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AfricaMarch 1 2012

Rwandan banks seek to boost profitability amid high growth

Rwanda’s banks have benefited from the country’s rapid development since its genocide less than 20 years ago. With a high unbanked population and expectations of continued near double-digit economic growth, their rise is unlikely to slow soon. But the banks will have to boost their efficiency quickly if they want their profitability to match that of other east African lenders. 
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Rwandan banks seek to boost profitability amid high growth

Rwanda’s development faces no shortage of obstacles. The small east African country of just 11 million people has few natural resources, a low export base and sits more than 1000 kilometres from its nearest coastline, making it logistically difficult and expensive to bring in much-needed imports. With a gross domestic product (GDP) of just $6bn, it is one of the world’s poorest countries.

Yet since its genocide in 1994, when Hutu militias massacred between 800,000 and 1 million Tutsis and moderate Hutus in just over three months, Rwanda has made plenty of progress. Thanks to rigorous government reforms over the past decade and foreign aid, it has been one of the world’s fastest growing economies in recent years. GDP expanded 8.8% in 2011 and is forecast to increase 7.6% this year.

Poverty has been reduced substantially since 2000 and the country has become one of the few in sub-Saharan Africa that is self-sufficient in food production. “We used to have famine,” says Claver Gatete, governor of the National Bank of Rwanda. “But now we’ve solved that problem. We’re completely food secure.”

Rwanda also stands out for the efficiency of its public sector and institutions. New businesses can be registered online in 24 hours, which is partly why in last year’s global competitiveness report from the World Economic Forum, Rwanda ranked higher than all African countries bar South Africa, Mauritius and Tunisia. It is also judged to be the fourth least corrupt place on the continent by Transparency International.

“[Foreign investors] see Rwanda as an attractive business environment that has all the things they are looking for: limited levels of corruption, good infrastructure, a government that’s very open to foreign investment,” says Patrick Mair, an east Africa specialist at consultancy Control Risks.

Banks rising

Rwanda’s banks have grown rapidly in tandem with its economy; their assets having risen by an average of over 20% annually since 2006. Last year, Bank of Kigali (BK), the biggest of the country’s nine commercial lenders, saw its asset base grow 42%.

The country's banks are in little doubt that such rates of expansion can be sustained, or even increased, in the next five years. They have plenty of scope to achieve this, given that their assets amounted to just 22% of GDP in 2010, making theirs the shallowest banking sector in east Africa. By contrast, Kenya’s lenders had assets equivalent to 66% of GDP and Tanzania’s 50%. “There’s no reason why we can’t grow our assets at a rate of 30% [over the medium term],” says Lawson Naibo, chief operating officer at BK. “Even if we were to double the assets of the banking sector, we’d still be below the regional average.”

Competition is fierce in the corporate banking sector. Banks flock to lend to industries such as telecommunications, cement making and food processing. All are doing well amid attempts by the government to turn Rwanda into a regional IT and services hub, encourage more construction and further increases commercial, rather than subsistence, farming.

Lenders are keen to raise their exposure to the nascent manufacturing sector, which only makes up 15% of the country's GDP. Bankers say it will grow over the next decade as integration in east Africa reduces the costs of shipping from ports such as Mombassa in Kenya and Dar es Salaam in Tanzania, the inputs which are vital for manufacturing businesses. “Whatever little manufacturing there is, banks are trying to support it,” says Sanjeev Anand, head of Banque Commerciale du Rwanda (BCR), the country’s fourth biggest lender by assets.

More opportunities for banks lie with small and medium-sized enterprises (SMEs) such as small traders, however. Typically classified as any operation with annual revenues of less than RwFr80m ($135,000), they account for about 90% of Rwanda’s businesses and 80% of its GDP. “Banks are very interested in developing products for SMEs,” says Maurice Toroitich, head of KCB Rwanda, a subsidiary of Kenya’s biggest bank. “It is only natural, given that there are few other options. In Rwanda you can’t only focus on corporate banking because it just isn’t there.”

