It will be a tough year for banks, but the economy is beginning to improve– Karusisi

The Covid-19 pandemic has posed unprecedented health, economic, and financial stability challenges. The financial industry in Rwanda has been at the forefront of driving a role in the economic recovery through slashing interest rates and easing loan repayment conditions. The big question has been whether local banks will be able to withstand the impending impact of Covid-19 outbreak? The New Times’ Julius Bizimungu spoke to Diane Karusisi, the Chief Executive of Bank of Kigali Group and the Vice Chairperson of Rwanda Bankers Association, about this and more. Below are excerpts: Has the impact of the coronavirus outbreak on the global financial sector reflected the same effect it has had on your banking business? It all started as a health crisis that turned into a huge economic crisis, and that’s what we are now battling with. On the health front, as far as Rwanda is concerned, [we] believe things have stabilized – we know how to protect ourselves, we know how to protect our families and our staff. The economic crisis is indeed serious across the world, mainly driven by a lot of uncertainties and huge disruptions in terms of global supply chains. If you look at the region alone, intra-EAC trade has dropped by 40 per cent, which is unprecedented. Customers enter Bank of Kigali head office in Nyarugenge District. Photo: Sam Ngendahimana. That means for us who work with logistics companies, transport companies, with traders, obviously you see a serious impact because these people are heavily impacted, and this reflects in their performance as far as credit performance is concerned. This impacts our liquidity because these people are not returning over as much money as they used to. Obviously this (the pandemic) has taken a heavy toll on all of us. We, however, believe things are starting to improve – goods are starting to flow a little better, but we still have challenges at borders because of border restrictions and controls. But things are generally improving, we are seeing a flow of goods with cement, for instance, coming and other goods. Now even the airport is open, although traffic may still be very low. How generally has Covid-19 affected the banking business in the country? First of all, in terms of our operations, only a few branches were allowed to open, we restricted working hours, we had to protect our staff, we had to sort of activate our business continuity plans because this is a massive crisis, and we had to do that very quickly. Normally when you plan for a business continuity crisis, you think of an earthquake where the main building goes off and you have to activate your services from the disaster recovery sight. In this case, we couldn’t work, we couldn’t make it to the office. Generally, it was being resilient in terms of operations, still being able to serve clients. Many of them were, of course, encouraged to go digital, which is something positive. But of course business had disappeared; we were doing just basic operations with no loans, yet lending is our biggest business, and deposits were drying up because people were now consuming their savings. How then have banks responded? In terms of us containing the liquidity, we, as Rwanda not just as BK Group, started with a strong liquidity position. This gives you some buffers to weather such a crisis. Before the crisis, people were telling us that you are too prudent, you have too much capital, and too much liquidity. Rwanda is a trading country, so trade was heavily affected except for a few essential products like food and beverages which were seeing some business, as well as medical products. What we had to do was to provide some payment reliefs to our clients. At the height of the crisis we had more than 40 per cent of loan-book restructured, meaning 40 per cent of your clients not paying back. Beyond that, I think the biggest problem was uncertainty. Are these people going to be able to survive? That’s how we came to take huge provisions in terms of credit losses, and this affected our performance as you have seen in our quarter one. There has been a huge decrease in our bottom-line (net income) because we wanted to be prudent enough and take provisions for expected liquidity losses. To revive the economy, the government has put in place the economic recovery fund which businesses are accessing through banks. How’s the performance of the fund? The economic recovery fund has two windows. The first one is the hotel refinancing facility, which allows hotels to get affordable financing from different banks. This has performed quite well because, of all our portfolio clients, we have about 44 hotel owners who got access to this facility – contracts signed, funds disbursed, so we believe this is something good. There are also new guidelines that were put in place by the Central Bank, allowing us to give these people a longer moratorium. Normally when you are a business coming for restructuring you are supposed to be downgraded, but this time we are able to give them up to two years without them paying any interest and we can keep them in the class they were during pre-Covid. The second one is a working capital window, which is trickier because it’s open to everyone. Of course the criteria are not very easy to meet for every business because you have to show that your returns have reduced significantly. Because some of those [businesses] have not really registered the effect of the crisis on their returns, it’s difficult for them to show that the business has been affected. But we already have about 40 clients that we have bank approval for, we are now going to forward this to the Central Bank for them to re-consider and give us feedback. The good thing with this window is that it is open to everyone; SMEs, corporates, and micro companies but the main problem is the risk appetite of banks, because this is giving new cash to a client that doesn’t necessarily have repayment capacity. You have clients who have quite leveraged, they have liabilities worth Rwf2 billion that they are really struggling to pay because of the crisis, because of economic situation, and they come to ask for additional Rwf200 million or Rwf300 million, so you look at the business and wonder whether this person is really going to be able to repay! We had to do thorough analysis to be sure that this additional funding is going to help them to revive their businesses, and help them to repay the new funding but also the old funding. That is challenging because risk appetite in the crisis period for all banks has reduced because the economy is not doing that well, but we’ll see some disbursements starting next week for BK. What is it that you think can be done to improve eligibility criteria