This Selected Issues paper for Rwanda reports the growth strategy described in the Poverty Reduction Strategy Paper (PRSP). The PRSP constitutes a critical effort aimed at generating poverty-reducing economic growth. Sustained growth in the primary sector serves as an engine of growth in the rural nontradable sector. The consequent rural employment generation provides income to the poorest among the rural poor. In generating an annual rural nonfarm growth rate of 6.7 percent, the PRSP assumes an elasticity of rural nonfarm activities with respect to farm growth.

Abstract

This Selected Issues paper for Rwanda reports the growth strategy described in the Poverty Reduction Strategy Paper (PRSP). The PRSP constitutes a critical effort aimed at generating poverty-reducing economic growth. Sustained growth in the primary sector serves as an engine of growth in the rural nontradable sector. The consequent rural employment generation provides income to the poorest among the rural poor. In generating an annual rural nonfarm growth rate of 6.7 percent, the PRSP assumes an elasticity of rural nonfarm activities with respect to farm growth.

IV. Rwanda’s Banking Sector79

A. Introduction and Summary

124. This chapter discusses the structure, performance and problems of Rwanda’s banking system. The sector was severely damaged by the genocide of 1994 and its rebuilding has since then been in the particular focus of the activities of the Fund, the World Bank, and other institutions.80 This report is to give an overview of the current state of affairs.

125. The growing banking sector in Rwanda is relatively limited in size and marked by significant government intervention. This is despite the emergence of the private sector and the participation of foreign banks. With fast growth of credit to the economy, financial intermediation has developed rapidly, with Rwanda now reaching the average level of financial development in Sub-Saharan African countries of similar income levels.

126. Bank regulation has been strengthened although implementation is problematic. New regulations have been issued at the end of 2003 but the institutional framework for bank supervision and prudential norms can be improved. Implementation of comprehensive bank regulations still faces a number of obstacles and compliance of banks remains uneven.

127. The health of the banking sector remains fragile. Efficiency and profitability of the sector have shown encouraging signs in 2003. However, with a significant share of non performing loans and high risk concentration, asset quality is poor. Capitalization of the sector remains insufficient despite the recent capital injections of the government in two of the six commercial banks.

128. The problems of the banking sector are compounded by their direct links to macroeconomic policy: High and volatile excess reserves render the money multiplier unstable; precarious liquidity situation of several banks impedes monetary policy implementation; and bank restructuring imposes a high quasi-fiscal burden on the economy.

129. The remainder of this chapter is organized as follows. Sections B, C, and D discuss the structure of the sector, its development, efficiency, and profitability, respectively. Section E gives a brief account of regulation and supervision, while sections F and G examine issues of asset quality and capital.

B. Structure of the Sector

130. Rwanda’s banking sector is of very limited size, and the state retains a significant stake, despite recent privatizations. At the end of June 2004, Rwanda’s banking system had total assets of RF 266 billion (US$460 million) and total deposits of RF 170 billion (US$293 million). Total employment in the sector is approximately 1,800, more than one third of which is accounted for by the association of credit unions (UBPR). Weighted by total assets, the government owned about 45 percent of the banking sector at end-2003. While this number is to fall significantly after the completion of the sale procedure of two state-owned banks, BCR and BACAR, scheduled for the second half of 2004, government involvement will remain significant. Rwandan or international private interests, which have played an increasing role due to the economic boom after the genocide, control most of the rest (Table IV-1).

Table IV-1.

Overview of Financial Institutions

(End of 2003)

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Balances with non-banks.

After government take-over in 2004, but before the transferral of ownership after privatization.

Sources: Rwandese authorities; BBA(2003).

131. At end-June 2004, the banking sector consisted of the central bank, the Banque Nationale du Rwanda (Rwanda National Bank, NBR), six commercial banks, and three special-purpose banks. The commercial banks are (in the order of total assets) Banque de Kigali (BK), Banque de Commerce de Developpement et d’Industrie (BCDI), Banque Commerciale du Rwanda (BCR), Banque à la Confiance d’Or (BANCOR), Banque Continentale Africaine du Rwanda (BACAR), and Compagnie Generale de Banque (COGEBANQUE). BANCOR, BCDI, and COGEBANQUE were established during the economic boom after the 1994 genocide. The sector is dominated by the three largest commercial banks, which account for two thirds of deposits and nearly two thirds of outstanding loans.

