Microfinance in Rwanda: from an optimistic perspective

In The New Times of Monday, April 21, Prof. Nshuti P. Manasseh discussed a number of issues pertaining to microfinance sector. He concluded his article by stressing the need for an urgent microfinance Bill, which would address the issues he clearly highlighted, such as poor governance and ownership structure among microfinance institutions (MFIs), lack of appropriate product development approaches, as well as weaknesses in the current legal and regulatory framework. The article presents the sector with a little touch of pessimism.

In The New Times of Monday, April 21, Prof. Nshuti P. Manasseh discussed a number of issues pertaining to microfinance sector. He concluded his article by stressing the need for an urgent microfinance Bill, which would address the issues he clearly highlighted, such as poor governance and ownership structure among microfinance institutions (MFIs), lack of appropriate product development approaches, as well as weaknesses in the current legal and regulatory framework. The article presents the sector with a little touch of pessimism.

Of course, it is not all rosy in the microfinance sector. Indeed, we are still observing MFIs opting for "blue print" products, without a thorough assessment of needs of potential clients, and the market conditions under which they are operating. We still come across MFIs managed on a trial –and- error basis, and those which set interest rates simply on the basis of "the way things are out here".

Microfinance is a bit complex industry: it is not managed as one would manage a "boutique", because it involves people’s money. That is why the central bank, BNR, is making valuable efforts to put the sector back on the right track.

The good news is, challenges and weaknesses in the sector have now been pinpointed, and many actors are trying their best to ensure safe and secure financial system is in place to cater for needs for finance in our communities. These are some encouraging efforts in the sector, just to name a few:

The bill

BNR plays a supervisory role. It has since early this decade tried to develop a regulatory framework in which microfinance players would fit.

Under the law No 08/99 governing banks and other financial institutions, BNR has introduced two instructions for regulating micro finance activities. Those are instructions no 06/2002 and no 05/2003. These instructions on microfinance considered all microfinance institutions in the same way, whatever their size or services rendered. As a result, the approval procedures, as well as the requirements in the area of internal and information management control systems were the same for all microfinance institutions.

ccording to the Ministry of Finance (in the recently developed Microfinance Strategy), this universal legislation and extended supervision was chosen for the following reasons:

• The best way to protect the savings of depositors is to have profitable microfinance institutions that are adequately "capitalized", and whose management is healthy and prudent.

• Microfinance Institutions which only offer credit were regulated and controlled to avoid the risk of contagion of depletion of capital reserves (especially given the small size of Rwanda) and to help foster a good culture of credit.

• There was no central organ or apex organization in place, which had the mission, capacity and authority to set standards, ensure their application and punish those who did not conform. Self-regulation has more chances of success when MFIs are attached to a sound structure or agree to respect the standards set by such an apex organization.

The regulatory provisions of 2002 and 2003 have been considered as a constraint for many microfinance institutions incapable of conforming to certain conditions required to be officially recognized. Nevertheless, these BNR instructions aimed at framing the management of these institutions so as to ensure their sustainability and thus protect public deposits.

n March 2008, BNR has presented to Microfinance actors a Bill drafted in accordance with many recommendations from practitioners, which has a particularity of grouping microfinance providers in categories:

The first category constitutes the informal microfinance institutions. The informal MFIs are those which are in the form of ‘tontines’ (ibimina) under all their variants and operate on the basis of contributions by their members only. They request no legal form and approval of the Central Bank for their activities. Nevertheless, the members remain subjected to their statutes and internal rules.

No capital requirement for this category was imposed by the Microfinance Bill.

The second category comprises the MFIs that have acquired a legal form of savings and credit cooperative. The value of deposits they have mobilized is less than an adequate capital fixed by regulations of the Central Bank. It is exonerated of certain prudential standards like the solvency ratio and the legal requirement for minimum capital, as well as certification of the financial statements by an approved auditor. They should not have more than one service point or counter.

There is no minimum capital required but there is a threshold on savings they are entitled to mobilize, which was fixed at 20 million RWF.

The third category is composed of MFIs that have adopted the legal form of savings and credit cooperative or limited company (SA). They will have already mobilized a volume of deposits more than an adequate capital fixed by regulations of the Central Bank. They are required to respect the management rules and prudential norms defined by the Central Bank corresponding to their level of categorization, and have to adopt a structure of functioning and control developed. A minimum capital required for SA is 300 million RFW, and 5 Million for COOPECs, when the savings mobilized is above the fixed threshold (RWF20, 000,000).

The fourth category is composed of MFIs that grant credits to the public without receiving saving deposits. The Central Bank defines by means of regulations, a special regime of control for the micro finance institutions of the fourth category. The minimum capital required for this category is 300 million RWF.

The new Bill has also introduced a new concept in Rwanda: Microfinance Bank, which requires 1.5 billion as capital, and has full access to the compensation chamber at BNR, to modern payment system (cheques, debit cards, etc), and the refunding window facility offered by BNR.

Best practices

A number of training workshops are regularly organised since late 2007, and the main focus is on Best Practices in the microfinance sector. Most recently, Terrafina, a Dutch NGO, jointly with MicroSave, a renowned organisation spearheading microfinance research in Africa, organised a workshop on Market Research and Product Development at Kabusuzu, in which over 50 practitioners from COOPECs all over the country participated. It was noted that a new wave of market research has started in Gicumbi, by COOPEC Iriba. At least three organisations report regularly on the MIX (Microfinance Information Exchange network: e.g. Urwego Opportunity Bank) and some others to the Microcredit Summit (e.g.Umutanguha). The rural-based CAF Isonga (district of Muhanga) has set precedence in Best Practices in Rwanda: it was the first microfinance institution ever to be rated. Such little initiatives, once spread over the country, will certainly push further the positive attitude towards public disclosure, transparency and good governance.

In a nutshell, the Microfinance sector in Rwanda still faces a number of challenges, but let us remember that it is only few year old. Tremendous efforts have been made, and we encourage different actors to keep on the track. It was reported that almost 1 million Rwandese access to finance through this channel, while traditional commercial banks boost a meagre five-digit outreach.

 

Contact: stratonh@yahoo.fr

 

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