Rwanda bank moves to spur growth in private sector

Rwanda’s private sector is likely to benefit from relatively cheaper credit, after the central bank maintained its repo rate at five per cent, a move that is expected to further stimulate banks’ lending to the private sector.

Analysts say interest rates are likely to drop from the current average of 18 per cent to at least 16.4 per cent in the coming months due to an accommodative monetary policy, improved economic performance as well as increasing competition in Rwanda’s banking sector.

In addition, the current low rate of the repo rate, the rate at which the central bank lends to commercial banks, may reduce appetite for commercial banks to invest in government securities which may force banks to issue more credit to private sector at favourable rates.

In 2016, it stood at seven per cent, and the fact that it currently stands at five per cent shows the central banks willingness to stimulate growth in the private sector.

Banking sector lending picked up in the first three quarters of this year due to increased demand for credit, with an increase in outstanding loans of 20.1 per cent (Year-on-Year), compared with a 7.2 per cent growth recorded end of September, 2018.

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 asset quality for banks and microfinance institutions improved during the first nine months of 2019, with the non-performing loan ratio (NPLs) in banks declining from 7.2 per cent in September 2018 to 5.3 per cent in September 2019, while in the same period, NPLs ratios in the microfinance sector dropped from 6.8 per cent to 6.1 per cent. The central bank said the drop in NPLs ratio largely reflects the positive effects of the stronger economic performance in 2019, although loan write-offs also contributed to this reduction.

“The committee identified credit risk as main risk facing the lending institutions. Credit risk is manifested through high loan concentration to some sectors, particularly mortgage and hotels,” the National Bank of Rwanda Stability Committee said recently after its meeting held on November, 15, 2019.

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 (SOL) as well as Loan to Value (LTV) limits.

But this comes at a time many businesses; especially those tied to the tourism ecosystem prepare to partake in the preparation of the Commonwealth Heads of Governments Meeting due in June 2020.

The interest rate had reached as high as 18 per cent or more in some banks, and had become a disincentive for some businesses to get loans; coming down to 16 per cent will be a boost especially as the year comes to a close. The central bank says it expects it to continue the downward trend even in the coming years, especially as economic conditions continue to improve. Transporters, hoteliers, event organisers, down to producers of the food served in the hotels, are some of the businesses expected to cash in from summit, and banks are ready to work with them.

“We are ready to provide the financing needed by businesses in preparations for Commonwealth Heads of Governments Meeting, we are also ready to provide means of payment, hotel bookings, the more activity the meeting brings the better for everyone”

“What I know is that the businesses in events are already looking at banks to strengthen their capacity for Commonwealth Heads of Governments Meeting,” said Maurice Toroitich, Chairman Rwanda Bankers Association.

In the last few years, many banks in Rwanda have suffered major setbacks as a result of having large sums of money tied in non-performing loans, many of which had been issued to hoteliers, who ended up defaulting.

At one point up to 100 hotels were up for auction, a development which sent shock waves through the market, however, after interventions from authorities, some banks sat down with their defaulting clients and restructured the loans, while other banks went on to auction some hotels which were transformed into shopping malls or university premises.

“We are happy to see transmission of our policy rate in commercial banks, the private sector will be positively impacted,” said John Rwangombwa, central bank Governor.

“The impact we normally see is on the money market rate, the interbank rate, the repo rate, short-term treasury bill rate, this is our main focus,” he added.