132. The three special-purpose banks are de jure, but not all de facto, delineated from the commercial banks mainly by their source of funding. In principle, special-purpose banks do not offer demand deposits. They fund their activities by savings and term deposits of a maturity of at least one year, through own funds and via refinancing facilities for priority sectors managed by the NBR on behalf of the government. This group comprises a development bank (Banque Rwandaise de Developpement, BRD), a mortgage bank (Caisse Hypothecaire du Rwanda, CHR), and 148 cooperative banks that are united in the Union de Banques Populaires de Rwanda (UBPR). UBPR takes demand and time deposits from its members. It differs from other banks by its ownership structure and by a different set of prudential regulations which apply to micro finance activities.81 The special-purpose banks play an important role: UBPR’s market share, both in deposits and in loans, is larger than those of three of the six commercial banks, while BRD’s market share is larger than the one of the smallest commercial banks. However, BRD has a stagnant activity and so far does not fulfill its assigned role of development bank, while CHR, which had been insolvent for many years, received RF 500 million in capital from the government in 2003 and intends to grant housing loans to public servants.

C. Development of the Sector

133. The state of development of the banking sector is broadly in line with that of other Sub-Saharan African countries at similar income levels. The 2003 average ratio of broad money to GDP in the countries shown in Table IV-2 was 19.7 percent, compared to 18.5 percent in Rwanda. However, variation in the peer group is very high and the definition of broad money may varie between countries.82

Table IV-2.

Ratio of Broad Money to GDP in Selected Countries

(in percent)

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Source: IMF, World Economic Outlook Database.

134. A trend of financial deepening could be observed in recent years, accompanied by rising dollarization. The M2/GDP ratio was highly volatile during 1994–97 due to the genocide and the subsequent strong presence of NGOs and aid agencies. However, it has been trending upward steadily since 1998. More than half of the increase in monetization since 1998 was due to growth in foreign currency deposits (Figure IV-1). These amounted to 4.6 percent of GDP or 31 percent of total deposits at the end of 2003, which is in line with the average for African countries.

Figure VI-1.
Figure VI-1.

Indicators of Financial Depth

(in percent of GDP at year-end)

Citation: IMF Staff Country Reports 2004, 383; 10.5089/9781451833331.002.A004

Source: Rwandese authorities; and Fund staff estimates.

135. An extremely concentrated customer base has lead to fierce competition among banks. Only seven percent of the population have bank accounts, most of them with UBPR which has around 350,000 members (BBA 2003). The customer base of commercial banks comprises around 10,000 commercial and 100,000 individual clients. All commercial banks compete both on the deposit and the loan side for a core group of only approximately 50 corporate customers. In addition to a couple of private firms and large public sector entities, this group comprises NGOs, consulates, embassies, and international organizations, which make both foreign exchange deposits and engage in numerous exchange transactions. The fact that only large deposits are remunerated contributes to the banks’ dependency on a small group of major depositors.

136. Loan-to-deposit ratios are relatively high in Rwanda. At 76 percent in 2003, the overall loan to deposit ratio is close to Kenya’s figure of 80 percent. Also, banks in Rwanda hold less government bills than in other countries. While holdings of government paper have been growing rapidly since 2001, they represent only 10 percent of assets (compared with 25 percent in Kenya, 27 percent in Tanzania and 35 percent in Uganda). However, loan to deposit ratios tended to decrease in past years with a rebound in 2003.

137. While credit to the economy has grown rapidly in recent years, provision of credit to the private sector remains narrowly concentrated to Kigali and to specific sectors. A declining government domestic financing requirement permitted credit to the economy to grow twice as fast as nominal GDP since 1994 (Figure IV-2). However, regions and sectors have benefited very unevenly. As much as 80 to 90 percent of banking transactions take place in Kigali. Only UBPR is represented in all of the eleven prefectures.83 In terms of sectors, loans go mainly into trade, tourism, property development, and manufacturing. Agriculture, by far the largest sector of the economy, received only 2.3 percent of bank credit in 2003 (compared with about 10 percent in Kenya and 14 percent in Tanzania), notwithstanding the existence of UBPR, which was explicitly charged with provision of credit to the rural areas.

Figure VI-2.
Figure VI-2.

Commercial Bank Credit and GDP

(end of year, 1994=100)

Citation: IMF Staff Country Reports 2004, 383; 10.5089/9781451833331.002.A004

Source: Rwandese authorities; and Fund staff estimates.

