Microfinance institutions (MFIs) are a major driver of financial inclusion in Rwanda. Generally, MFIs aim to provide financial services to the poor, low-income unbankable clients mostly in the rural and hard to reach areas of the country, as well as those that lack collateral to access some banking services. The microfinance sector is dominated by Savings and Credit Cooperatives (SACCOs), and is also composed of some limited companies that operate microfinance activities. Presently, Rwanda has 154 microfinance institutions operating across the country, accounting for 6.3 per cent of the total assets in the financial assets portfolio.
The National Bank of Rwanda and government are trying to increase financial inclusion through expansion of microfinance services. Despite of adequate regulation and the continuing infrastructure development in the sector, financial inclusion is still low in terms of coverage.
Over past few years, there has been increase in non-performing loans among microfinance institutions. In Rwanda, non-performing loans for banks were recorded at 6.6 per cent by end June 2014, while those of the microfinance sector were at 7.6 per cent. The latest data from the central bank, indicate that bad loans MFIs increased to 11 per cent as at June 31, from 8.5 per cent during the same period last year. MFIs are facing double challenges: they are failing to provide finance to all those that need funding and, are also suffering under the weight of growing non-performing loans.
The increasing rate of bad loans is threatening the growth of the sector, and slowing down efforts to deepen financial inclusion in the country. High rate of bad loans also affects viability and sustainability of MFIs and hinders the achievement of their cardinal goal; to ease access to financial services and at affordable rates. The growing ratio of bad loans in the sector is affecting the ability to provide funding to customers as they have to increase loan loss provisioning.
Apart from non-performing loans, there are also concerns about the sustainability of the growth of Rwanda’s microfinance sector due to poor portfolio quality, high interest rate spreads and low influx of external funding.
Why bad loans are rising among MFIs
There is generally weak credit analysis, as well as poor monitoring and poor project design and implementation among microfinance institutions, which have been repeatedly faulted for the increasing level NPLs.
Mismanagement of loans recorded over the past few years has also contributed to the growth of bad loans. This (mismanagement of loans) has affected the growth of deposits in the sector, which slumped to 5.9 per cent by June 2017, from 20.1 per cent registered in the same period last year.
Microfinance institutions provide a major portion of the agriculture sector funding. Therefore, the increasing non-payment of agro-loans has added to growth of bad loans in the microfinance sector. In fact, MFIs had to write off many loans borrowed by agriculture sector as farmers failed to repay loans due to poor crop that resulted bad weather conditions experienced over the past seasons. Most MFIs provide loans to borrowers on collateral without registering collateral with RDB. The risk associated with such unregistered collateral is that the MFI finds it difficult to recover such loan through legal means because it will find itself in a weak position, legally.
In addition, there are some serial defaulters that borrow from different MFIs and then fail to repay all the accumulated loans. Lack of information sharing among MFIs is also becoming cause of increasing NPLs.
There is need of stringent credit monitoring and regulation among MFIs. Therefore, the move by the central bank to engaging financial institutions so that they improve their credit underwriting and monitoring standards for containing growth of NPLs is in the right direction.
Though the microfinance sector stepped up efforts to reduce the increasing number of bad loans, experts say MFIs will need to do much more to reverse the trend. Big loans are more risky than small loans. High collateral and tightening of recovery methods will help in reducing NPLs among clients from other sectors other than agriculture.
For farmers, scheduling loan recovery targeting the harvesting season could help in recovery of loans and hence reduce the number of borrowers failing to service their loans. Registering collateral with RDB, though expensive, will also help in recovering NPLs.
The writer is a senior lecturer at Jomo Kenyatta University of Agriculture and Technology, Kigali Campus.