31 March 2014

Rwanda: Financial Literacy Campaigns Can Help Banks Stem Bad Loans

LAST WEEK, the central bank announced that it had held its key repo rate unchanged at 7 per cent, in part to support "expected economic growth recovery" by sustaining increasing credit flow to the private sector.

Credit to the private sector is projected to rebound this financial year after slowing down last year on account of a rise in government domestic borrowing.

According to the central bank, the 2014 outlook is promising with over Rwf133 billion new loans approved by the banking sector during the first quarter of the year.

By holding the lending rates at 7 percent, commercial banks are expected to keep pace.

However, the banks are facing a challenge of nonperforming loans which increased from 5.4 per cent in 2012 to 7 per cent by the end of 2013, according to highlights of the performance of the service industry presented to Parliament by the Prime Minister last week.

While it's good for banks to lend, this should come with more efforts in sensitising the public on the financial discipline and responsibility to manage the loans. The growing rate of bad loans could be partly because people get loans without first seeking good advice on how to manage or some financial institutions may not be doing the appropriate due diligence on borrowers. There is therefore need for more financial literacy campaigns to avoid bad loans.

People should not take loans not planned for or to put into unproductive ventures. Banks also need to cultivate better relationships with their clients to help them utilise their financial services better.

This will prevent the pain clients go through when banks employ 'ruthless' methods to recover money from defaulters.

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