The reduction in interest rates is already impacting Rwanda’s banking sector, with some players already registering growth in their loan books, as the growing appetite for credit paints an optimistic picture for 2020.
The country’s central bank recently maintained its repo rate at five per cent, which ended up having an effect on interest rate reduction, but industry players have noted that it is the stiffening competition that is largely responsible for the reduction in interest rates.
The sectors interest rate now stands at 16 per cent from the previous 18 per cent and above, with some banks even able to go lower than that depending on the customer’s credit history.
Interbank interest rates fell from 5.64 per cent in 2018 to 5.45 per cent on average in the first half of 2019, according to the recent Central Bank monetary policy and financial stability statement, which made it possible for banks to afford a reduction in interest rates on loans to their customers.
Interbank activity almost doubled both in value — from Rwf225 billion, to Rwf493 billion. The bulk of deposits that cushioned Banks came from Non-financial corporations, which grew by 11.1 per cent.
Access to relatively cheaper loans this year led to an 8.2 per cent growth in loans to the private sector.
The industry also saw a reduction in rejected loans, standing at 12.1 per cent from 27.9 per cent in 2018.
“What is driving the decline in interest rates is competition. The repo rate is there but the key ingredient is competition, we have 11 banks operating in a small market,” said Diane Karusisi, the CEO of Bank of Kigali.
She said that the appetite for loans driven by the cheaper loan products offered by banks, is expected to spill into the new year, and that it will happen in tandem with the growth trajectory the economy is taking.
“The demand for loans is always big as the economy grows, next year we still see the demand for financing growing, we have seen inflation going up, we do not know how the Central Bank will respond,” Ms Karusisi said.
Most banks recorded an increase in their loan books in the last quarter of the year, spelling increased activity in the private sector as the country continues to attract capital investments in different sectors of the economy.
I&M Bank’s loan book portfolio increased by 17 per cent by 30th September compared with the same time of the previous year, while Bank of Kigali’s net loans and advances grew by 30.1 per cent to Rwf651.1 billion.
In the first nine months of 2019, new authorised loans grew by 41.1 per cent, from 0.3 per cent in the same period of the previous year, mainly attributed to easy monetary conditions and improved economic conditions.
The growth in new authorised loans was reflected in manufacturing at 176.3 per cent from 16.4 per cent in 2018, restaurants and hotels recorded a 385 percentage growth from -60 per cent, while the water and energy sectors stood at 236.02 per cent from -97.8 per cent.
The sector is also recovering from the acute problem of non-performing loans (NPLs), which had dampened the credit market.
NPL’s had grown to 7.2 per cent by September 2018, but with help of the credit reference bureau and other industry interventions; it now stands at five per cent, while NPLs ratios in the microfinance sector dropped from 6.8 per cent to 6.1 per cent.
Industry analysts have, however, noted that the interventions are yet to bring meaningful stability in the easing of NPLs because the reduction has been largely due to loan write-offs.
The Central Bank said it will continue to regularly monitor the performance, classification and provisioning of mortgage loan facilities in banks, ensure compliance with Single Obligor Limits as well as Loan to Value limits.
And 2019 started with a shock for the sector after the regulator came up with a directive to increase the minimal core capital by 300 per cent from Rwf5 billion to Rwf20 billion.
However, industry analysts have said the smaller banks, which are the ones most affected by the directive, will go to their groups and get capital injection, while others will tap into reserves, and that by the time five years elapse, they will have raised the 20 billion.
There were also concerns that even after they raise the capital threshold, some banks are likely to suffer financial losses, because returns on capital may not be immediate.
Rwandan banks have been averaging return on capital at 9 per cent at a time when their peers in the region are in double digits.
The biggest news in the industry this year was Equity Bank Group announcing that it is seeking to acquire 62 per cent of stake in BPR Atlas. The deal was supposed to be finalised before the close of year. Expectations are that it will be closed next year.
Kenya’s biggest lender by assets, KCB Group, also announced plans to buy a bank in Rwanda and one in the DR Congo, but this too is yet to materialise.
BK Group hit a billion dollars in assets, the first time a Rwandan company achieves this feat. Its assets increased 23.7 per cent to Rwf 944.3 billion ($1.037.3b) by September this year.
Also, Bank of Kigali financed cement company, Mara Phones, which launched the first smartphone manufactured in Rwanda, and a host of other projects it financed, to mark a bullish year for the biggest lender.