Rwanda's banking sector saw a 14percent increase in profits in the first quarter of 2012 compared to the same quarter in 2011 driven by increased lending on the back of the growing economy and money recovered from bad loans.
Banks amassed Rwf6.9 billion in profit after tax in the first three months of 2012 which is an increase of Rwf822, 829 million compared to the same period last year, according to the National Bank of Rwanda (BNR), the sector's regulator.
Bank of Kigali (BK) alone, Rwanda's largest bank in terms of assets and profitability, accounted for nearly half of the profits of the sector as it posted a mammoth Rwf3.2 billion in net earnings between January and March.
Rwanda's banking sector, which is dominated by foreign shareholders, currently consists of about nine commercial banks and at least three micro-finance banks.
The Chief Executive Officer (CEO) of Urwego Opportunity Bank (UOB), one of the three micro-banks Jeffery Lee says the bank posted a much higher profit than the average profit of the entire sector, thanks to the stable and growing economy.
The increasing economic activities in the lower-end market which the bank serves are triggering higher demand for borrowing because of the rising consumer spending, which in turn, triggers higher imports since Rwanda is a net importer.
"Economic growth in the country is making contribution to the growth of loans. From our experience, we are now financing trading and importing of all sorts of goods and when people buy more, there is an impact," Mr. Lee said.
BNR statistics show that gross loans in the first three months of the year rose by 33 percent to Rwf695.4 billion compared to the first quarter in 2011 driven mainly by the loans issued by the new commercial bank--Equity bank--and two new microfinance institutions that upgraded to the microfinance bank status.
New authorized loans, however, jumped more than two folds to Rwf117.05 billion from Rwf60.93 billion in the first quarter 2011.
But as usual, loans to the agriculture sector, which include lending for purchase of equipment, remained insignificant and during this period they went down to Rwf2.12 billion from Rwf3.82 billion in the first three months of 2011.
Nevertheless, the agriculture sector, mainly farming and to some extent livestock, remains the backbone of the economy as it consists nearly one third of the growth and employs over 80 percent of the adult working population.
According to interest groups and the civil society, the agriculture sector should receive more funding both from the government in form of budgetary allocations and the private sector in terms of direct investments by individuals or through bank loans so that the sector continues to play its gatekeeper role.
BNR statistics indicate that more loans went into commerce, hotels and restaurants. Loans to this segment more than doubled and hit Rwf45.49 billion between January and March 2012 from Rwf20.82 billion in the same period in 2011.
This, according to analysts, indicates a rapidly expanding retail sector as well as the hospitality sub-sector, which reflects on the high performance of the tourism sector.
Banks also injected more money in public works and construction industry which reflects the growing public investments in the infrastructure sector especially roads repair, and government buildings as well as the booming construction business in the area of commercial and residential properties.
Loans in this segment rose to Rwf31.67 billion from Rwf14.25 billion in the first quarter of 2011, indicating a tremendous growth.
Transport, warehousing and communication activities saw a three-fold growth in terms of loans to Rwf6.97 billion in the first three months of 2012 compared to the same period in 2011.
The manufacturing sector also saw a sharp jump in loans to Rwf8.8 billion from Rwf2.54 billion. The banking sector did not lend to the mining sector according to the BNR statistics.
Energy and water sector, which is one of the crucial sectors to drive growth in many sectors especially manufacturing and processing, received a slight increase in loans to Rwf0.1 billion from rwf0.02 billion.
As banks were busy meeting the demand for loans, they were also investing heavily in recovering the so-called Non Performing Loans (NPLs) or loans that are in default or close to default.
In terms of value, NPLs reduced significantly by 15 percent to Rwf45.4 billion in the first three months of 2012 from Rwf53.4 billion in the same period 2011.
The Central Bank attributes this decrease to the "measures taken by the commercial banks to recover loans and bring NPL value to 7 percent of the total loan book as requested by the Central Bank.
But also, the credit reference bureau, notes the central bank, played a key role in making sure that the banks lend to the clients whose credit history is known, thus helping to avoid default risks.