138. Maturities are very short both for deposits and for loans, against the background of a highly risky environment. Maturities generally do not exceed three months for deposits and one year for loans. There has been some shift away from demand and into fixed deposits in 2001 and 2002, but fixed term deposits came back to 29 percent of total deposits at the end of 2003.

139. Many banks habitually hold high and volatile excess reserves, mainly due to a tenuous money market, among other reasons. More recently, the deterioration in the health of the banking sector reduced excess reserves of the overall system to low and often negative (end-month) levels (Figure IV-3). The overall figure, however, disguises continued high excess reserves of several healthier banks. The main factors accounting for the banks’ propensity to keep high working balances appear to be: (a) volatile interbank market that is marked by the perception of high credit risks; (b) limited number of depositors and short maturity of deposits, which imply that management decisions of individual customers can give rise to significant liquidity risks for the banks; (c) closing of accounts with the NBR at the same time as the end of the clearing house session, which is at 12 noon; (d) very high penalties for shortfalls in required reserves that force banks to take strong precautions.

Figure IV-3.
Figure IV-3.

Commercial Bank Excess Reserves (RF bn)

Citation: IMF Staff Country Reports 2004, 383; 10.5089/9781451833331.002.A004

Source: Rwandese authorities; and Fund staff estimates.

D. Efficiency and Profitability

140. Combined efficiency measures reflect encouraging improvements in 2003 (Table VI-3). Cost efficiency, which had deteriorated sharply in the preceding years due to high loan-loss provisions, reached its best level in five years. Strong credit growth and high domestic government financing raised revenue and consequently intermediation efficiency84 as well as productive efficiency. Compared to other banking sectors of the region, productivity remains low, however (Table IV-4).

Table IV-3.

Performance Ratios

(in percent)

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Sources: Rwandese authorities; Fund staff estimates.
Table IV-4.

Bank Productivity

(2002, if not stated otherwise; in thousands of US$)

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Source: NBR Staff calculations and Cihak, Podpiera (2004)Note: excluding UBPR.

141. Profitability improved substantially in 2003 (Table IV-3). After reaching record lows in 2002 due to high loan-loss provisioning, both return on assets (RoA) and return on equity (RoE) rose markedly in 2003. This was mainly due to lower provisioning and higher revenues, and partly due to a forceful attempt by some banks to increase loan recovery that will be difficult to repeat. A few caveats have to be mentioned: (a) the RoE measure would have to be adjusted downward by about 20 percent to account for the current capital shortfall relative to required capital in the system (see Table IV-7), (b) the average RoE still masks wide differences between banks. Low interest rate spreads (Table IV-585) suggest relatively strong competition in the Rwandese market.

Table IV-5.

Interest Rates, Spreads, and Margins

(2002, unless specified otherwise)

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Sources: Cihak and Podpiera (2004), NBR, and Fund staff calculations
Table IV-6.

Banking Sector Balance Sheet

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Sources: Rwandese authorities; Fund staff estimates.
Table IV-7.

Estimated Capital Shortfall in the Sector

(RWF Billion, Unless Specified Otherwise)

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Sources: Rwandese authorities; Fund staff estimates.

End-2003 figure applies new requirement of 10 percent.

E. Regulation and Supervision

142. The current banking law came into force in 1999 and was markedly strengthened by new regulations issued at the end of 2003. The sector was largely liberalized in 1995, including elimination of most restrictions on interest rates. The NBR is responsible for regulation and supervision of the banking system. At the end of 2003, it stepped up prudential regulations by raising the solvency ratio from 8 to 10 percent, lowering the permissible deduction of collateral from loan-loss provisions from 100 to 70 percent, and by strengthening rules on credit concentration, insider lending, and loan management.

143. The prudential regulations in principle conform to generally accepted standards, but important shortcomings remain, most importantly:

  • Loan classification is mostly based on past performance,86 and allows banks to deduct 70 percent of estimated collateral values from required loan provisions. As deficiencies in the legal infrastructure often impede the sale of collateral, the regulation stipulates that the collateral cannot be deducted from the provisions if it has not been sold after a certain time.

  • The NBR’s ability to effectively intervene in banks’ operations, though its foundations are laid in the banking law, could be strengthened in the following areas: (a) license revocation, (b) removal and/or fining of bank directors and officers, (c) takeover of a bank’s management, and (d) liquidation of a bank.