Banks typically lend to SMEs at interest rates of 16% to 18%. While these are a few percentage points higher than what they would get from lending to corporate borrowers, SMEs come with plenty of risks. Bankers say the sector is dominated by family-owned companies that lack good governance. “The SME sector in Kenya is much more advanced than what we have here,” says Mr Toroitich. “[In Rwanda] the owners know the information in their heads. There are no books or accounts. When you try to apply best practice such as book-keeping, auditing and having second-tier management, there’s a lot of resistance. It is viewed as an additional cost.”

Sanjeev Anand

Targeting mortgages

Banks are growing their retail arms, too. Most are targeting Rwanda’s middle class. Bankers say it is only about 200,000-strong, but it is rising as education standards increase and more urbanisation takes place. “Every bank is looking at the middle class. It is the critical mass,” says Rao Balivada, head of Fina Bank Rwanda, another subsidiary of a Kenyan lender.

Mortgages are among the products that have proved popular. Banks are still cautious, usually offering them with loan-to-value (LTV) ratios of no more than 70%. But some, such as KCB, have started to sell mortgages with LTVs of 90% in an aggressive push to win market share. This could lead others to follow suit, especially given that most analysts are sanguine about the property market’s outlook. “There’s a lot of pressure on us to increase LTV ratios,” says BCR’s Mr Anand.

Banks are likely to have to diversify their funding bases if the mortgage market is to develop quickly in the long term. Most mortgages are about 20 years, while local banks typically finance themselves with short-term deposits. Several are trying to rebalance the mismatch between their liabilities and assets by obtaining long-term loans from the likes of the European Investment Bank and African Development Bank. BK signed two 10-year loans totalling $32m last year to help it take on more long-term assets.

The focus in Rwanda is still very much on lending, lending, lending

Sanjeev Anand

Lenders are also trying to pick up more customers among Rwanda’s mass population. As in other parts of east Africa, they are relying on new distribution channels to do this, particularly agency and mobile banking. The central bank has just started granting licences for the former, whereby banks use agents such as petrol stations or corner shops to sell their products and take deposits. Mobile banking is popular with Rwandans as it can be carried out on the cheap 2G phones that so many of them now have.

As such, mobile and agency banking make it far easier for banks to reach potential customers and lessen the need for them to build large networks of full-service branches.

“[Mobile banking] is about the convenience,” says Herman Klaassen, chief executive of Banque Populaire du Rwanda, which is 35% owned by Rabobank of the Netherlands. “[It is about] people in rural areas having access to a bank without having to wait for hours to do a transaction or balance enquiry. They can have that at the push of a button.”

The central bank wants 80% of Rwanda’s population to be banked by 2017. This goal, although it will include accounts held with savings and credit co-operative societies (Saccos), of which there are more than 400 in Rwanda’s rural districts, is highly ambitious. Only about 20% of Rwandans have bank accounts today. But bankers say the ease of new distribution channels will give them an incentive to bank a far greater number of poorer Rwandans. They add that the task will be made easier by Rwanda’s population, of which four-fifths are under 40, being so young. “These are the people who embrace new ways of doing things,” says BK’s Mr Naibo. “When you launch mobile banking they pick it up and run with it.”

Being careful

Rwanda’s banks insist that they can manage their expected growth over the coming years carefully. The central bank’s strict regulations, which require them to have capital adequacy ratios (CARs) of at least 15% and liquidity ratios of 20% or more, mean it is unlikely they will over-stretch their balance sheets, say bankers. “The banking sector has to remain stable,” says Mr Gatete. “We don’t want to take chances. So we go beyond the [Basel] requirements.”

The banking sector has to remain stable. We don’t want to take chances. So we go beyond the [Basel] requirements.

Claver Gatete

The banks are easily within these limits, their overall CAR rising from 24% to 27% last year. And most have loan-to-deposit ratios of less than 70%.

Moreover, non-performing loans, which reached more than 50% in the wake of the genocide, have fallen steadily in the past decade. They stood at 8% last year. Mr Gatete wants them below 7% by the end of 2012 and less than 5% in the medium term.