As a result, the NPL ratio, or the size of NPLs against the total loans, went down by 36 percent to 6.53 percent between January and March 2012 from 10.23 percent in the same period in 2011.
Mr. Lee explains that one reason that could have helped to reduce NPLs is that assets involving a loan are now easily liquidated making it easier for the banks to recover their money.
In an interview end of last year, the Managing director of Banque Commerciale du Rwanda (BCR), one of the strongest commercial banks in Rwanda, Mr. Anand Sanjeev said that more banks were increasingly tightening their recovery departments with the intention to lower the NPLs in their balance sheets.
But this was after the banking sector was hit by lack of liquidity in the system which starved the economy thus forcing the Central bank to set tight targets for the banks to meet in terms of NPL against the total loan book.
Banks had lent out a lot of money and the borrowers were hesitant to pay back because they had been hit by the slow economic growth.
But according to the Governor of the National Bank, local authorities such as district mayors have also increased efforts in cracking down loan defaulters which is equally increasing responsible borrowing.
The bank explains that the increase in the number of commercial banks and micro-finance banks, loans and the reduction in NPLs reflected positively on the total assets owned by the banking institutions.
Assets of the banking sector rose to Rwf.1.1 trillion from Rwf911 billion in the first quarter of 2011, indicating a significant growth of 22 percent.
Banks also registered a strong growth in the amount of deposits as they rose by 27 percent mainly driven by the deposits from Umurenge Savings and Credit Cooperatives (SACCOs) and the entry of new banking institutions. Deposits hit Rwf755.9 billion from Rwf595.1 billion in the first quarter of 2011.
The government's savings mobilization program to increase the share of domestic savings which would allow banks to lend more to the borrower with long-term projects has seen the rise of over 400 grassroots savings and credit cooperatives and their members are increasingly saving in them.
In turn, the SACCOs also deposit the money in the commercial banks for safety and sometimes for a profit as savings that attract an interest rate over a period of time.
Banks also registered 17,534 new customers increasing the total number of accounts to 2,044,272 from 2,026,738 accounts in the first three months of 2011. But accounts operated by the micro-finance sector as SACCOs reached one million which means that the total number of accounts exceeded 3million.
The first three months of the year also growth in the number of Automated Teller Machines (ATM) increasing to 209 from 107 in the same period in 2011 but the Central bank did not indicate the number of customers who had ATM cards.
This increase, although it remains small, further indicates the growing desire in the banking sector to ensure an electronic banking environment which increases efficiency in service delivery. This combines mobile and card-based banking.
But electronic banking as well as payments, is set for a dramatic growth once the national switch operator, Rswitch, which facilitates banks to offer card-based payments, rolls out a new service that will combine mobile, online and card-based payments in September this year.
According to the new CEO of Rswitch and the former Chief Operating Officer at Banque Populaire du Rwanda (BPR), Konde Bugingo, the new platform will allow users to transact locally and in some of the East African countries such as Kenya.
Although the banking sector performed well in the first three months of 2012, Lee says that some banks were used unprofessional approach to win new customers.
This means that they used uncompetitive behavior. He also says that uncertainties in the government policies, which he declined to name, have been a challenge.
"The government policy has to be consistent and if it is not, it can create uncertainty and that is going to destabilize financial institutions to make more predictable investments," he said.
He said that the sector continues to see growth in the second quarter which ends with this month because of the stable economic growth. Rwanda's economy is expected to grow at the rate of 7.7 percent this year much slower than 8.6 percent last year.
The slow-down is attributed to the uncertainties in the global economy especially the Euronezone where some member countries of the single currency zone are battling recession arising from bankrupt governments because of debts.
In addition, changing oil and food prices globally could hit the demand for Rwanda's exports thus reducing the earnings which are already projected to increase by a mere 1 percent. This many affect Rwanda's import-dependent economy and the banking sector which lends to the tea, coffee and other export oriented activities could feel the pinch.