144. Several improvements in the institutional arrangements for banking supervision have been or are currently being implemented:

  • The coverage of supervision has been extended. While only three of six commercial banks were audited in 2002, that number was increased to four in 2003 and 2004 (in addition to BRD and CHR). Full annual audits of all six commercial banks are planned to begin in 2005. Two banks are currently under enhanced supervision.

  • A Micro-Finance Supervision Unit was established in 2003.

  • A new IAS-based accounting plan for banks took effect in 2004.

  • A relaxation of the regulation on the limits on net foreign exchange exposure, that had taken effect in June 2003, was reversed in May 2004.

F. The Problem of Asset Quality

145. In spite of recent improvements, asset quality remains the main challenge for Rwanda’s banking sector. At the end of 2003, 30 percent of commercial bank gross loans were nonperforming, 8 percent net of provisions.87 This was equivalent to 17 and 4.7 percent of total assets, respectively. Asset quality of some of the special purpose banks is even more problematic. In 2002 and 2003, the share of nonperforming loans (both in total loans and total assets, and both gross and net of provisions), has declined (Figure IV-4, Table IV-6). However, this is partly attributed to strong credit growth that could backfire if the financed projects do not yield the expected results.

Figure IV-4.
Figure IV-4.

Bank Lending and Non-performing Loans

Citation: IMF Staff Country Reports 2004, 383; 10.5089/9781451833331.002.A004

Source: Rwandese authorities; and Fund staff estimates.

146. While the genocide has contributed to a large volume of bad loans, it only explains about one fifth of its present-day total. During the genocide, many borrowers were killed, fled the country, or disappeared. But according to NBR (2002), only 16 percent of total loans on the books at end-June 2002 were contracted before the war, 72 percent of which were nonperforming. Given that total loans at end-June 2002 amounted to 71 percent of total loans at end-2003, bad loans contracted before the genocide amounted to only 8 percent of end-2003 gross loans (0.16*0.71*0.72=0.08). These constituted about a quarter of bad loans at end-2003.

147. Shortcomings of the judicial system and banks’ poor management explain the accumulation of most new nonperforming loans. Many debtors do not meet their obligations even though they are in a position to do so. For instance, NBR (2002) classified 48 percent of nonperforming loans as “capable, but unwilling to pay” at end-June 2002. With respect to banks’ management, a study conducted by the Belgian Bankers Association (2003) highlighted the following as areas of particular weakness: strategy and general loan policies; functioning of organizational structure; information systems and management reports; controlling and internal audit; quality of human resources; style of management; and corporate governance.

148. In order to improve loan recovery procedures, measures recently implemented, measures currently being implemented, or measures planned to be introduced, include: 88

  • The voie parée accelerated loan recovery procedure, although temporarily suspended by parliament due to alleged abuses, was reinstituted. Parties can agree on a potential voie paree in the loan agreement. Under such an agreement, the bank can seize the collateral automatically under certain circumstances and safeguards it for the borrower.

  • The office of a public notary has been operational since 2001.

  • The creation of financial and commercial courts is ongoing.

  • An out-of-court arbitration center has been established and staffed.

  • The municipal administration of Kigali has created a registrar of land deeds to facilitate mortgaging.

  • The NBR has strengthened its Risks and Unpaid Debts Unit, which centralizes credit information related to delinquent borrowers.

  • Since end-2003, banks have not been permitted to lend to borrowers that owe loans in categories three to five. In addition, lenders have to work out restructuring plans with delinquent borrowers, whose names would otherwise be published in newspapers “widely available in the country.”

  • An action plan for further improvement of credit information quality is to be implemented in 2004.

149. Risk concentration is a problem that is difficult to address given the structure of the economy and its lack of diversification. In addition, seasonal derogations have been put in place to take into account the coffee season. Consequently, risk concentration is very likely to continue to impair asset quality. Risk concentration limits appear difficult to implement and are frequently breached by most banks. Overall, the limited development of the private sector, lack of sectoral diversification and limited access to banking services by a large share of population and businesses constitute serious difficulties for regulators.

150. The exposure to foreign-exchange risk is significant and has been growing. At the end of 2003, about 30 percent of assets and liabilities were denominated in foreign currency. Deposits in foreign currency are allowed, with a rising trend in deposit dollarization having somehow stabilized more recently. As lending in foreign currency for domestic operations is not permitted, banks hold foreign assets in correspondent banks. Some of the banks frequently breach the regulatory limits on their net open foreign exchange positions.

