Which way to go: state-owned banks or private control

As some banks were releasing their second quarter results in the last three weeks, I realised that state-owned banks were performing better than private banks (which have much foreign influence in this country). Going through their income statements, balance sheets and detailed ratio calculations, one easily notices that government-owned banks are so much better in terms of profitability, asset base and efficiency. This in someway raises questions about government’s rationale to divest the industry. On the basis of profitability, the consolidated net profit for eight commercial banks in the country was established at Rwf3.6 billion as of June 2009. Their combined balance sheet was Rwf525.5 billion, according to the Central Bank. Bank of Kigali’s (BK) profits alone amounted to Rwf2.9 billion, representing 80.6 percent of the total net earnings of the assessed commercial banks. BK is a government owned bank that was a target for privatisation until late last year when Barclays Bank (the would-be buyer), one of the causalities of the global financial crisis failed to meet government’s valuation. Other banks’ share of net profit was definitely about19.4 percent. New entrant into Rwanda’s banking industry, Kenya Commercial Bank (KCB) Rwanda— subsidiary of Kenya’s KCB Group, posted a net loss of Rwf381.4 million. However, its performance is justifiable because of the high start-up costs. Research has proved that more than half of start-ups register losses in their first year of operation. The Development Bank of Rwanda (BRD), where government is the largest shareholder, registered Rwf1.4 billion in net profit. While practitioners, expert, multilateral institutions, development partners, policy makers and definitely capitalists around the globe are overwhelmingly opting for banks privatisation, reflecting a huge consensus that state influence in business is undesirable, the current trend in Rwanda’s banking industry is in favour of the status quo. It is also important to note that the general economic slowdown has affected the entire banking sector but detailed statistics of individual banks suggest that sate-owned banks have showed more financial stability than those under private control. This trend comes at a time government is privatising most of its businesses to implement one of the Structural Adjustment Policies (SAPs), a requirement of the World Bank and the IMF. The SAPs call for liberalism which means opening up for the private sector. But it is also Rwanda’s goal to sale off most of its parastatals because government is not for business. This has allowed in more foreign influence in Rwanda’s banking sector, reflecting a collective view that indigenous banks, often under-capitalised and poorly managed struggled to meet private sector demands. The last two years have seen an influx of foreign financial institution like RABO Bank, Access bank, Shorecap International, Africainvest and Belgium Investment Company (BIO), Ecobank, African Development Cooperation and Actis into the Rwandan market through joint venture partnerships with local banks. Yet large literature has suggested that government owned banks produce inferior outcomes compared to privately owned banks, poor service delivery, limited and inferior financial services in the Rwandan banking industry do not reflect the banking experience the foreign banks that have dominated Rwanda’s banking industry. On top of increasing efficiency of the local banking system, foreign banks are supposed to bring in more dynamism in the financial industry. This has not been the case though and it causes temptation to conclude that Rwanda should be strict about the entry of foreign banks. However it sounds irrational because Rwanda’s banking system is still very small with inability to handle increasing private demand. Nevertheless, it is an indicator that there is need to shift approach towards regulation, supervision and awarding of banking licenses. The National Bank of Rwanda, before awarding a banking license, needs to consider the banking model of the bank other than focusing on the promises of the size of investments. The regulatory and supervisory practices cannot directly increase profitability for these banks but it checks their operations to ensure effective service delivery, which in turn can increase customers and revenues. The writer is a Journalist gahamanyi1@gmail.com