recently during an exclusive interview that part of the problem emanates from the fact that there is still a low financial literacy skills set within the local business community.

"Quite a number of business persons approach banks with requests for funding which are in some ways questionable. The low culture of embracing accounting best practise coupled with this low financial literacy within the society had worked to negatively impact the banking system’s books,” he observed.

Jack Kayonga the Managing Director of Rwanda Development Bank told the Bussiness Times last week that much as NPLs are actually the key thrust of banking business, tackling the challenge has much to do with the processes and systems put in place by the individual players.

"Speaking for Rwanda Development Bank I must say that we also have learnt some lessons along the way so much so that by looking at the threshold instituted by the Central Bank we have been able to surpass it,” he said.

"I think we are the only bank to have met that target as we are below 7 percent. We have a legal environment for seeking redress which has improved tremendously through the establishment of commercial courts. Looking ahead our strategic plans targets a 5 percent provision in 2010,” he added.

Just like RDB other banks have also set their own targets. Access Bank for example is set to reduce the net position of the bad debts to 2 percent.

Jean Claude Karayenzi, Managing Director of Access Bank said that his institution is taking on new measures to clean books with a view of hitting this target this year.
”We are looking forward to improvements within the economy such as within real estate to meet these targets,” he said.

However Daniel Sackey the Managing Director of Ecobank Rwanda says that the bad debt situation can be said to be a function of all sectors of the economy. He said that improvements within the sector can be seen through new measures such as sector wide information flow and sharing adding that, "bad clients will be discriminated as they have a higher risk profile.”

"There is proactive monitoring of the situation. Hopefully the trend will further go down towards Central Bank threshold. For instance the Credit Reference Bureau will boost such efforts.”

In 2007 when Ecobank took over BCDI and renamed it Ecobank Rwanda the bank managed to bring down NPLs from 64 percent to 43 percent in 2008 which went down to 23 percent a year later. The institution is now looking at less than 12 percent.

The Central Bank had indicated that during the first half of 2009 the quality of the overall banking sector’s aggregated loan book slightly worsened.

The aggregated loan book is a measure of the level of the non-performing loans on net loans issued by the banks. This figure increased  from 9.3 percent in December 2008 to 10.5 percent in March 2009.

However the Central Bank was quick to point out that there was a significant improvement by June 2009 which saw the figure going down to reach 8.6 percent.

Lack of qualified staff at the level of loans management has been cited as one of the reasons inducing the NPL situation.

Poor assessment of risks at the time of loan granting and poor management of the same risk during the period of reimbursement is attributed to poor quality staff.

Central Bank has indicated that closely related to this issue of professionalism is the fact that some banks have continued granting loans to the customers who have been defaulters in other banks.

This further compounded the problem of recovery even though this challenge is being tackled through the establishment of Rwanda’s first Credit Reference Bureau.

Deficient collateral and overvaluation of collateral value which is closely related to poor appraisal of loans granted has been highlighted as reasons traced to poor professionalism.

The Central Bank further adds that the monitoring of banks’ NPL recovery plans in order to reach the threshold of 7 percent for each bank during 2010 will be greatly assisted by the opening of Rwanda’s first Private Credit Bureau.

Ends