Bankers have warned that some banks are likely to suffer financial losses when they meet the central bank’s Rwf20 billion capital threshold.
According to the bankers, returns on capital may not be immediate, a development that would expose lenders to losses.
“I don’t see the existing commercial banks having a problem raising the required capital in five years, the only challenge I foresee is ability to deliver the expected return on capital on the Rwf20billion,” said Maurice Toroitich, chairman of Rwanda Bankers Association.
Rwandan banks have been averaging return on capital at 9 per cent at a time when their peers in the region are in double digits.
The other investment options in the market like government bonds have been making a 12 per cent annual return, posing competition to commercial banks in terms of investment alternatives.
“The magic will be in being able to deliver banking at a low cost, and that is the only way to make a profit for the investors” said Mr Toroitich.
He said even though the market could not grow as quickly as required in the next five years, the threshold has capacity to increase if banks employ better risk management technology.
For years, the Rwandan banking sector has grappled with non-performing loans, although they reduced slightly in recent past, moving down to 5.6 per cent in the first six months of 2019 from 6.4 per cent in December 2018.
“The reduction in NPLs does not mean much, they have reduced because banks have written off loans, this does not change the ratio.”
“We are still a high cost industry and this is a big challenge,” he added.
At the close of last year, the National Bank of Rwanda issued rules that require all commercial banks to increase their minimal core capital from Rwf5billion to Rwf20 billion in a period of five years.
Most of the banks are already above the Rwf20billion capital threshold, and the central bank is optimistic that even those that are below will have got the required capital in five years.
“We don’t have any indication of banks struggling to comply with the new capital requirement, those that cannot comply now have five years,” said Peace Uwase Masozera, director general of financial stability at the National Bank of Rwanda.
The move was partly prompted by the growing financing needs of the economy as well as the need to increase financial stability and protect public deposits.
Despite the challenges at hand, the big players in the market seem to be fairing well, some expanding while others are financing big projects in the country.
Kenyan-based Equity Bank Group recently announced that it is seeking to acquire 62 per cent of shares in BPR Atlas Mara while KCB Group announced its plans to buy a bank in Rwanda and one in DRC.
Local banks like Bank of Kigali have been expanding and diversifying over the years, the group recently hit $1 billion in assets, boasts of four subsidiaries, including a bank, an ICT firm, and insurance firm and the recently launched investment firm BK capital.