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AfricaMarch 3 2010

Rwanda: A risk worth taking?

Top reformer: Rwandan president Paul Kagame at an East African Community conference in 2007. Rwanda joined the regional economic group earlier that yearRecognised as the world's top reformer by the World Bank last year, and a member of the East African Community since 2007, the outlook is certainly promising for Rwanda. But the opportunities also come with a high probability for risk. Writer Peter Guest
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Rwanda: A risk worth taking?

Relaxing at a poolside table overlooking Kigali, Rwanda's capital city, Jean de Dieu Mbarushimana, administrative manager of the Hôtel des Mille Collines, is gearing up for an influx of business travellers. The hotel's flow of visitors and conferences has been steadily increasing over the past five years, says Mr Mbarushimana, a trend which can only build as the country integrates with its neighbours in the East African Community (EAC), an international organisation comprising Rwanda, Burundi, Tanzania and Uganda.

The Mille Collines, which gained an international - and tragic - reputation as the centrepiece of the Hollywood genocide drama Hotel Rwanda, is about to enter its final phase of renovation, courtesy of a $2.5m loan from the International Finance Corporation. Down the road, the new Serena Hotel has just opened, meaning Mr Mbarushimana's establishment has competition on its hands.

World's top reformer

The story of the Milles Collines hotel is in many ways indicative of Rwanda's overall development. As the Milles Collines looks to achieve "international standards", wider reform in the country's economy has been internationally recognised. Last year, the World Bank's Doing Business report marked Rwanda as the top reformer globally. The country's private sector is growing and international investment is rising. Entry into the EAC swells Rwanda's market from its own population of 10 million to a regional total of 127 million, but it also introduces competition from larger and more sophisticated Kenyan and Tanzanian businesses.

Equally, banking in the Rwandan private sector presents significant opportunities and complex challenges. As Maurice Toroitich, managing director of Kenya Commercial Bank Rwanda, notes: "The corporate businesses that we have here you can count on your fingers... Rwanda is largely a small business economy."

Anywhere between 60% and 90% of the country's industry is composed of small and medium-sized enterprises (SMEs). This market segment is unstructured. Businesses are often unregistered and lack formal business skills. While the growth potential of these businesses is huge, their associated risk - and the ease of estimating that risk - has burned banks in the past.

"SMEs have traditionally been the area where the non-performing loans [NPLs] and credit write-off problems have been," says Sanjeev Anand, managing director of Banque Commerciale du Rwanda (BCR). "No doubt about it, it's an unsophisticated sector. They don't produce proper financials, they lack expertise to execute their projects, they lack business acumen. It is a difficult sector to operate in.

"Last year the growth in banking credit was actually negative. The reason for that was that banks were focusing inwards and trying to clean up their portfolios, banks spent time training and educating their personnel to process transactions... The average NPL ratio a couple of years ago had gone up to something like 30%. Many banks are still smarting after that."

Collateral is a barrier

The key, Mr Anand believes, is in appropriately collateralising and in properly pricing the risk. "One of the traditional reasons why banks have not made money on this is that they have under-priced [risk]. BCR has under-priced it historically by about 1.5%, so on a risk-adjusted basis we were losing about 1.5% on our portfolio," he says. "You have to be prepared to take losses in this portfolio, and you have to build that into your pricing. And you have to have good security so when you have a loss you are able to sell that security and realise it. We have done that successfully. Collateral is key."

Collateral, however, is often the biggest barrier for SMEs looking for financing. Legislation surrounding property rights is still young - although international investors are encouraged by its progress and structure - and the sector is still heavily weighted towards the bottom of the pyramid - small, family businesses. Most companies or individual entrepreneurs simply are not able to offer the 100% collateral that the banks require. To compound the issue, interest rates are punitive - sometimes upwards of 20%.

Some players, such as GroFin, a Mauritius-headquartered growth finance firm, are offering venture capital-style services to SMEs in the country. Their model diverges from the traditional collateral-based lending offered by banks, using instead the 'viability' of the business or of the entrepreneur, according to Eric Rwigamba, a former banker who now heads GroFin's Rwandan office. The company generally prefers to use a combination of equity and debt in its financing, but in Rwanda it is constrained by what he believes is a cultural resistance to equity. "People feel insecure that you are going to come in and take most of the business, they feel that you are going to take it away," says Mr Rwigamba.

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Antoine Bigirimana, partner at Thousand Hills Venture Fund (THVF)

Venture capital activity

A handful of pure equity venture capital funds have begun to build a beachhead in the market. Antoine Bigirimana, a Rwandan-Californian software entrepreneur turned investor and a partner in the Thousand Hills Venture Fund (THVF), is looking to invest between $100,000 and $600,000 in growth companies. "In Rwanda there are a number of fields that are particularly active," he says. "Telecoms is one but it requires so much money that it's beyond our current offering. We have construction companies which are very active right now. Real estate is a good investment. ICT seems to be interesting and we're looking at that."

There is, he adds, "a lot of money floating around looking for projects". The problem is once more one of risk assessment. Mr Bigirimana has a large network of contacts in Kigali, which to some extent mitigates the risks involved, but it is a high-touch process. Furthermore, THVF has an unusual fund structure. The 30 high-net-worth individuals that back it choose to invest on a project-by-project basis, as and when companies are identified by the firm, unlike a typical venture fund where the general partners would have complete control over their pooled funds.

The presence of these players is positive for overall investment sentiment. However, these venture capital solutions have limited systemic impact beyond acting as a proof-of-concept and they are not open to the broader mass of small companies.

After a year of operations in the country, in which Mr Toroitich admits going for "quick wins" in the corporate sector, KCB is shifting its focus to take on that challenge.

"We believe that [strategy] was not sustainable because that segment is quite finite and we don't believe the expansion of large scale business is going to be a major phenomenon in this market," he says. "So we've taken the view that this year and going forward we have to develop an SME and a microbusiness proposition."

Whereas Mr Anand at BCR believes that it is only the top two quartiles of the SME sector which are bankable, KCB is looking to push its offering much further down to very small enterprises.

"We know that asking for standalone security is not the way to go because a lot [of SMEs] hardly have that. If you're looking at property or bank guarantees, they wouldn't have them," says Mr Toroitich.

While he does not claim to have a panacea, he does have some idea how it could work. "We think that the way to do this is to follow sectoral value chains," he explains. "The challenge really is to understand their cash flows and to work with them to basically develop value chain partnerships." This means hooking the fortunes of smaller businesses onto the larger companies that they supply and securitising, for example, the commissions that mobile operators pay to their local sales agents. It is an approach that the International Finance Corporation has been pioneering in the country.

"It's a win-win situation," says Mr Toroitich. "The way we see it is if the corporate entities that are actually the users of the services of these small businesses come to the party then it encourages banks to provide finance to improve quality, volumes and so on. And in the end, all this feeds into the corporate entity, and the cycle should grow and grow."

In the long run, picking businesses that grow beyond Rwanda's borders, either into the populous east of the Democratic Republic of Congo, or into the EAC, is where the benefit for KCB comes. It is also, Mr Toroitich suggests, where the future of Rwanda's economy lies. "The gross domestic product [GDP] of this country is just about $3bn," he says. "Even if it grew by 10% for five years, how big would it get? There's promise, but there's got to be something fundamentally different to create new industries, new sectors, green-fields, basically, to generate additional GDP and additional income."

Access to the $73bn economy of the EAC could be a start on that path.

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