analysisBy Bosco Hitimana
Between 2007 and 2010, Rwanda's banking sector faced dramatic turbulence. "The banking sector at the end of 2008 was suffering from high levels of Non-Performing Loans [bad loans], lack of liquidity [lack of cash], poor infrastructure, high operating losses and bad controls," said the Managing Director of Rwanda Commercial Bank (BCR) Anand Sanjeev.
Domestic credit also went down significantly, as banks lacked cash to lend out, leaving the economy to contract below 7%. Banks, according to Anand, also held back on large extensions of credit and focused internally to fix the internal shocks, which eventually helped to lay foundation for an improvement in performance. In 2010, when the economy regained strength, the banking sector began to blossom again, albeit slowly. By 2011, the banking sector turned a profit, liquidity levels went up and the capacity to handle risks increased significantly.
When presenting the monetary policy and financial stability statement on Feb 9, 2012, the Governor of the National Bank of Rwanda (BNR)--the banking sector's regulator--Claver Gatete said that the sector was "liquid, well-capitalised and profitable." This literally means that banks have capacity to deal with demand for cash, and that their investment and cash holdings are healthy and they are bringing good returns to their shareholders.
The banking sector remains the strong driver of growth in the financial sector, which also includes the pension sector, insurance and microfinance sectors. The National Bank indicates that the banking sector dominated the financial sector, controlling over 73% of the total assets. According to the National Bank, the sector, which is comprised of nine commercial banks, including the new entrant Equity bank from Kenya, one development bank, three microfinance banks and a cooperative bank, has shown a growth in assets, profits and the capacity to deal with external shocks.
The growth in the banking sector witnessed an increase in profits by 42.4% to Rwf22.8 billion 2011 from Rwf16 billion in 2010, according to the National Bank. Commercial banks and specialised banks saw a 24.5% growth in assets to Rwf1, 083.3 trillion in 2011 from Rwf869.8 billion a year before, driven mainly by the entry of Equity bank and upgrading of two big Microfinance Institutions (MFIs) to microfinance bank status.
Commercial banks and specialised banks assets accounted for 82.2% of the total assets of the banking sector, which could be explained by the increased consumption of the formal banking services in the Rwandan community. The national bank statistics indicate that the increase in banking sector assets was boosted by loans and advances (53.8%).
Apart from loans and advances, 11.9% of the banking assets came from placements made in other local banks and financial institutions, while placements in foreign banks brought in 9.8% of the total banking assets. Investments in both government securities and other forms of investments contributed 6.8% to the growth of the banking assets. This demonstrates the move by the banks to grow their asset base from various sources, avoiding risks that could arise from placing their fortunes in the same basket.
Over the past year, banks increased lending to the private sector to the tune of 28%. Loans from commercial banks and the Rwanda Development Bank rose to a monstrous Rwf336 billion in Dec. 2011 from Rwf262 billion during the same period in 2010, indicating a growth of 28%. Also, the amount of deposits, which the National Bank had not provided by press time despite our request, rose by 29% from 17.4% in 2010, reflecting a boom in economic activities, supported by government spending and the increase in credit to the private sector.
Consequently, commercial banks controlled 90.9% and 77.9% respectively of the total sector deposits and gross loans. Of all the total deposits made into the banks, 88.1% financed the credit to private sector. Moreover, beyond being liquid, Rwandan banks increased their capacity to hedge against risks and losses, something that indicates the growing level of comfort in the sector.
At the end of 2011, the capitalization levels in the banking sector as measured by total capital to risk weighted assets stood at 27.2% compared to 24.4% realized at the end of 2010. Capital Adequacy Ratio (CAR), moreover, was above the regulatory capital of 15%.
Banks also reduced bad debts or Non-Performing Loans (NPLs) thus improving the quality of their assets. In the past year, NPLs were reduced to Rwf50.5 billion from Rwf54.8 billion in 2010, reaching around 8% of all the total loans given out in the year. This year, the target is to reduce NPLs to 7% of the total loans. This will help increase the quality of assets and liquidity in the banking sector. The ongoing reduction in bad loans explains the quality of borrowers and the increased efforts banks have put in to recover the loaned money. It also reflects the move by the judicial sector to punish loan defaulters and the involvement of local authorities to ensure that such cases end.
