Banks post huge losses in first Semester 2009

A report on the banking industry has exposed significant losses in major banks as they continue to tighten credit to the economy despite efforts by the Central Bank to boost liquidity in the sector. The report Business Times has seen shows that in the first semester of this year, a total of 10 banks made a meager profit margin of Rwf4.1 billion with four banks posting significant losses. Two banks recorded significant profit namely: the Development Bank of Rwanda (BRD) which made a net profit of Rwf1.4 billion and Bank of Kigali which made Rwf2.9 billion in first half of 2009 respectively. Among the 10 banks under study. four banks including new entrant Kenya Commercial Bank (KCB) recorded significant losses. While attempts to reach most banks for comment were fruitless, KCB said its losses were mainly driven by high costs on development of physical infrastructure, human resource and technology to penetrate into Rwanda’s banking industry. KCB Rwanda, a subsidiary of Kenya’s KCB Group, which also has presence Tanzania, Uganda and Southern Sudan started operations in Rwanda late last year. “This normally happens in the first year of operation which is basically a year of investment. Unfortunately, this happens even before you start getting customers. This means we have a period of time when we are spending money before generating any revenue,” Maurice Toroitich, KCB Rwanda’s Managing Director said recently. Toroitich explained that the bank’s first year of operation was about investment in terms of fixed assets, staffing, training and paying costs related to starting a new business. “As we get into another year we shall begin normal trading with a whole range of our banking services,” he said, pointing out that his bank expects to break even in the coming year as it will be fully established and operational. The banks have also generally tightened lending standards, raising the risk of a prolonged credit slump, something that has had an adverse impact on the economy. Second quarter statistics by BNR show that credit to the private sector dropped by as much as 24 percent. from Rwf94.4 billion in the first half of 2008 to Rwf71.7 billion in same period this year. Regulators attribute the poor performance of the banks to the general economic slowdown of the economy at the beginning of the year due to the external shocks of the global recession. “It is a problem remaining even in the second quarter. Banks have been obliged to make huge provisions cutting off increase in non-performing loans. But we do expect that this situation is changing beginning the third quarter of 2009,” Francois Kanimba,Central Bank governor told Business Times, pointing out that the liquidity crunch experienced in banking system in the last quarter of last year also worsened the condition. Kanimba also said he was optimistic that banks will do better as there are signs of recovery in the economy. “The liquidity problem in the banking system has been addressed and the world economy is slowly recovering. A number of sectors which have been hit by the global economic recession are now recovering slowly,” Kanimba said. The Central Bank has promised to strengthen supervision of banks in order to minimize risks within the banking sector. The institution recently instructed all banks to set risk management departments. In a parallel interview with Business Times, Leonard Rugwabiza, an economist at African Development Bank, reaffirmed that the banking sector has recovered. “I do not think the banks are in a serious problem now. The resources are there. I guess in one year or six months they will start thinking – we are back to normal so we can give credit/ begin to lend,” Rugwabiza said. “These are positions that are quite new here, positions that they did not have before. The credit manager should be good enough. May be that is the problem we have – you got credit managers with one year experience – or even no experience,” he added. According to the economist, weaknesses in risk management makes banks vulnerable to losses arising from bad debt as credit is extended to people who cannot manage it. Rugwabiza argued that while the banks may be able to get to recover their money, it is not “good business” for the banking sector. “Good business for the banks should be when you (client) succeed and you are able to pay me properly. If the credit manager actually did his job properly, things are okey- we should not get a problem but then you never survey the market,” he said. “You know that this is going to work because risk management is about how this credit will revolve overtime, in one – 2 years. You even have to know the person’s managerial skills,” he said, adding that selling guarantees is not good business for the banks. He also advised that banks should put in more effort to ensure their customers succeed as this will help them to recover their resources. “The risk management is not good, only because they do not have staff,” he said, urging banks to recruit staff with reasonable experience in risk management. Rugwabiza also pointed out that selling guarantees held by banks takes a long time, implying that the financial institution’s capital is held. Ends