Washington DC – The soundness of Rwanda’s financial sector has significantly improved from the tight credit conditions experienced in 2009, enhancing stability within the sector, the Central Bank has said.
Speaking to Business Times along the sidelines of the ongoing Annual Meetings of the World Bank and International Monetary Fund (IMF) on Tuesday, François Kanimba said that the average capital adequacy ratio within the banking system currently is higher than 15 percent.
“This is an extremely important advantage that we have right now. With a high capital adequacy ratio, banks now have quite a significant buffer to face any significant shock that would create a major potential loss for a bank,” he said.
The Governor was commenting on the latest global financial stability report released by the IMF which indicates that recovery of the global financial system remains fragile as the global financial system still faces “considerable downside risks” from the effects of the global financial crisis.
The consolidated balance sheet of the banking industry expanded by 8.3 percent during the first half of the year 2010 compared to the same period of 2009.
As of June this year, commercial banks registered an increase of 8.7 percent in deposits base from Rwf425.4 billion in December 2009 to Rwf462.7 billion.
During the first semester of 2010, stress testing showed a resilience of banks’ capital to shocks in terms of increase in Non Performing Loans (NPLs). The NPLs stood at 12.2 percent at the end June 2010 compared to 13.1 percent in December 2009.
However, Kanimba observed that this has been mainly due to increased risk aversion within the banking system.
“When banks increase their lending, their adequacy ratio typically drops,” he pointed out.
According to Central Bank figures, during the first half of this year the outstanding credit to the private sector recorded a moderate increase of 3.9 percent against 6.7 percent projected.
The Governor said, this reflects simultaneous efforts by banks to recover NPLs distributed before end of 2009.
“Banks have now realized how taking a lot of appetite in terms of transforming short term deposits to long term – created liquidity problem and are now extremely cautious,” he said.
Banks reported an amount of Rwf5 billions in terms of debt recovery during the first half of 2010, from loans in arrears as at end of December 2009.
With the Central Bank maintaining a low interest policy, the Governor said he was optimistic of further credit expansion.
On average, this year credit to the economy is expected to grow by 12 percent.