The latest Rwandan Central Bank financial sector report shows that the country’s commercial banks accrued an impressive consolidated net profit in the first quarter of 2011. The availability of private sector credit also increased by a healthy 10% in the same quarter. Overall, the sector is currently well capitalised with strong liquidity and solvency. Asset quality is also advancing, along with banking sector publicity.
The most recent individual growth figures for the country’s largest banks indicate that gains are fairly well distributed across the sector. The Bank of Kigali (BK), Rwanda’s largest lender by assets, recorded a 17% hike in profits over 12 months to $10.2m, following an 18-month push to increase its number of branches from 18 to 33. “We have proven yet again that we can continue our growth without sacrificing profitability,” said James Gatera, the bank’s managing director.
Similarly, Rwanda Commercial Bank (BCR), the country’s second largest private bank, with more than 30% of the market share in the country, posted a year-on-year net profit increase of 35.2% to Rwf1.3bn ($2.2m) during the second quarter of 2011. The bank also reported a 12% drop in Non Performing Loans (NPL) to 13.05% as of June 2011. Another leading financial institution in the country, KCB Rwanda, a subsidiary of Kenya’s KCB Group, is projecting “a very big profit margin” for the end of this year. Such optimism is ostensibly justified; KCB recorded a healthy profit of Rwf54m ($91,000) in the first quarter of 2011 and Rwf34m ($57,000) in the second quarter.
Such encouraging figures confirm that the sector is making a robust recovery from the painful losses that it incurred in 2009 and 2010, in the wake of the global financial crisis. During these two years, dangerous discrepancies between bank deposits and loan disbursements led to toxic debt levels and inflated interest rates. The outcome was eye-watering financial losses, which are estimated to have been as high as Rwf300m ($505,000) in 2010. Analysts largely attribute the turnaround in the sector’s profitability this year to a healthier overall economy, advancements in financial risk management and more prudent Central Bank policies, aimed at encouraging banks to expand their private sector lending.
Key players in the financial industry are nonetheless anxious not to exaggerate recent successes, but instead view them within the context of the sector’s rocky trajectory since 2009. When commenting on the recent expansion of available credit in Rwanda, Sanjiv Annand, managing director of BCR, is circumspect: “In inflationary terms and real terms, in the last two years, the credit had actually declined; for it to go up now, is a good thing but in a sense it is also a catch up of credit that fell down in the last two years.”
Yet, despite the fact that the attitudes of bank executives are inflected with caution, it is difficult to ignore the government’s rising hopes for the sector; although only 17% of Rwandans were reported to own bank accounts in 2008, the government’s intention is that figure should rise to 80% by 2017.
Furthermore, appetite for competition is increasingly palpable across the financial sector. Rwanda’s financial domain is steadily generating regional interest. In November 2011, Equity Bank, Kenya’s second-largest retail bank, which already has operations in South Sudan and Uganda, commenced operations in Rwanda, opening four branches in Kigali, Muhanga, Musanze and Rubavu. The bank aims to increase this figure to nine by the end of the year. They are the third Kenyan bank to commence business in the Rwandan market, following the earlier entries of KCB and FINA Bank.
Equity Bank evidently has its sights on the country’s burgeoning SME sector and has committed $6.5m of investment aimed specifically at boosting lending to this group. Industry experts are confident that the company’s entry will add value to the market by driving competition. Claver Gatete, governor of the Central Bank, said: “The coming of Equity Bank adds competition. When there is competition there is always improvement in terms of how [banks] perform.” Analysts also believe that Equity Bank’s entry will increase the banking sector’s overall reach into Rwanda’s rural areas, large swathes of which are still largely unbanked.
There are already strong indications that other banks operating in the country are responding to new competition from Equity Bank by expanding their operations and diversifying their product portfolio. BCR is a case in point. The company is making a big push to expand its national reach in coming months, by setting up more Automated Teller Machines (ATMs) and opening several new branches. BCR also unveiled its new e-banking platform in November, which will enable customers to make banking transactions online or on their mobile phones. “The market is still there and competition makes you more innovative,” said Isaiah Chindumba, Chief Operating Officer of BCR. “Now a client can pay for their bills, buy electricity, purchase airtime and also transfer funds to other bank accounts through the platform.” BCR also hopes that its new internet banking services will generate investment by facilitating the inward flow of migrant remittances.
Other competitors are taking similar steps. In the autumn, KCB Rwanda announced that it will shortly launch a new portfolio of mobile and internet banking products. Banque Populaire du Rwanda (BPR) will also increase its ATMs to 100 by the end of the year and is continuing to develop its mobile and internet banking services, which it initiated in July.
However, experts attest that Rwanda’s financial sector still has to overcome formidable obstacles before it can reach its full potential. For example, uptake of electronic banking will depend to a large extent on the ability of banks to resolve problems with the low efficiency of the national switch operator, which has a direct impact on the functionality and availability of ATMs – frustrated customers finding that ATMs they approach on the street are out of order is still a too common occurrence in Rwanda. Nonetheless, some banks such as BPR and BK have sought to obviate this problem by buying their own switches.
Other capacity-building challenges are more intractable. Financial experts cite the need to tackle fundamental legislative, institutional and organisational quandaries. It is true that an important package of banking regulations was passed last autumn, which included measures concerning the oversight of bank inspections and loan classifications. Some progress has also been made in overhauling other important aspects of the legislative framework, such as with the Pensions Law, which was promulgated in March, and a number of insurance laws, which will be approved by the end of the year. However, much of this is yet to be properly implemented and important facets of the legislative framework still need updating.
Moreover, the country’s accounting and auditing systems have been criticised as inadequate; the shortage of chartered accountants in Rwanda is a particular shortcoming, which makes it more difficult to ensure that companies prepare accurate annual financial statements. In addition, experts highlight the need for Rwanda’s financial sector to invest greater sums into human resource development, so that higher quality and more frequent staff training is established and modern corporate governance principles can be successfully incorporated into operations at all levels of the command chain.
Rolling out banking services to less wealthy Rwandan citizens, including those who reside in rural areas, faces particular challenges. Based on 2009 estimations, around 60% of the population live beneath the poverty line. Approximately 90% of the population is also engaged in rural agriculture, which is largely subsistent. At present, the majority of banking transactions still happen in Kigali and loans are largely given to manufacturing, trade, tourism and property development companies. Agriculture, the largest sector of the Rwandan economy by far, receives a derisory proportion of direct bank credit. Getting to grips with this issue will require the commercial banking sector to improve their portfolio of microfinance products. Microfinance institutions will also need to radically build their capacity in a wide range of areas, including management, training and product development.
Finally, it is worth noting that appraisal of any aspect of Rwanda’s economy, which is detached from analysis of the country’s recent history and political dynamics, has limited usefulness. Although some attest that political stability, and thus economic achievements, are precarious, a more optimistic interpretation is that the determination of Rwandans not to relive the country’s genocide nightmare adds much-needed fire to the economic fuel tank. The requisite steely determination is certainly discernible within the financial sector and, given the sector’s impressive performance this year, its progress over the course of 2012 is definitely one