Farmers have increased their ability to pay back the money that they borrow, boosting the financial position of microfinance institutions.
This is reflected in the significant drop of Nonperforming Loans (NPLs)--loans in default or close to being in default -- reported by Microfinance Institutions (MFIs).
With commercial banks shying away from financing the agriculture sector because they consider it to be highly risky, MFIs remain the biggest lenders to farmers--especially smallholder farmers.
Microfinance institutions largely serve rural Rwandans, who account for more than 70 per cent of the country's workforce that is engaged in agriculture. This means that the performance of agriculture has a significant bearing on the financial performance of the microfinance sector.
According to central bank data, in 2016, NPLs in microfinance institutions stood at 9 per cent before easing to 8.2 per cent in 2017 and further dropping to 6.5 per cent last year.
Aimable Nkuranga, Executive Director of Association Microfinance Institutions in Rwanda (AMIR), attributes last year's reduction in NPLs to the improved performance of the agriculture sector, which boosted the incomes of farmers.
Consolidated profits for microfinance institutions increased from Rwf2.4 billion in 2017 to Rwf7.3 billion last year, according to central bank statistics.
Microfinance lending increased from Rwf138.3 billion to Rwf164 billion in the same period.
"Our goal is to bring it down to less than five percent... we will continue putting in efforts so that we reduce it to the lowest level possible (close to zero)," Nkuranga said.
"We have set strategies to deal with Non-Performing Loans, including scaling up the monitoring of provision of loans, straitening collaboration between the existing systems such as TransUnion, the credit reference bureau in Rwanda.
We are encouraging our members to report any (default) debt whether small or huge to the credit reference bureau," he remarked.
He reiterated that the credit related information should be analysed and utilised accordingly while considering to provide loan to an applicant.
Factors driving profitability
The rebound in the sector's profitability is also attributed to increased income on loans and other incomes from recoveries that outweighed expenses.
Net interest income for microfinance institutions increased by 8.5 per cent in December 2018, up from 5 per cent in the year before.
In addition, the central bank says, recoveries were also important for the MFIs profit pick up. Last year, microfinance institutions recovered Rwf2 billion.
Nkuranga said that microfinance institutions were also becoming more prudent in their lending practices.
"Loans are the main source of revenues and income in a financial institution. If an institution provides loans to people and they pay back with interest, it is such interest that impacts profitability of that institution," he said.
Rwanda has 459 microfinance institutions, of which 20 are microfinance institutions with limited liability company status, 439 are Savings and Credits Cooperatives (SACCCOs) made up with 416 Umurenge SACCOs and 23 non-Umurenge SACCOs.