to help those vulnerable businesses to access recovery funds? I think, when you look at the eligibility criteria, there is nothing difficult. It is mainly us banks being confident that this person is going to be able to pick up the business and being able to pay back. That’s a problem because the credit risk remains on us; you give this person Rwf300 million, the risk is on you. Of course you get funding from the Central Bank at an affordable rate, but the credit risk is on you. So you want to be secured. You request that person to give you collateral and many of clients do not have additional collaterals to provide, and that becomes a problem. You still want to have these facilities reasonably covered by collaterals, so this person comes and has goods he wants to clear from RRA [Rwanda Revenue Authority] to revive the business but there is no collateral this person is providing, then it’s hard. I think it’s about having comfort that the economy is going into the right direction. When we have trust that the economy is going into the right direction, our risk appetite will increase and we’ll be able to release funding even when we are not fully covered. Many banks project losses this year as a result of the outbreak. You, on the other hand, will remain profitable as you mentioned earlier this year during your AGM, how? We, because we continue to charge interest on loans that we give to our clients, and we have also been able to significantly reduce our costs. Today, we are implementing large projects that would normally require people to travel or consultants and pay for their accommodation. Now we have dozens of consultants all working remotely. So we are making some efficiency savings. Of course we’ll remain profitable but our profitability will be impacted. I believe we’ll have positive profit at the end of this year, but again our margins are going to shrink. Because we are relatively a good margin business, normally we return on equity – ideally I am requested by my shareholders, to return a minimum of 20 per cent on the equity that we invested in the bank. We are probably going to achieve half of that – 10 per cent is not good but it’s better than posting a loss. The pandemic hit the world a few months after you had cross-listed on the Nairobi Stock Exchange. How’s been the performance? It has not been very good in Nairobi because of liquidity. Even before the pandemic, we saw flows of the capital out of emerging markets going to more mature markets just because performance of stock markets in the US was unprecedented in the good sense – people saying why would I invest my money in an emerging market when I can get better returns and perceived low risks in developed markets? This of course has affected liquidity but also the performance of stocks mainly in markets that have accepted turnovers and liquidity. That has happened, but when we look at our core investors – people who bought into BK from the IPO and came with us even with our second re-offering, they are still with us, they are sticking with us, they believe in the story of Rwanda, and this crisis is not making them reverse. This is giving us a lot of support and courage to continue doing what we are doing. FinScope surveys show that few people access loans. What does that say about the uptake of financial products? We have people who have bank accounts, but in terms of being covered by other financial services than just savings or depositing, we still have a long way to go. Most of these people probably don’t have insurance policies, be it life or non-life. That means we have to design more products for more segments that are not covered. Today, typically someone who will have a mortgage or loan facility as a retail client, most likely we want to demand that person not only have a bank account but a formal job, formal employment, and we know in Rwanda we only have very few people with employment. Most of the people rely on small jobs for their livelihoods like agriculture. It’s upon us to design the right products that would serve these segments that are still underserved. Digitalization is a hot topic for banks. Are you happy with the progress the bank is making in digitizing services? No, I think we have so much room to cover and I think this pandemic has shown us that we need to do much more than we are actually doing in terms of being able to work remotely, to approve a facility remotely, disburse remotely, etc. We are not yet there, so there is a lot of work to do for us. But when I think of basic services that we are offering a client – having internet banking, USSD, having an app, we still don’t have every one of our clients using them. Even before starting to build new products, which we should be doing, we need to migrate more of our clients towards digital channels. I think they were forced to do that during the lockdown, but we still see them coming to branches to pay taxes, to pay Irembo bills when they could do that on their phones. We still need to do a lot of awareness and education. In some markets, you see technology allowing the uptake of micro loans. Is this the same trend you see here? It’s not as good as in other markets like Kenya in particular. Every bank has online or mobile loan products because the uptake is still very low, because again we are still targeting the same segment – the people who have a salary at the end of the month. We need to design more products to cover more segments like farmers. For example, we have millions of farmers so we still need the right loan facility for them. There are few women in senior banking positions, as the VP of Rwanda Bankers Association, what are you doing to get more women to play executive roles in the sector? We have about four, five bank CEOs of eleven commercial banks, which is not bad. But I agree, when you look at senior management and executive roles, we don’t have enough women as we would wish. I think it’s the role of every leader to look at empowering young women to take on a career and work hard to move up the ladder. I think we have policies in many banks to ensure women get chances (to access) training, etc. The programme that is managed by the Rwanda Bankers Association – Rwanda Academy of Finance – we usually have as many women as men in this programme, so we believe we need to build a female population in the banking industry from lower levels to give them the right opportunities to rise to executive roles. I believe, in Rwanda, we are in a much better position than many other countries. Women see more role models in local government, in business, and I hope in the not-so-distant future we shall see more women in executive roles.

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It will be a tough year for banks, but the economy is beginning to improve– Karusisi