In 2011, the number of bank accounts in the banking system grew to 2.3 million from 1.77 million in 2010, yet financial inclusion is still very low at around 22%, yet the country has a population of more than 10.7 million people. Limited knowledge of the financial services mainly in the rural population contributes to insignificant participation of the population in formal financial services like banking.
Bank branches also increased in 2010 to 683 countrywide, while Automated Teller Machines (ATMs) reached 170 from 84. This further increased access to banking services, according to Governor Claver Gatete. Banks invested heavily in electronic banking in order to increase access to their services and to reduce operating costs to increase more avenues for profits.
The performance of the banking sector was a reflection of the performance of the economy. The Rwandan economy was expected to expand by 8.8% in 2011 from 7% in 2010 but financial statistics are yet to be announced. If this is achieved, it would be higher than an average of 5.2% in the Sub-Saharan Africa region.
Inflation, which was stubborn throughout the year, ended the year at 8.34% compared to other member countries of the East African Community (EAC), which had inflation in double digits.
The Rwandan currency remained stable throughout the year and appreciated against the Euro and other East African curries namely the Uganda, Kenyan and Tanzanian Shilling and Burundian Franc. It however depreciated slightly against the United States Dollar because of its high demand in the Rwandan as well as the international market.
The growth of the Rwandan economy was driven by the better performance in the agriculture sector, which expanded by over 8.2%, while the services and industry sectors grew by 7.2% and 15% respectively.
This year, the national bank projects the economy to expand by 7.6%, while inflation is expected to slow to 7.5%. The slow economic growth reflects the global economic imbalances arising from the U.S. and European debt crisis and volatile oil prices that could influence negatively food prices on the international food market. Price increases in the region could have negative impact on prices in Rwanda especially on impact goods thus fuelling inflation. This could have a serious impact on the Rwandan economy but the Central Bank says it is ready to take action especially to control further inflation rises.
According to Anand, the banking sector will continue to grow as the economy expands. He says that more growth avenues are expected in the construction sector especially from large projects such as construction of the new airport in Bugesera, southeast of Kigali, and construction of the Kigali convention centre. Construction of residential and commercial properties will also continue to grow, as the demand remains high. Banks will consequently benefit from this demand especially with the ongoing mortgage loans.
High consumption of goods, said Anand, is expected to drive retail business up, as more people will need credit to buy essential goods. Manufacturing, agriculture as well as the services such as hospitality are also expected to grow, which could increase demand for loans to expand existing facilities or to build new ones.
Meanwhile, as the economy expands, banks will continue to face new challenges regarding financing. The Small and Medium Enterprises (SME) sector, which supports over 80% of jobs in Rwanda, is currently undergoing massive changes that will increase its demand for credit. Young entrepreneurs and managers of SMEs have acquired business management skills, meaning that they are capable of designing incredibly new bankable projects, which require heavy financing. This will put a lot of pressure on the banks to deliver.
Governor Getete expects credit to the private sector to grow by 16.6% this year but this is likely to be way below the current demand if the economy continues its upward trend. On the other hand, liquidity levels in the banking sector could increase as banks become more capitalised. However, profitability could be reduced following tough competition especially within the commercial banks.
With nine commercial banks and other specialised banks, the Rwandan banking sector is headed for robust competition. Banks have been reaping much of their profits from the corporate sector but it is also facing tough competition. For instance, the telecom sector, which drives liquidity and deposits in the banking system, has seen dramatic competition pushing down call tariffs thus reducing the amount of revenue from each user. This could reduce telecoms appetite for credit thus lowering interests telecom pay on credit because they are not expecting higher returns. But in the end, the increased competition in the banking sector could force banks to lower lending rates, something that would benefit the borrowers and the economy as a whole.