Commercial banks’ focus on small businesses paying off

Commercial banks operating in Rwanda earn about 40 per cent of their net interest incomes from lending to small-and-medium enterprises (SMEs), the chairman of the Rwanda Bankers Association, Sanjeev Anand, has said.
A farmer feeds pigs. Lending to small business like this one has boosted commercial banks revenues. The New Times / Triphomus Muyagu
A farmer feeds pigs. Lending to small business like this one has boosted commercial banks revenues. The New Times / Triphomus Muyagu

Commercial banks operating in Rwanda earn about 40 per cent of their net interest incomes from lending to small-and-medium enterprises (SMEs), the chairman of the Rwanda Bankers Association, Sanjeev Anand, has said.

According to Anand, who is also the managing director of I&M Bank, more than 50 per cent of commercial bank loans go to SMEs that constitute about 75 per cent of the market for bankable projects in the country.

Anand was responding to the results of the recent World Bank survey, which revealed that commercial banks in Rwanda earn 20 per cent of their net incomes from lending to SMEs. “That is very conservative. In my opinion, the figure is at least 40 per cent because most of the companies that look like corporate are actually SME by world standards,” he said in an exclusive interview last week. The World Bank study also put local commercial bank lending to SMEs at only 17 per cent.

Anand’s estimates are corroborated by figures from the National Bank of Rwanda (BNR), the regulator of the banking sector, that show growing focus by commercial banks to attract small businesses to take up long-term credit.

According to the central bank, outstanding loans granted to SMEs by banks alone rose by 14 per cent from Rwf161.9b at the end December 2012 to Rwf183.9b by the end of June this year, accounting for 23.3 per cent of the total loan portfolio of the banking sector during the period.

By the close of business on June 30, commercial bank loans to the entire private sector had increased to Rwf788.2b from Rwf747.3b in December 2012, with SMEs accounting for most of the growth.

Income from corporate loans, according to Anand, account for about 25 per cent, the same as what banks earn from retail that mainly comprises of lending to individuals such as monthly salary earners.

The reason is that SME lending in Rwanda is vibrant and business is dominated by SMEs with only about 30 companies with annual turnover of $10m and above (Rwf6b and above) classified as corporate. 

According to the World Bank Study titled Bank Financing of SMEs in Five African Countries, lending to SMEs was found to be “vibrant in Rwanda and Kenya compared to other countries covered by the study. South Africa, Nigeria and Tanzania were the other countries covered in the survey.

This, however, does not come as a surprise because about 75 per cent of the market is SME. “You just cannot, but deal with them,” says Anand.

Indeed, banks cannot afford to ignore SMEs and are even taking up long-term credit lines from international finance institutions to boost their lending capacity to this lucrative market segment.

Recently, Bank of Kigali, the country’s biggest lender secured a $10m credit line from the OPEC Fund for International Development for on-lending to the SME sector.

There is global emphasis on SMEs because of the central role they play in providing employment and their contribution to tax revenue for governments.

According to the World Bank survey, Kenyan commercial banks earn the highest proportion of income from lending SMEs at about 20.5 per cent, with lending to same market segment at 17.4 per cent.

 

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