Banks seek help over a weak Rwandan franc
Posted Saturday, April 13 2013 at 18:40
- The banks’ reluctance to borrow in hard currencies, according to analysts, stems from the recent spike in the Rwandan franc, which is now depriving the country of an important form of foreign capital flows.
- The banks argue that borrowing in foreign currencies, such as the dollar, euro and the pound sterling, hurts their profit margins when the currency in which they borrowed appreciates against the franc.
Smarting from the huge risks that come from borrowing in foreign currency against a weak local equivalent, Rwandan banks are now seeking the help of the National Bank of Rwanda in facilitating such transactions.
The banks and experts say the central bank could take the lead by introducing measures, such as currency swaps, that would allow Rwandan banks to borrow in local currency from foreign lenders, with both sharing the foreign currency risk or transferring the same to a third party.
The banks’ reluctance to borrow in hard currencies, according to analysts, stems from the recent spike in the Rwandan franc, which is now depriving the country of an important form of foreign capital flows.
The banks argue that borrowing in foreign currencies, such as the dollar, euro and the pound sterling, hurts their profit margins when the currency in which they borrowed appreciates against the franc.
Sanjeev Anand, managing director of Rwanda Commercial Bank (BCR), says that while a host of international financial institutions are willing to lend money to local banks, the mismatch between the Rwandan franc and foreign currencies exposes them to losses.
“The fundamental reason is that foreign lenders will usually lend you in dollars. But local banks lend in the local currency; it is the local currency that we use in our operations. Since we have to pay back this money in dollars, if the Rwandan franc depreciates, we are exposed to losses,” said Maurice K Toroitich, managing director of KCB Rwanda.
With the banks struggling to attract deposits locally, experts argue that mitigating foreign exchange risks would free them up to take lines of credit from international lenders in order to finance major investment projects.
On several occasions local banks have struggled to raise money to fund big projects — public and private. For instance, in 2009, when MTN Rwanda — the country’s biggest telecoms operator by market share — was looking for Rwf10 billion (or $16 million based on the current exchange rates) to upgrade its network, no single bank was able to finance such a project on its own. MTN had to arrange for a syndicated loan.
The banks are yet to finalise a similar facility aimed at lending cement manufacturer Cimerwa some $100 million.
“If the central bank can provide hedging instruments as a business opportunity, many commercial banks would jump on to that to provide solutions... it is within the mandate of the central bank to do this,” said James Ndahiro, chairman of the Rwanda Capital Markets Authority.
Whereas some economists say that it is the responsibility of private financial institutions to arrange for such instruments, others say that in less sophisticated financial markets like Rwanda, the central bank has to take the lead.
Central bank Governor John Rwangombwa says the fear of foreign exchange loss is offset by the relative stability of the Rwandan franc and the low interest rates on the international market.
Last year, the Rwandan franc depreciated by 4.5 per cent against the dollar, compared with 1.6 per cent a year before. Mr Rwangombwa says the risks are mitigated because interest rates at international markets are very low — at their lowest level in decades.
With interest rates on the local market averaging 17 per cent while lending rates in European markets range between four and six per cent, the central bank does not see a risk from local currency depreciation.
“If you compare the gap between domestic borrowing and foreign borrowing with the depreciation against the hard currency, you still benefit by borrowing from the international market. That risk is not there, at least for now. We don’t expect interest rates in foreign markets go up within the next five years,” said Mr Rwangombwa.