TOP STORY: Credit to private sector tightens

Local commercial banks are finding it hard to finance the growing demand for credit from the private sector. This is because they do not have enough money, according to the Ministry of Finance. 

Local commercial banks are finding it hard to finance the growing demand for credit from the private sector. This is because they do not have enough money, according to the Ministry of Finance.

The situation is due to the mismatch of banks’ short-term deposits to long-term lending.

Usually banks need short-term cash to cover themselves in case of deposit withdrawals. Rwandan banks however, have issued much of that cash as long term loans and that is why they are pulling back on lending.

“Credit supply to the private sector in 2009 will not meet demand especially for longer maturity loans like constructions and big investments,” James Musoni, Minister of Finance and Economic Planning said.

He was making a presentation of the 2009/2010 Budget Framework Paper to the two chambers of Parliament on Monday last week.

Official figures show that in recent years, there has been a huge increase of long-term credit to the private sector, especially in the construction sector.

The increase in deposits in banks was also slower, only at 6.4 percent in 2008 due to institutional investors, who  withdrew large sums of money to meet their investment demands.

The declining liquidity in banks is also partly explained by the huge foreign investments made in 2008 and less savings due to high inflation which stood at a record high of 22.3 percent in December last year.

Central Bank statistics show that total borrowing by the National Bank Of Rwanda (NBR) from commercial banks, fell to Rwf16.6 billion at the end of December 2008 from Rwf58.6 billion at the end of December 2007.

The declining liquidity in banks has put a tight grip on the economy, which is also still grappling with the effects of the global economic recession.  Rwanda’s 2009 /2010, Gross Domestic Product (GDP) growth has also been revised to 5.7 percent down from last year’s 11.2 percent.

The Minister said that the economic recession would lead to a 15 percent decline in tourism receipts while Foreign Direct Investment (FDI) and remittances from abroad will drop by 15 percent.

In 2007, Rwanda witnessed growth in excess liquidity and the Central Bank quickly moved to mop up that excess liquidity. However, the situation has reversed.

According to Musoni, last year monetary expansion was condensed and money supply fell by 10 percent against rates of over 30 percent that prevailed in the previous years. This means that there was a sharp decline of money in circulation.

 “The impact of reducing the pace of monetary expansion is reflected in falling inflation in the last months of 2008 and this will continue in 2009,” he said.

Some private sector members have said it is even difficult to access short term loans from the banks.

“Banks no longer give overdrafts,” a businessman who is also an ex-banker spoke on condition of anonymity. 

 “Many exporters sale their goods to economies that have experienced economic shocks, and this increases the exporter’s risk profile. As a result, banks have taken a more conservative approach to lending,” the source said.

Robert Mathu, the Executive Director of the Capital Market Advisory Council said that though the global economic recession has not affected the Rwanda capital market, limited liquidity in banks is always a challenge to the development of a stock exchange. 

 “When issuers want to raise money, some of that money comes from banks where by some investors go to the bank; they withdraw those savings from banks and put it in the long term market,” he said.

 “So if there is a liquidity crunch, the natural thing is that money won’t be available for investing in the capital market because…the capital market actually provides that process of converting from short-term deposits to long-term.”


On February 6, 2009, the central bank reduced the reserve requirement ratio from eight percent to five percent and also reduced the width of the inter bank corridor from three percent to two percent.

Government also says that it is in talks with some commercial banks to help them access external support from some multilateral institutions like the African Development Bank.

This approach has however had its challenges as banks fear that they might incur foreign exchange losses in the process.

“We will put up measures of controlling it,” Musoni argued.
The Minister says that this situation signals that banks and the private sector in Rwanda have reached another stage of maturity but maintains that bankers ought to have realized it.

“They (banks) should have syndicated because you cannot rely on domestic savings 100 percent….the current private sector demand requires another alternative.,”  he said