Rwanda’s banking sector is headed for a shake-up as the country’s largest bank by market share, the Bank of Kigali, prepares to splash at least $35.4 million in proceeds from the ongoing initial public offering to strengthen its position.
With competition in the sector increasing with the entry of new banks, and the increase in capital base and launch of new products by existing lenders, the manoeuvres by Bank of Kigali are expected to heighten market rivalry.

The proceeds from the IPO, analysts argue, will give the bank headroom for growth both in the short and long term. An analysis by Dyer and Blair shows Bank of Kigali has the highest level of efficiency in the market and an increasing capital base is an indication of a strong growth potential. The bank hopes to use long term funding from development agencies like the French Development Agency, European Investment Bank and proceeds from the IPO to significantly lift its liquidity ratio from the current 42 per cent as well as solve the duration mismatch. The bank is on target to raising the $35.4 million it is seeking through the IPO if the interest from international investors is anything to go by.

The bank is looking to use the IPO funds to expand its branch network, grow its loan portfolio and reduce its assets-to-liabilities maturity gap. A week after the IPO opened on June 30, the bank’s managing director James Gatera said the international pool was oversubscribed 3.5 times.

Foreign investors took up all the 120.1 million shares, representing 40 per cent of the shares on offer. The domestic pool — which includes East African citizens — was allocated the remaining 60 per cent – equal to 180.2 million shares. The shares are selling at US cents 21 with a minimum of 100 shares.

Bank of Kigali’s move to raise funds comes at a time when the Rwandan banking market is gearing up for increased competition with the entry of new players into the market — bringing the number of banks to eight.

Increased competition means banks have to share blue chip corporate customers, and there will be increased pressure on their interest rate spreads.

Bank of Kigali, though, will be making a strong push to reach the underbanked and unbanked segments of the population in the country by more than doubling its current 33 branches in the next two years, according to information in the IPO prospectus.

According to reports by the IMF, Rwanda lags behind other East African states in terms of banking assets as a percentage of the country’s gross domestic product. Kenya leads the pack with banking assets as a percentage of GDP at 66 per cent, Tanzania (50 per cent), Uganda (33 per cent) and Rwanda (33 per cent).

This means that Rwanda has a relatively lower banking penetration compared with other East African countries, a fact which presents an opportunity for banks to grow their share of business.

Noticeable growth

Bank of Kigali has been growing its loan portfolio with a strong presence in Rwanda’s corporate banking segment. According to the IPO prospectus, the bank’s overall loan portfolio increased by over 41 per cent — net of provision for loan losses — between December 2008 and December 2010.

Bank of Kigali’s net profit grew from $9.8 million in 2009 to $10.3 million in 2010 driven by growth in non-interest income.
The bank projects its net profits will grow to $13.25 million at the end of its financial year in 2011.

But the bank faces some risks. Key among them is the reliance on deposits made by corporate and retail customers to grow its loan portfolio.

“There can be no assurance that if unexpected withdrawals of deposits by the bank’s customers create liquidity gaps, that the bank will be able to cover such gaps,” the bank said in the IPO prospectus.

Analysts say that the financing mismatch, where long term loans are financed by short term deposits, is common within regional banks and is not necessarily bad.

“This is a situation that is common with many of African banks. An ideal situation would be where the two move in tandem to each other,” said analysts from Dyer and Blair Investment Bank.

Competition in Rwanda’s retail banking sector is set to intensify as Kenya’s Equity Bank — which has cut a niche in retail lending across east Africa — enters the market by end of this year.

Equity and KCB bank have been expanding into the regional market attracted by opportunities where the penetration of financial services remains low. Rwanda’s eight commercial banks only cover about 14 per cent of its bankable population. Microfinance Institutions and Saccos cater for 33 per cent leaving 53 per cent unbanked.

This creates an opportunity for banks to open more accounts to shore up deposits and lend to clients.

The National Bank of Rwanda — the central bank — expects credit to the private sector to increase by 20 per cent this year as banks grow their loan book despite an expected rise in inflation.

Rwanda’s inflation has remained moderate, kept down by the good performance of the agricultural sector, compared with other East African countries where inflation has hit double digits.

Rwanda’s inflation is expected to hit 5.7 per cent in June from 4.5 per cent for figures of urban centers in May.

Bank of Kigali will be Rwanda’s second IPO in its nascent capital markets after the beer maker’s Bralirwa IPO which took place last November.

Bank of Kigali’s IPO is expected to generate similar levels of interest as did the Bralirwa IPO because local, regional and foreign investors will look to purchase the shares eyeing the potential rally in the price once they commence trading on the Rwandan Stock Exchange.