A brief on Rwanda’s financial sector as gathered by Ecobank

Posted on June 24, 2013

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Banking in Rwanda: Size does matter
Highlights
 At the close of 2012, Rwanda’s banking sector was composed of nine commercial banks and five specialised institutions (that included three micro-finance banks, one development bank, and one co-operative bank).
 Commercial banks’ total assets returned a +13% y-o-y growth to stand at USD1.6bn, making it the second smallest banking sector in the larger East African Community (EAC) region, after Burundi.
 However, banking sector penetration still remains low, with the ratio of total banking sector assets to GDP standing at 28% in local currency terms, and representing a massive growth opportunity.
 The Bank of Kigali (BK) continued its dominance as the country’s largest bank, with total assets worth USD496mn at the close of 2012.
 From a profitability perspective, the Rwandan banking sector’s 13% return on equity (ROE) places it at the bottom of the profitability rankings of the EAC region. However, on a micro-level, Banque Commerciale du Rwanda (BCR) was the country’s most profitable bank.
 With regard to efficiency, the country’s banking sector ranked as least efficient compared to its major EAC peers, with a consolidated cost-to-income ratio (CIR) of 71%. However, on a micro-level, BK was the most efficient bank while Equity Bank ranked at the bottom as the least efficient one.
 Overall capital adequacy levels remained strong and the sector still ranks as the most capitalised one in the EAC region, with industry total qualifying capital to total risk assets standing at 25%, well above the regulatory threshold of 15%.

Banking Penetration and Access to Finance
When compared to its major EAC peers, Rwanda had the lowest banking sector penetration levels, with the ratio of its banking sector assets to GDP ending 2012 at 25%. 

However, compared to its major EAC peers, Rwanda has the highest financial inclusion levels, with the FinScope survey done by the Central Bank (BNR) showing that access to formal financial services by adult population increased from 21% in 2008 to 42% in 2012. At the same time, the percentage of adult population accessing both formal and informal financial services surged from 48% in 2008 to 72% in 2012. Additionally, adult population financial exclusion continued to decline, from a high of 52% to 28% in the same period. These achievements are attributable to the tweaking of the informal banking sector, most notably with the emergence and growth of the Umurenge Savings and Credit Cooperatives (U-SACCOs). The term Umurenge simply means a sector, the smallest administrative unit in Rwanda. The Government rolled out this concept of Umurenge SACCOs in a bid to increase access to financial services to Rwandan citizens and it was premised on the fact that financial services were concentrated only in major urban centres while the majority of the country’s population live in rural areas (73% of total loans and advances are domiciled in the greater Kigali region). These U-SACCOs, though not there yet, remain relatively liquid and will continue to play a significant role in the funding of banks; 

Balance Sheet Review
In 2012, commercial banks’ total assets grew by 13% y-o-y to stand at RWF1.0trn (approximately USD1.6bn), making the sector the second smallest in the EAC region after Burundi. BK continued its dominance as the country’s largest bank in asset terms after recording a 12% y-o-y growth in its asset base to USD496.61mn. At the bottom of the table was Equity bank, which only began its operations in Q4 2011, with an asset base of USD37mn.

In terms of key asset items, net lending assets represent the lion’s share, accounting for nearly 51% of total assets, followed by interbank lending (both local and foreign), which accounts for about 22% in total, while Government securities come a distant third at 10%. There has been a sustained gradual uptick in the share of net lending assets to total assets for three main reasons; first, there has been a marked decline in industry provisioning levels for impaired assets, as stakeholders strive to address asset quality. Secondly, as the country’s economy continues to grow, credit appetite too has been growing, with credit to the private sector alone expanding by a strong 21% in compounded terms in the period between 2003 and 2012 (and outperforming the overall 17% compounded growth in domestic credit extension in the same period under review). However, it is worth noting that private sector credit extension has largely remained concentrated around Kigali and, as earlier highlighted in this note, the capital city accounted for 73% of total net lending assets. Finally, the entry of new players has also had an uplift effect.

Lending: Bank of Kigali dominates
Industry lending grew by 34% y-o-y, even outpacing the growth in total assets. BK had the largest loan book in the market, with its lending growing by 50% y-o-y to USD285mn, giving it a leading 32% share of the market; second came Banque Populaire du Rwanda (BPR), also the largest in terms of branch network, with a marketshare of 19%. 

Five banks, namely BPR, Ecobank, KCB, Fina Bank, and Access Bank, recorded a decrease in their loans market share and this could have been caused primarily by narrowing lending-deposit margins; specifically in the second half of 2012, there was a marked uptick in the cost of funds that saw deposit rates edge up by up to 300bps while at the same time lending rates slumped by nearly 60bps. As a result, the affected names could have developed a degree of risk-off approach. With the exception of Equity Bank, only three banks, led by BK,grew their loan books on a y-o-y basis.

Sectoral Exposures
From a sectoral point of view, lending is mainly concentrated in the mortgage and tourism sectors of the economy,which together accounted for 62% of overall lending. The latter accounted for about 34% of overall lending and this is attributable to the Government’s efforts to promote the country as a tourism destination in a bid to attract increased FDI inflows. Additionally, the post-Genocide period, and especially during the emergency period, saw an influx of NGOs into the country, which stimulated the lending market, specifically real estate, and led to banks’ financing hotels, buildings, and residences both for commercial and rental use. 

Funding: Overall liquidity challenges easing
Local currency liquidity remains very stable, especially since actions by the Central Bank back in 2009 that averted a possible liquidity crunch in the market. With banks still relying on traditional customer deposits to fund their assets, BK still commands a leading market share in the deposit space, with its 28% share of the market. On average terms, deposits registered no y-o-y growth primarily on account of the upward re-pricings of customer deposits, especially in the second half of the year.

Funding Mismatch
Between 75-80% of total deposits are demand deposits and have a contractual duration of less than 12 months; what is more, term deposits account for only about 20% of deposits while the rest are savings.

Maturity mismatch
remains a common banking problem and is quite pronounced in the EAC region. It is the management of this mismatch that remains the key to successful banking in the region; but while it remains difficult to match funding, the Central Bank has a quiet policy that banks should match up to at least 50% of their funding, especially when creating longer term assets, specifically mortgages.
However, asset creation momentum has continued to pick up strong pace, especially in the period between 2010 and 2012; the industry local currency loan-to-deposit ratio has since surged to 77% from a low of 60.8% in 2010, surpassing the 75% ideal mark.

Profitability Rankings:

Ecobank the best performing…KCB and Equity still struggling
BCR ranked as the most profitable bank with an ROE of 27.4%, which was a 430bps y-o-y increase over the 23.1% the bank returned in 2011; and, as illustrated in Table 1, BCR had only 15 branches, which effectively indicates that the bank is operating on the ‘branch profitability’ approach. BK, which had 60 branches and the largest asset book,returned 18.7% on its shareholders’ funds. However, BPR which had the largest branch network and operates on the micro-finance model, only returned 12% on its shareholders’ funds, which was a 420bps y-o-y improvement from the 7.8% return in 2011.
Ecobank, which closed the year as the third largest bank in terms of assets, returned 2% on shareholders’ equity,which was a significant turnaround from an ROE of -8.1% in 2011, and it ranked as the most improved bank among its peers. However, KCB and Equity Bank, both Kenyan banks, continued to struggle, after returning -9% and -34% respectively on their shareholders’ equity at the close of 2012. 

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