It has been one year that chocked the banking industry due to bad debts that lead to losses. Some of the leading banks like Kenya Commercial Bank, Equity Bank and GT Bank made loan loss provisions in their books to cover for the written off loans.

The banking industry is now considering recapitalisation as a result of low profitability levels stimulated by high operating costs and non-performing loans (NPL).

Although the NPL has been at 6.6 per cent on average this year, the industry still struggled to recover from a higher default rate last year, which stood at 7 per cent and the impact of the spill-over were felt this year.

READ: Banks record fall in number of bad loans, growth in personal lending

The banking industry is struggling to register profits despite heavy investment that the players have injected into their operations over the years. Over the past nine months, Kenya Commercial Bank set aside Rwf1.2 billion to cater for bad loans and injected Rwf1.1 billion as additional capital. However, the bank has registered a staggering Rwf4 billion loss.

Equity Bank in 2013/2014 financial year capitalised its operations to the tune of Rwf5 billion and set aside Rwf306 million for bad loans. However, the bank registered a loss of Rwf2.2 billion.

GT Bank, a Nigerian bank, which recently acquired Fina Bank, also registered a loss of up Rwf821 million this year.

“Most banks are considering or have already added more capital into their operations as profits are being weighed down by non-performing loans and high operation costs,” said Maurice Toroitich, managing director of Kenya Commercial Bank Rwanda.

Bankers put the cost to income ratio in Rwanda’s banking industry to over 70 per cent.

“The NPL appears low but in actual sense, its covered by the high level of loan loss provisions, which banks draw from their profits thus disguising the fact that NPL is not too high,” added Mr Toroitich.

Cogebanque is one of the banks with a small loan loss provision at Rwf22 million coming down from Rwf1.1 billion last year. For instance, more than 100 businesses and home buyers in Rwanda are facing huge losses if KCB Rwanda succeeds in auctioning property belonging to DN International (DNI), a real estate construction firm that is currently facing liquidation.

DNI,registered in Rwanda but run by Kenyan investor Nathan Ndung’u Lloyd, defaulted on a loan acquired in 2010 to construct a housing estate, prompting KCB to auction the property.

DNI had taken out the loan to construct Green Park Villas, a development with 50 housing units in Rusororo on the outskirts of Kigali. Each unit was to be sold at Rwf75 million ($125,000) for those who secured 15-year mortgages with KCB Rwanda. This year, however, banks have seen their assets grow amidst poor profitability due to increased investments by some banks.

Grew balance sheet

From January to September 2014, KCB grew its balance sheet by 41 per cent compared with the same period last year while GTbank has grown its balance sheet by 16 per cent.

For the 2013/2014 period, Equity Bank grew its balance sheet by 114 per cent while Cogebanque in same period grew its balance by 30 per cent.

Over 60 per cent of the banking industry is controlled by Bank of Kigali, which also controls 30 per cent of industry assets.

The banking industry also suffered in the Past two years partly because there were not much economic activities to boost the economy, following aid cut by donors in 2012 after the accusations that Rwanda supported M23 rebels fighting eastern Democratic Republic of Congo. The government denied the allegations that were made by the United Nations team.

However, with regional projects such as the standard railway, the regional oil pipeline and local projects like the long awaited Bugesera airport expected to kick off next year, most banks are positioning themselves to extend credit facilities.

“With these huge projects on the horizon, we expect Rwandan companies will be subcontracted by international firms to do some work and banks’ credit to private sector will grow,” said Lawson Naibo, the chief operating officer of Bank of Kigali.

Countries on the Northern like Kenya, Uganda and Rwanda are introducing an oil pipeline and a railway line extending to Kigali in order to boost cross-border trade among these countries. Experts also believe that the entry of new players in the country’s banking sector is another factor that is likely to turnaround the fortunes of the industry next year.

“Atlas Mara acquiring Rwanda Development Bank as well as Crane bank’s entry will give new dynamism to the industry and the landscape is likely to change in the interest of the people,” added Mr Naibo.

However, according to the central bank figures, for the first half of this year, the loan book from commercial banks to the private sector grew by 7.2 per cent. As of June this year, the banking sector had given out Rwf904.5 million up from Rwf843.9 million that was given out from June to December last year.

Deposits grew by 20.6 per cent from Rwf1, 019.9 billion as of end of December last year to Rwf1, 230.2 billion by the end of the first half of this year.