The decline in bad assets has been helped by the establishment of a credit reference bureau and the central bank working with the judiciary to make it easier for banks to get hold of collateral on defaulted loans. “Because of the credit reference bureau, customers can’t shop around and create bad loans everywhere,” says Gilles Guerard, managing director of Togo-based Ecobank’s Rwandan arm. “And because the government has [improved] the legal framework and given banks the capacity to [realise] security and sell the assets quickly, we are seeing a speed up in recovery rates.”

Despite their high growth, Rwanda’s banks have lower profitability than other lenders in the region. Their returns on assets (ROAs) averaged about 2.2% in 2011 and their returns on equity (ROEs) 15%. In 2010, Kenyan lenders made ROAs of 3.7% and ROEs of more than 30%. Part of the reason is that net interest margins in Rwanda, which has the lowest inflation and interest rates in east Africa, are about 6%. In Kenya, they are closer to 10%.

Margins in Rwanda could soon be squeezed further, according to some bankers. Inflation is expected to fall from 8.3% to 7.5% this year, which could lead to a drop in interest rates. Yet banks’ costs of funds are unlikely to decline, given that raising cheap deposits is difficult. “The cost of funds is quite high because there are no savings,” says Mr Guerard. “There is no culture of saving. That means we don’t have access to cheap money.”

High costs

Equally big a factor in Rwandan banks’ low profitability is their high cost-to-income ratios. Many have ones of close to 85% and only envisage them dropping below 70% in a few years. Bankers blame this mostly on the high cost of goods, most of which have to been imported, and low secondary school and university enrolment in the country, which means labour productivity is low. “The biggest problem for our industry is the skills of the staff,” says Robert Adam, head of Cogebanque. “We do a lot of training, but it’s still not enough.”

The biggest problem for our industry is the skills of the staff. We do a lot of training, but it’s still not enough.

Robert Adam

As Rwanda’s banks grow in the coming five years, they are likely to develop more sophisticated business models and rely more on fee-based revenues, which account for less than 30% of total revenues today. “The focus in Rwanda is still very much on lending, lending, lending,” says Mr Anand of BCR.

With interest spreads unlikely to increase soon, some banks are trying to boost their sales of foreign exchange and trade finance products such as letters of credit. Bankers admit, however, that part of the reason they make little from these is because they are usually sold cheaply to clients in the corporate sector, where competition is fiercest. “We will always be squeezed by corporate clients,” says Mr Naibo. “And trade finance and fee commission mostly comes from them.”

Maturing capital markets

Bankers hope that Rwanda’s capital markets mature in the coming years. At the moment they are shallow, with only two local companies – BK and Bralirwa, a brewer – listed on the stock exchange.

Mr Gatete say he wants all the banks to list eventually as a way of encouraging portfolio investment in the country and increasing banks’ capital so that they have more capacity to fund large infrastructure projects. But few seem ready to follow BK, which did a $65m initial public offering of 45% of its shares last year, just yet.

Bankers are more optimistic about the local bond market. Mr Guerard says the government should look to sell more debt and in longer tenors as it would encourage several private companies to tap the market. “There’s a huge opportunity for the government to issue debt,” he says. “That would help develop the capital markets.”

The government, whose curve only stretches out to five years, is this year planning a seven-year bond and also one targeted at Rwanda’s diaspora. Mr Gatete says the central bank then wants to move on to 10- and 15-year bonds.

International help

Regardless of how quickly Rwanda’s banks grow and by how much they increase their capital bases, they will be unable to meet all the needs of the private sector in the next decade, particularly when it comes to the big construction works planned in Kigali and energy projects elsewhere that the government hopes will hope turn the country into a middle-income state by 2020. Local lenders will not have the balance sheets to cope with all of these. As such, the central bank has been in talks with international lenders – including Citi, HSBC and JPMorgan – about them working on such deals. “If you wanted, for example, a big project such as an airport, convention centre or hotel, which might require $100m to $500m [of financing], the local banks would have a problem,” says Mr Gatete. “So we need other banks with muscle.”

But Rwanda’s lenders are hardly likely to feel left out. If the economy keeps growing at its current rate, there will be no shortage of opportunities for them in the largely untapped and booming retail and SME sectors.

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Read more about:  Regulations , Africa , Rwanda