Operating costs of local banks have been rising steadily in the last three years, statistics from the Central Bank show. In 2019, Rwandan banks incurred Rwf372.5bn in operating costs up from Rwf278.4bn in 2016. The largest driver of the rise in costs was interest expenses as the 16 local lenders have to borrow money at times outside the country and often in foreign currency which drives up the cost. Banks also lend from customers deposits which can be expensive to collect as it requires a countrywide network and value chain. Diane Karusisi, the Bank of Kigali chief executive, said often drives up the cost of operations as banks do not borrow from the Central Bank. Karusisi was speaking during last week’s Central Bank Monetary Policy and Financial Stability Statement. Banks incurred up about Rwf105.6bn in interest expenses. Local banks also saw a rise in costs due to the adoption of digital services which is expected to drive up financial inclusion, more services to clients and improve their relevance. Digital services adoption comes with costs such as the acquisition of systems and necessary infrastructure and training of staff. Bankers who spoke to this paper said that adoption of digital services is among the highest drivers of costs and will remain so for a number of years going forward. The returns from the investment is not instant and will also take several years with some putting it at 5 to 7 years. The period before banks can reap the returns on the investment is among other things dependent on the pace of uptake by the public and impact on financial inclusion. Robin Bairstow, the President of the Rwanda Bankers Association, told Doing Business that the highest cost most banks are currently incurring costs in digitization. Bairstow said that the cost of operation is further likely to go up with the year as investments in the technology continue. Globally, digitization of banking services is a popular trend as lenders seek to innovatively reach out to clients replacing the habitual long queues in banking halls. Across the world, bank services are increasingly available via mobile phones and internet banking. This, however, requires better and cleaner data that the new systems banks are acquiring and building are expected to address. Banks operating costs also went up due to provisions for bad debts which were about 18 per cent of all expenses, about Rwf 67.8B. This is because there was a significant write-offs in bad debts of about Rwf57 billion. A 2017 law requires banks to write off loans that have been classified as a loss for over 360 days. More write-offs increase expenses as banks are expected to make 100 per cent provisions on written off loans without deducting value of collaterals. Banks are also in the process of reducing their branch network as they adopt digital technologies. This has seen costs incurred in the rent of premises remain fairly stable. However, profitability among banks has been growing in recent years through not proportional to the rising cost of operations. In 2019, the 16 Rwandan banks made a total of Rwf 76B from Rwf 29B in 2017. The central bank in the Financial Stability Statement expressed interest on the future of profitability of banks as they currently depend on loans and the quality of loans. As interest margins decrease, the central bank fears that it could pose a threat to banks’ profitability. With that, the regulator is calling on banks to diversify their income-generating activities primarily through the growth of non-interest income. Non-interest income was about Rwf 35.6B in 2019. Commenting on the operating costs of banks, Peace Uwase the Director for Financial Stability at the Central Bank told Doing Business that going by the aggregate cost to income ratio for local banks, which stands at 77.1 per cent as of 2019 its indicative of growing bank incomes. Cost to income ratio is operating expenses against the operating income generated to the profitability of a bank. A lower ratio is better because means higher profitability. In 2017, the ratio for local banks was 85.1 per cent.
