Rwanda boasts of more than 17 licensed commercial banks with over 416 credit saving institutions (UMURENGE Saccos). The findings from the FinScope Rwanda 2016 survey revealed that financial inclusion was at 89%, up from 72% in 2012. This is largely attributed to the growing banking industry that has become more innovative and competitive of late. Many experts attribute this excellent performance to the country’s strong monetary and fiscal policy implemented by The National Bank of Rwanda (BNR) over the years. Rwanda needs a stable and sound banking industry to reduce poverty and transform the country into a middle income status by 2020.

John Rwangombwa, Governor of the Central Bank, says Rwanda’s banking sector has continued to hold significant capital buffers and higher liquidity positions, significantly above regulatory requirements. These capital and liquidity buffers not only depict current stability but also ensure future financial stability as banks can fall back on these buffers during times of financial stress.

“Going forward, BNR will continue to implement its monetary and exchange rate policy to keep inflation low and stable, and will ensure that all requirements for the use of the interest rate as an operational objective are in place before the end of 2018,” said governor Rwangombwa adding that  in order to maintain stability and efficiency in the financial sector, the National Bank of Rwanda will continue to conduct prudent surveillance of the entire financial sector through regular onsite inspections and offsite analysis

Current trends

The Central Bank estimates the size of the financial sector, as measured by total assets relative to GDP, increased to 55% in June 2016, up from 53.8% in June 2015 and 38.4% in June 2011.

Equally, the Central Bank estimates the sector’s loans to private sector now make-up 42.4% of total financial sector assets and grew by 19.9% (year-on-year) in June 2016. This means more people now have access to finance which will eventually translate into a faster economic growth.

This current performance means, “Financial institutions are moving closer to people through network expansion and digital financial services,” said Sanjeev Anand, the Chief Executive Officer Banque Populaire du Rwanda (BPR).

The sector is expected to post a higher growth rate than earlier projected which will further drive economic growth. Anand argues that the cornerstone of modern banking has shifted to include innovation and digitization to enable banks to reach everyone in the most efficient and affordable way.

While experts urge that Bank failures are the most obvious manifestation of an unsafe and unsound banking system, for Rwanda, both the regulator and market players have managed to remain stable and competitive despite the challenges. According to Rwangombwa, the secret has been excellent political will and good corporate governance that has enabled stakeholders to grow and thrive.

In the last five years, alone, the country’s banking system liquidity improved significantly. Commercial banks continued to have sufficient liquidity to finance economic activities and invest in different financial instruments such as repurchase agreements and government securities (both short and long-term).

Improvement of BNR liquidity management has progressively contributed to the development of interbank market which is key to the efficiency of monetary policy, according to the Managing Director of KCB Rwanda, Maurice Toroitich.

The banking expert says the sustainability of a banking business must be deeply rooted in a strong governance and ethical foundation that permeates through its structures.

The central bank has spent the big part of the past 2 years battling effects of an erratic global economy characterized by low growth that inspired weak commodity demand, consequently pushing international prices into a nosedive.

For-example, total volume of transactions increased to Rwf281.5 billion in the first six months of 2016 from Rwf242.5 billion recorded in the whole year 2015 and Rwf224.5 billion in 2014. The number of transactions increased to 172 from 150 and 167 in the period under review.

In the recent past, good competition among investors in the government bond market and commercial banks is noticeable and has begun to materialize.

The central bank estimates that the industry’s total assets increased by 13.9% in June 2016 (year-on-year) – from Rwf2.0 trillion in June 2015 to Rwf2.3 trillion in June 2016 with issued loans accounting for 60%.

Overall, the banking sector remained profitable with banks posting a net profit of Rwf19.4 billion.

This, however, reflects a decrease of 18.2% when compared to 23.6 billion reported for the same period in 2015.

The decline in profits according to Central Bank is due to high growth in expenses (increase in remunerated savings, deposits and operating costs).

For example, the sector’s return on assets (ROA) and return on equity (ROE) declined to 1.7% and 9.2% respectively as at June 2016 from 2.4% and 13.1% in June 2015.

Experts say the overall growth in the banking sector is largely attributed to an increased level of competitiveness due to generic growth of new players entering the market and favourable legal environment on financial services which is coping with international and regional dynamism in the banking area.

According to the governor, all operating banks are adequately capitalized with the Capital Adequacy and Core Capital Ratios surpassing the minimum prudential of up to 15%.

The banking sector’s capitalization levels continue to remain high with capital adequacy ratio (CAR) recording 23.3% during the quarter under review compared to 24.3% recorded in June 2015. The change was largely due to increased appetite for loans and advances by banks.

However, total liabilities of banks grew by 13.4% from Rwf1.6 trillion in June 2015 to Rwf1.9 trillion by end June 2016 with customer deposits accounting for 81%.

Sector experts say that a strong banking industry means Rwanda can actually fast track and accelerate its rate of economic development. They argue that a stable banking industry means stable interest rates, which gives investors the confidence to continue investing in the country.

Marc Holtzman, Board Chairman of Bank of Kigali, says there is always room for improvement and the sector must always look for ways to do better in terms of innovation and efficiency and ensure they bring to the market affordable products.

But as this market becomes more developed, with a more predictable environment for investment, interest rates will decline organically. Competitive forces in the market will demand that interest rates become more competitive especially considering that inflation is relatively modest in this market.

Robin Bairstow, I&M Bank Chief Executive Officer adds it is essential for the banking sector to promote e-banking and other electronic facilities, like use of credit/debit, including Visa and other cards, so that clients can understand the benefits and embrace them. This way, the sector will be able to reduce the cost of transactions and boost cashless economy.

 

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