News analysis: Gaps in banks despite growth

Despite registering healthy growth in the last five years, Rwanda’s banking sector still offers a limited range of products, creating a mismatch in an economy that is witnessing a massive reconstruction agenda. Central bank’s latest statistics on the banking sector show that deposits have reached Rwf662.37b as at September 2011 up from Rwf307.22b in December 2007 while loans hit an all time high to Rwf559.15b up from Rwf218.98b. The banking sector’s capitalisation level of 25.8 per cent is far above the requirement of 15 per cent. These are very impressive results especially given the economic and historical context of the banking sector, which rose from the ashes and destruction of 1994. “Rwandan banking system is reasonably sound, properly regulated and is in a better position to cope with the effects of the financial distress,” the central bank said in a report, adding that the consolidated balance sheet of the banking industry expanded by 38.1 per cent in the period between September 2010 and September 2011. Skills deficit However, other authoritative reports including experts’ views depict gaps within the local banking system. Such reports and comments give reasons why the current status of the sector, cannot adequately service the requirement of an economy that is experiencing a huge reconstruction agenda, which requires deeper and specialized banking services. The Managing Director of Rwanda Commercial Bank (BCR), Sanjeev Anand told Business Times that the sector still lucks sufficient skilled personnel. “Up to now, banks still train most of their staff, which is very expensive as local universities have failed to provide skilled graduates,” he said. Despite such gaps, Anand acknowledged the tremendous growth the sector has achieved in the past one year. “Banks are now moving away from short term to medium and even long term lending, something that never used to happen before.” While the central bank says that stability of the sector is assured, banks remain largely in need of additional and specialised services needed by the economy. In a report dubbed “Rwanda’s financial stability assessment” that was released mid this year, International Monetary Fund (IMF) said that Rwanda’s financial sector faces new challenges, posed in particular, by the agenda to improve access to finance and quest for providing more long-term financing to the economy. Risks Although market risks in Rwandan banks appear to be quite limited, the IMF says that the sector’s assets and liabilities are mismatched based upon maturity, where 82.6 per cent of short term liabilities are funding assets with maturities greater than one year. Mobilisation of more long-term stable financing for the economy continues to be another major challenge, given the small and underdeveloped local capital market, the IMF says. “The banks are already exposed to the risks posed by the large maturity gap between their assets and liabilities, so encouraging them to increase long-term lending without a more stable funding source would only aggravate these risks,” the report states. On the other hand, the need to boost the service provision in terms of additional capacity within Rwanda’s banking sector can be seen through the same report that says that gross loans that grew by 42.7 per cent over last year, was largely funded by over 80 per cent of deposits. This analysis can be corroborated by looking at the current service provision of Bank of Kigali (BK), Rwanda’s most dominant commercial bank by market share and capital base. Despite being valued at US$151.2m by investment banking firm, Renaissance Capital, with a huge market share approximated at 30 per cent, BK is still struggling to offer long term funding options to the economy. “BK is primarily, a majority deposit-funded bank and is gradually increasing its proportion of debt and long-term financing into its product and service provisions as part of its new strategy,” Rennaissance Capital says in its report on BK valuation that was released last month. BK accounts for 29 per cent of banking sector deposits and 31 per cent of the credit portfolio. The Bank’s capital outpaces the industry’s second and third largest lender combined, further explaining why it is very challenging for investors to raise cheaper and longer term funding locally. New entrants to spur better service provision While the central bank paints a rather rosy picture of the sector, government is now mulling over the idea of expanding the scope of the sector to better respond to the needs of the massive reconstruction agenda, through various moves. They include paving way for new entrants. Such an observation is what prompted the Prime Minister to inform parliament early last week, that government is very keen to moot the idea of setting up an agricultural development bank that seeks to offer tailor made financial solutions capable of meeting the needs of the highly ambitious agricultural reform agenda. The issue of allowing new entrants into the sector is captured in the central bank report that states that during the first half of year 2011, Equity Bank, a leading regional bank was licensed to begin operations in Rwanda in March 2011. Equity opened its doors to the general public with four branches. In addition, two microfinance institutions have been upgraded to microfinance bank status. One of Equity bank’s famed innovations that it is set to rollout in Rwanda is agency banking scheme that has been successfully in Kenya. KCB Rwanda, a subsidiary of KCB Group plans to rollout the same scheme, a move that is set to trigger fierce rivalry and possibly usher in more innovative products. Maurice K. Toroitich, KCB Rwanda’s Managing Director, told Business Times that the bank is in the piloting phase of rolling out the scheme and that it is set to commercially launch it before the end of this year. “I think launching the same product which Equity bank is offering, will be good for the market and it will be value for customer’s money because now services will be closer to them,” Toroitich explained. Agency banking is postal outlet contracted by a financial institution to process clients’ transactions. Rather than a branch teller, it is the owner of the retail outlet who conducts the transaction including making deposits, withdrawals, and transfer of funds. The rollout of such products will boost the pace for the provision of formal banking services to the unbanked Rwandans. More competition is what is needed for the sector and clients will be deciding depending who provides better services. Ends