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Bad loans affecting Rwanda banking sector

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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

Posted  Sunday, February 12   2017 at  12:37

In Summary

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

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.

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