G. Capitalization and Restructuring

151. The sector barely reaches the required solvency ratio. The sectoral capital adequacy ratio at the end of 2003 amounted to only 3 percent (0.5 percent at end-2002), while 8 percent would have been required. This shortfall was accounted for by two of the six commercial banks. With the implementation of the new regulation on the capital adequacy ratio, most banks fall short of the new regulatory requirement. The need for provisioning has consistently eroded the capital position of most banks.

152. Recent capital injections by the government, although potentially giving rise to additional moral hazard, have alleviated part of the capital shortfall in the system. Recent capital injections by the government in two of the six commercial banks have increased the aggregate capital of the commercial banking system to RF 17.1 billion (Table VI-7). However, if capital is adjusted for nonperforming loans that have not yet been provisioned, the capital shortfall in the system remains significant. While down markedly from end-2002, it still was RF 3.5 billion, or 21 percent of actual capital, at end-2003.89

153. Past restructuring attempts could not achieve the sustained improvement of the health of the banking sector. After the genocide, three-year (1996–99) restructuring plans resulted from an audit of the three commercial banks that had existed prior to the genocide and of BRD. While the implementation of these plans was generally satisfactory, many loans granted during the economic revival after the genocide became also nonperforming. A new audit of the financial sector commissioned in 1998 revealed the precarious situation of two banks, for which another restructuring plan (2000–02) was prepared.

154. While the current restructuring process has been protracted, progress was made more recently. The privatization of BCR and BACAR, planned for 2003, has entered its final phase in July 2004, with buyers selected for each of the banks. For the BRD, a 2003–2010 strategy was completed in 2002, giving it the mission to lead poverty reduction measures. A new strategy is being prepared covering 2004–2008. CHR was recapitalized in 2003, with a capital endowment consisting of government owned houses to be progressively auctioned. The bank is now ready to issue housing loans.

References

  • National Bank of Rwanda (NBR), 2002, Rapport final de la commission interbancaire, Assainisement du portefeuille-credits des etablissements financiers rwandais (Kigali: National Bank of Rwanda).

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  • Belgian Bankers Academy (BBA), 2003, Evaluation du secteur financier rwandais (Brussels: Belgian Bankers Academy).

  • Cihak, Martin, and Richard Podpiera (2004): “Bank Behavior in Developing Countries: Evidence from East Africa”, draft IMF Working Paper (Washington: International Monetary Fund).

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Table 1.

Rwanda: Gross Domestic Product by Origin at Current Prices, 1999–2003

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Sources: Ministry of Finance and Economic Planning; and Fund staff estimates.
Table 2.

Rwanda: Gross Domestic Product by Origin at Constant 1995 Prices, 1999–2003

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Sources: Ministry of Finance and Economic Planning; and Fund staff estimates.
Table 3.

Rwanda: Supply and Use of Resources at Current Market Prices, 1999–2003

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Sources: Ministry of Finance and Economic Planning; and Fund staff estimates.
Table 4.

Rwanda: Supply and Use of Resources at Constant 1995 Prices, 1999–2003

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Sources: Ministry of Finance and Economic Planning; and Fund staff estimates.
Table 5.

Rwanda: Selected Food Crop Production, 1999–2003

(In thousands of metric tons)

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Source: Ministry of Finance and Economic Planning.
Table 6.

Rwanda: Coffee and Tea Production, Prices, and Costs, 1999–2003

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Source: Rwandese authorities.

Since 1996, producer prices have been market determined; in 1997, estimated average producer price.

Up to 1998, the export tax was proportional and based on the f.o.b. Mombasa export price; it was imposed only when the price exceeded US$0.95 per kilogram. The export tax was abolished in 1999.

Table 7.

Rwanda: Production of Principal Manufactured Goods and Minerals, 1999–2003

(In units indicated)

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Source: Rwandese authorities.
Table 8.

Rwanda: Energy, Water, and Telephone Production, Consumption, and Prices, 1999–2003

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Source: Rwandese authorities.

Includes only Rwandatel, and the cellular phone company, RWANDACELL.

Table 9.

Rwanda: Consumer Prices, 1999–2004

(March-June 1982=100)

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Source: National Bank of Rwanda (NBR).
Table 10.

Rwanda: Budgetary Operations of the Central Government, 1999–2003

(In billions of Rwanda francs)

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Sources: Ministry of Finance and Economic Planning; and Fund staff estimates.

Assistance from IMF only.

CSR (Caisse Sociale du Rwanda).