Local commercial banks are struggling to raise affordable long-term deposits due to limited access to funds in the market.

This is partly attributed to relatively low deposit rates offered by banks in comparison to treasury bonds.

Currently, the annual return on capital for commercial banks in the country stands at nine per cent, at a time when government bonds attract a 12 per cent return. This is proving to be a challenge for banks as they try to attract investors.

“Return on capital for quarter one stands at 9.2 per cent, this is not attractive at all because in other markets in the region it is 20 per cent,” said Maurice Toroitich, the chief executive officer of BPR Atlas Mara and president of Rwanda Bankers Association.

He said this has weakened the sectors value proposition as lenders attempt to get investors.

Konde Bugingo, a banking sector expert, said the country’s banking sector lacks a stable long-term deposit and savings base.

“The fundamentals are lacking which can easily deter an investor. There is lack of liquidity in the sector and people have very low purchasing power,” said Mr Bugingo.

He added that other factors like the high cost of running a bank, limited innovation as well as bad loans could be eating into the balance sheet of banks.

“The insurance sector needs a complete overhaul. I think over four players need to be consolidated into one and all the insurers have received capital call ups, which affects revenue returns,” he said.

The banking sector started the year with optimism, after a buoyant service sector performance in 2017, contributing 47 per cent of GDP in the last quarter. This has raised optimism that the sector is recovering from a hard year characterised by a depressed economy, bad loans and currency depreciation.

Last year, the banks that acquired dollar-denominated loans externally over the past few years, got exposed to forex losses while paying back due to the Rwandan franc’s depreciation against the dollar. However, the situation seems to be normalising now.

In the first quarter of this year, the banking sector registered a combined Rwf10.2 billion in profit before tax, remaining with Rwf3.9 billion after tax, according to a recent BNR monetary policy and financial stability statement.