Rwanda’s financial sector is solid; has strong capital base

Rwanda Central Bank Governor John Rwangombwa offers insights into the prospects and risks the economy faces in 2020 and trends in the banking industry.

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Give us a picture of the country’s current economic situation?

Nothing much has changed on the ground vis-a-vis what we had expected to see. We do not have all the numbers yet but the new authorised loans are already slightly above what we had by the end of February last year, even though the numbers then and in 2018 were high.

The IMF has raised the red flag on the likely impact of the coronavirus pandemic. What instruments are you considering to shield the franc?

The pressure surrounding coronavirus may impact the economy on inflation but not necessarily on currency, because we don’t expect the import bill to shift faster than we have seen.

The trade deficit has widened due to the heavy import bill vis-a-vis the exports. Last year exports grew at 3.8 per cent and imports at 10.8 per cent. The good thing is that the main driver of imports is capital goods and they are building the base for the growth of the economy going forward.

In the medium term, say the next five years, big imports, mostly capital goods going to projects like the Bugesera airport and peat plant will support our productive capacity and the manufacturing sector which will improve our foreign exchange earnings. Therefore, the solution really is to make the right investments in order to improve our export base, which we are doing.

Conference tourism will be affected by coronavirus in the short term and even if the crisis prolongs, it is unlikely to extend beyond this year. The work that has been done to promote tourism will begin to improve our foreign exchange earnings.

In addition, the Qatar- RwandAir partnership will contribute towards conference tourism and travel, and Rwanda acting as the hub will help us earn more foreign exchange.

Commercial banks wrote off Rwf57 billion ($59.9 million) in bad loans. What measures have you put in place to curb NPLs?

First, written off does not mean “lost.” Loan write-off is normal and it is done to clean up the loan book.

If an asset has reached class five as a bad loan, you are allowed to keep it on your books for one year. And if you are unable to recover it, you write it off and continue to follow it off the balance sheet. This gives a clear picture of assets and liabilities.

But despite the high write-offs, the capital base of banks remains strong. So at the financial stability point of view, we do not have any problem. If anything, the capital adequacy ratio improved by between 18 and 19 per cent because large banks like Bank of Kigali injected in heavy capital to strengthen their base and be in a position to write even bigger tickets.

On the other hand, NPLs did not impact the profitability of banks. If anything, it rose, driven by recoveries which stood at 15 per cent of the written-off loans. A 4.9 per cent rate of NPLs is healthy. Thus the financial sector has a strong capital and liquidity base.

Rwanda remains a net exporter in informal cross-border trade with a surplus of $97 million. But exports reduced by 13.1 per cent in and imports 41 per cent. How has this impacted the economy?

Informal cross-border trade contributes just around 9.4 per cent of total exports and 0.1 per cent of imports. It may have had a small impact on the traders but in terms of the macro picture, it is insignificant.

Last year Central Bank directed commercial banks to increase their core capital to Rwf20 billion ($21 million). But the banks say the return on capital has been a challenge. What assurances can you give investors?

We increased the minimum capital requirement to allow banks that have the capacity to do meaningful business. The stronger the capital base the more the banks can underwrite bigger risks and the more profitable they become. For example, Bank of Kigali (BK) , the biggest in the market with a capital base of more than Rwf100 billion ($105 million), last year went to the market to raise more capital.

Do you see a likelihood of a merger in the near future?

There is none in the pipeline. If there were to be a merger, it would not be due to the increase in capital. But as businesses grow and the market becomes more competitive, we are likely to see some banks merge. The Equity Bank- BPR merger is not off the table yet and we do not know how far that will go.

At some point we had the issue of concentration in banking sector. BK has a balance sheet that can do most of the deals. Do you see more banks having the capacity to do this?

Bank of Kigali is still the giant in the market with over 33 per cent of the total assets of the industry but other banks are growing and increasing their assets including Equity and KCB.

Towards the end of 2018, Ecobank was the leader for a big loan to MTN, and many banks subscribed to the loan. Banks are working together to take on big tickets.Earlier we saw a Cimerwa loan co-financed by many banks with KCB as the lead. This gives us confidence that even the medium banks can underwrite bigger loans.

Don’t you see a risk if the Equity merger goes ahead given that it is bigger than BK at the regional level? And won’t this lead to a concentration of power to two big banks?

I see this as a positive move. The concentration of only one bank is riskier. For the meaningful development of a nation, you need banks with the financial muscle to take on big risks and are able to finance the economy.

If we have two banks with the capacity to take on big loans, then the other banks can co-finance loans. Within our regulations, we follow up any unhealthy tendencies in the financial sector, so that they do not create negativity in the market.

With government’s issuance of bonds, are we likely to see the domestic debt growing?

Yes. The domestic debt is continuing on a monthly basis. This year for example, the government plans to borrow Rwf214 billion ($225 million). I do not expect that to stop because it is a channel to finance development.

Arent you concerned that banks will continue to lend the government instead of the private sector?

No. When you look at the composition of the domestic debt, banks have less than 30 per cent of the share. When we do allocation, banks take the residual because we normally consider individuals first. This started in 2014 when we began to promote non-bank investments in long term government debt. But that is not the solution because if the government was to over-borrow, then it would still affect the capacity of banks to lend.

The good thing is that the rise in government debt this year did not affect private sector borrowing. When we do our macroeconomic framework, the private sector borrowing is given priority.

Do you think this in a way reflects that our banks are evolving and there is more appetite for risk?

Bank assets have been growing and while government debt is growing, it is not big enough to absorb the money banks re sitting on.

So they have to create avenues to invest this money by all means. With their deposits of almost Rwf2.2 trillion ($2.3 bilion) while the government is borrowing Rwf200 billion ($210 million), banks have to invest this money in the private sector anyway.

Last year you mentioned that the central bank was coming up with its own digital currency. What is the progress?

We are examining what is being done by more advanced colleagues like Singapore, England and Canada, and they have all been hesitant at introducing it. There have been a lot of calls to research the impact that a digital currency would have on the economy.

This means that we might start dealing directly with the users of the digital currencies; so the intermediation role of banks might be affected and that could have an impact on investment and the role of the financial sector in the development of economies. However, there is still a lot of work going on in terms of studies. So currently, there is nothing in the pipeline and no commitment to issue a digital currency.

Last year a new big player joined the insurance sector and took over SORAS. But the insurance sector has failed to grow in value and penetration. What can be done to help it grow?

We are looking at four areas. First are the products on the market. We expect the new players on the market to develop new products that can speak to the population and increase the uptake of insurance. Micro insurance was introduced in 2018 and we expect more new products in the market.

Second, awareness campaigns must improve. The biggest challenge we have, is Rwandans understanding the need to take on insurance cover against different risks. Many businesses lack cover against risk. We are planning to have an “insurance week” as a long term strategy to educate both the population and the business people about the need for insurance cover.

Third, there are mandatory insurance covers that are not being taken today. These include buildings that accommodate many people, businesses, and professional practitioners like doctors. We are therefore working with different government institutions that are supposed to enforce this to make sure it happens.

Lastly, we have at least seen the insurance sector cleaning up its dirty business of negative competition that was eroding revenues. This creates healthy business environment that helps them to price their products well and limit losses.