Turnaround in Rwanda’s banking sector

A recent Central Bank report on the financial sector in Rwanda indicates that all commercial banks made a consolidated net profit of 1724 per cent (Rwf4.6b) in the first three months of 2011. All banks in Rwanda earned substantial profits in the first quarter of 2011, registering the strongest recovery from a dire 2009, the year that was characterised by high interest expenses and billions of bad debts, followed by a net loss of Rwf300 million last year. However, things turned around this year with a robust rebound in the financial industry, awarding banks with high profits in contrast to the pain they endured during the financial meltdown. In fact, banks should maintain their optimism because Central Bank Governor Claver Gatete says that credit designated for the private sector is expected to increase by 20 percent this year. As a sign of reassurance, the Central Bank said that there is a guaranteed liquidity should banks need more money to lend. The good performance in the industry is a result of a prudent fiscal policy for the last five years and increasing lending to stimulate economic growth. The current growth has not been hampered by the Central Bank’s tight rules that govern the financial sector in Rwanda. Banks work in an austerely monitored environment, but there have been a series of monetary easing measures of late. For example, the Central Bank in 2010 massively slashed its key repo rate — the rate at which it lends to commercial banks—to a record low of six per cent from nine per cent in 2009. This development came on the heels of a stimulus package of Rwf20.21 billion in the banking system in 2010 in addition to Rwf14.51 billion that was spent a year earlier in form of short and long term deposit liquidity facilities to banks. The Central Bank was also able to mobilise resources with an improved asset quality management, triggering an acute funds mobilisation of approximately Rwf751.1 billion at the end of March 2011, an increase of 26 per cent from the Rwf594.6 billion it mobilised in 2010. The Central Bank’s report indicates that the monetary business in Rwanda has blossomed because banks have now firmly held their position in terms of assets, loans, capital, deposit and profitability. The current report is a direct contrast to events in 2009 and 2010 when losses in Rwanda’s financial institutions was fuelled by the sharp mismatch between bank deposits and loan disbursement as a result of poor risk management practices within banks. “When you look at 2008, it was a problem of the banks,” says Lawson Naibo, the Chief Operations Officer of Bank of Kigali (BK). “In 2009, we started to feel that there’s lack of liquidity in the market when large depositors started withdrawing money from the banking sector, putting it in properties and investing in the stock exchange.” The major issue, he says, was that people who managed to deposit in banks demanded high interest rates on their deposits, leading to high interest expenses incurred by banks. Naibo believes the situation was actually worsened by high default rates because of the low economic activity in all sectors. “That affected the profitability of banks,” he says, but is now upbeat that “the situation has already improved.” But the improvements have not come from nowhere; a combination of improved risk management and the Central Bank’s policy actions ultimately encouraged banks to lend more to the private sector. Numbers published by the Central Bank indicate that private sector credit grew by 10 per cent (Rwf404.3 b) in the first quarter of 2011. However, after healing the panic caused by poor management in credit and lending, banks have become relatively cautious when it comes to lending, a move that could help reduce non-performing loans from 10 per cent to the Central Bank’s threshold of seven per cent. In fact, many analysts have come out to strongly criticise banks for failing to manage a long term liquidity facility that had been offered by the Central Bank. Instead of addressing the real economic problems that had been created by the financial crisis, most banks invested a considerable amount of the money in a few selected lucrative sectors such as mortgages, while denying retail businesses access to loans. Because the Central Bank maintains a tight regulatory stance on lending and interest rates, commercial banks deposit interest rates slightly declined to 7.1 per cent in December 2010 from 8.5 per cent in December 2009 and lending rates remained high, oscillating between 16.7 per cent and 17.6 percent. While deposits grew by 22 per cent to Rwf540.2 billion in the first quarter of 2011, as banks’ loan books expanded, BK’s Naibo says that banks still largely depend on local deposits. Naibo believes that the Central Bank’s policy action will be more effective once the banks get broad based sources of funds other than entirely relying on local deposits. “Now that we are mobilising funds from outside, the situation will change and there won’t be a lot of competition for local deposits. Therefore the rates will come down,” he says. One of the policies to encourage the increase in bank loans to the private sector is to reduce incentives for banks to invest in Central Bank or government instruments by lowering the key repo rate. Bankers believe that the increasing competition as a result of more banking licenses being issued by the Central Bank will bring about the much needed competition in the industry and encourage innovation. According to the Managing Director of Kenya Commercial Bank (KCB), Maurice Toroitich, the current growth can also be attributed to improved value addition to banking services, which may be a result of heightened competition within the banking industry. “Banks have expanded a wide range of products and better services that attract more customers which has increased revenues,” Toroitich says. The Independent