Industry experts are predicting diminished margins for commercial banks in Rwanda this year, as a weakened local unit exposes them to higher foreign exchange losses.

The banks that borrowed in dollars for on-lending local currency to their borrowers now have to absorb the cost of currency depreciation when paying back to their offshore lenders.

According to industry sources, most banks opted not to pass on the currency losses to borrowers, a decision likely to cause lower returns on capital for most banks this year.

“There is pain. The banks in Rwanda have borrowed externally and the market has been exposed to foreign currency risks, the pain is normally passed onto the final consumer, but this time banks are absorbing most of it, and I suspect many of them will take a reduction in profit margins this year,” said Maurice Toroitich, the managing director of KCB Rwanda, and president of the Rwanda Bankers Association.

He said by the end of last year, the average return on capital was 11 per cent, but by June this year the return on capital stood at 9 per cent.

“It largely depends on how the banks have utilised the borrowed money, if the banks spent the money in dollars, then it is okay, but if the loan was in dollars and converted into francs there is a loss incurred, you have to buy dollars to pay back,” he said.

Rwandan banks have acquired loans in form of foreign financial institutions like IFC, Exim bank, AfDB, among others and according to industry experts, such loans come down to how the borrower negotiates, some loans structure in who takes the currency risk.

In some instances, the foreign lender takes the risk, but for this to happen the lender charges a local borrower a premium. But much as it cushions local banks from depreciation risks, the premium charged increases the cost of the loan, which if passed onto the customer drives up lending rates.

The depreciation rate stands at 8 per cent, and is expected to close the year at 9.8 per cent.

Despite the country receiving more than a half of the IMF $204 million facility the Rwandan franc is expected to depreciate further this year as a result of falling commodity prices, and dwindling exports which has sharply widened the trade deficit, and caused dollar shortages in the market.

Rwanda received $100 million (Rwf82 billion) from the IMF, improving its capacity to import from 3.6 months in December 2015, to 3.8 months in September. Reserves had dropped to just four months worth of imports as of March this year.

The past three years have seen strong growth in imports into the economy, spurred by massive capital investments made by government and the private sector. Most of the construction materials used on the big structures, like the Kigali Convention Centre, Kigali Heights and many others in the country, were imported, hence draining dollars from the market.

In 2014, Rwanda’s imports reached $2.6 billion (Rwf2 trillion), and data from central bank shows that the country’s imports widened by 5.1 per cent in the first half of 2016, from $859 million (Rwf699 trillion) to $902.69 million (Rwf735 trillion), while the value of formal exports contracted by 2.4 per cent.

In the third quarter of 2015, Rwanda exported goods worth $96 million (Rwf78 billion) against imports of $481 million (Rwf392 trillion) and worth $46 million (Rwf37 trillion).

Government made commitments to the IMF to stem its imports by $330 million (Rwf269 trillion) less between 2016 and 2017. Efforts to get a comment from central bank were futile.

Although the banking sector has maintained stability over the last few years, and is adequately liquid, Rwanda’s return on capital is the lowest in the region’s banking sector.

“The returns on capital in Rwanda are small compared to banks in the region, when people hear banks making profits in billions they think banks are making a lot of money but when you compare to the capital invested the profit is small. For instance, if that money is put into government bonds, you get a 12 per cent return” said Toroitich.

Borrowers complain of high interest rates on loans, which stands at 17 per cent, which rate seems to also be a result of the currency risks banks expect to incur.