Bad loans affecting Rwanda banking sector

Sunday February 12 2017

Banks prefer to give large institutions and the government loans than small businesses. Photo/File

Banks have become more cautious in their lending over non-performing loans, with customers saying it is becoming more difficult to get credit. PHOTO | FILE 

By Moses K Gahigi

The banking sector remains dogged by non-performing loans, with experts saying they are likely to increase this year, which threatens the sector’s fortunes.

“We expect some growth this year but not at the level we have been growing at and non-performing loans (NPLs) are a contributing factor,” said Maurice Toroitich, the managing director of KCB, and president of Rwanda Bankers Association.

“NPLs have increased from five per cent to 7.9 per cent at the close of the year and they are likely to increase to 8.5 per cent this year,” he added.

As a way of dealing with the issue, banks seem to have become more cautious in their lending, with customers saying it is becoming more difficult to get loans.

“I run a business that makes a daily average deposit of Rwf300,000 for over three years, but the bank can’t give us a loan,” said Sam Habimana, the managing director of Amazon Complementary Therapy.

He said that despite providing all relevant information, the bank still won’t loan him money.

Many banks have loaned out large amounts of money, which they are having trouble recovering and this could explain their hesitation.

New loans increased by 18.3 per cent amounting to Rwf426.7 billion in the first half of 2016, against Rwf360.8 billion in the same period in 2015, where loans accounted for 60 per cent of total bank assets.

Working capital

Experts have attributed the increasing number of defaulters to delayed government payments to private contractors who often take bank loans as working capital.

“A large number of bad loans are related to the construction sector, where there have been delays in payments for government-funded projects and small contractors are the most affected,” said Mr Toroitich.

Through the difficult times, banks have relied on nominal growth in deposits, which are said to have increased by 6.1 per cent in 2016. However, these deposits have also not been very helpful because they correspond with demand withdrawals.

Demand deposits stood at 35.1 per cent in 2015, while term deposits grew by 8.3 per cent in the same year, demand deposits continued to have the biggest share of total deposits, reaching 45 per cent on average in 2016.

Term deposits and foreign currency deposits accounted for 36 per cent and 19 per cent respectively in 2016, which has further constrained commercial banks

“Term deposits are concentrated among few institutions with RSSB, insurance companies and MFIS accounting for more than 50 per cent of total term deposits on average, which constitute a liquidity risk for banks,” reads part of a recent statement from the central bank.

Capital buffers

Recent reports show that some banks have curtailed depositors from withdrawing money above Rwf4 million, which could mean the sector is under liquidity pressure, hence ring-fencing deposits.

The central bank said the sector holds significant capital buffers and higher liquidity positions that are above regulatory requirements, and are enough to cushion it in times of financial stress, but this could be changing.

As of June 2016, the total assets of the financial sector expanded by 13.7 per cent to reach Rwf3.4 trillion, growing at an average 23 per cent in the past five years. However, according to data from central bank, the asset quality deteriorated in 2016.

Total liabilities of banks grew by 13.4 per cent from Rwf1.6 trillion in June 2015 to Rwf1.9 trillion by end of June 2016. Customer deposits account for 81 per cent of total liabilities of banks.

Banks’ net profits decreased by 18.2 per cent by June 2016 to Rwf19.4 billion compared with Rwf23.6 billion in 2015.

The decline in profits was attributed to high growth in expenses, which led to a decline in return on assets and return on equity to 1.7 per cent and 9.2 per cent respectively.

In 2015 over 100 medium-sized hotels were reportedly put up for auction by financial institutions, after the owners failed to pay back the loans.