The strong growth witnessed by Rwanda’s banking industry, last year, is likely to trigger a bigger rush for new entrants buoyed by the country’s status as an ideal investment destination.
This follows a recent central bank report, which indicates that the sector rebounded to record the highest earnings ever.
According to the central bank, local banks recorded a consolidated pre-tax profit of Rwf13.1b in 2010, up from Rwf3.8b in 2009, a huge jump of over Rwf10b. The net profit yielded an annualised Return on Assets (RoA) of 1.9 percent from 0.7 percent while Return on Equity (RoE) increased to 13.7 percent from 5 percent in December 2009.
The implication of last year’s performance is varied, according to the central bank’s latest Monetary Policy and Financial Stability Statement.
François Kanimba, the Governor of the central bank says in the statement that the earnings show confidence in the growth of the economy from sector players.
With projections that local banks are poised for greater profitability, this year, the sector is very likely to attract leading banking brands from Africa and other continents. Already, leading Kenyan banks have expressed strong interest in the Rwanda market.
“The developments in the banking sector through December 2010 continued to be healthy as shown by the financial soundness indicators of the Rwandan banking industry, measured in terms of capital adequacy, earnings, asset quality and liquidity,” the statement reads in part.
The central bank says that such high earnings are a result of prudent policy measures that were instituted as part of a wider policy move meant to boost the competitiveness of the entire economy towards higher levels of growth.
The record earnings materialised after central bank instituted what it termed as relevant “policy support instruments” that were largely more proactive to support the gradual economic recovery in 2010.
“By stimulating lending to the economy through low underlying inflationary pressures, coupled with real interest rates being kept at positive levels, central bank continued to stimulate domestic savings mobilisation and support to the financial sector deepening,” the report says.
It further states that: “The monetary policy committee (MPC), housed at the central bank, decided to maintain the official policy rate at low levels with the objective of releasing more liquidity to the system.”
The MPC also committed during the course of its workings last year, to keep the cost of funds for banks at equally low levels and at the same time discouraged banks to invest on the money market.
The statement adds that, the Key Repo Rate (KRR)—at which the central bank lends to commercial—was reduced progressively in 2010, dropping from 9 percent at the beginning of the year to 7.5 percent in March. It slid further to 7 percent in June and settled to 6 percent by the end of the year.
Such a policy move, the central bank says, ultimately led banks to lend more to business entities. By increasing liquidity within the entire banking system, central bank left licensed commercial banks with wide room to benefit from lucrative interest rate spreads, which ultimately led to the record earnings recorded.
The net effect was that the major source of income by the banks, according the report was interest income from loans, which accounted for 45 percent of the bank’s total income.
While commenting on central bank’s statements, the Managing Director of Rwanda Commercial Bank (BCR), Sanjeev Anand, said that the local banking industry has generally made a good recovery compared to the previous year, adding that the sector should emerge much stronger this year.
“The Governor has been using monetary policy to stimulate the productive sector. This is a good step and the strong overall macroeconomic fundamentals for 2010 shows that the economy can still sustain more easing, particularly as inflation is low,” he told Business Times.
“I think our financial industry is strong and better positioned to handle shocks that are likely to appear this year such as volatilities from highly anticipated soaring oil prices arising out of chaos in the Middle East.”