Africa Economy: Rwandan banks' shareholders earn little from investment

For the last 20 years, the number of commercial banks in Rwanda has grown significantly, from three in 1994 to ten in 2015.

Despite being an impressive leap and a show of how sound Rwanda' s financial sector is, banks are still facing low profitability, a turn-off for banks that may want to enter the market in the future.

Banks' return on average equity (ROAE), a measure of their profitability for the first nine months of last year stood at 10.9 percent, according to National Bank of Rwanda's (BNR) last month monetary policy statement.

This is lower compared to banks in neighboring East African Community countries, Kenya, Uganda and Tanzania which have their ROAE at above 25 percent.

Lawson Naibo, chief operating officer of Bank of Kigali (BK) attributes the low profitability in the market to continued "pressure" on the banks' sources of revenues while their cost structure remains the same.

"Unlike in other countries where if a client deposits money into their account, there is a small charge, in Rwanda clients are not charged because people are still improving on their appreciation of banking," he told Xinhua on Monday.

Naibo noted that banks in Rwanda don't charge for use of Automated Teller Machines (ATMs) contrary to the practice other countries, and that clients still complained of the market interest rates being too high.

"We don't charge for all these services because we are still trying to grow the market. Therefore the return on every single cent shareholder has invested is still going to be a bit low. One can't compare us with other EAC countries where the banking penetration is much wider."

The 10 commercial banks operating in the country include Kenyan bank group subsidiaries, Equity, I&M and KCB, Nigerian bank group subsidiaries; Access and Guaranty Trust Bank, Togo-headquartered Ecobank, Ugandan-brand Crane Bank, and the traditional Rwandan- owned Bank of Kigali, Banque Populaire du Rwanda and Cogebanque.

They are all competing for the 25 percent of the banked population while carrying out investments in expanding their branch networks, introducing agency banking models, mobile and internet banking in a bid to attract the unbanked population.

"We have to have channels ATMs, mobile banking and branches which mean that our cost structure is almost the same as in other countries in spite of the pressurized revenue sources," Naibo explained.

Fortunately, banks' ROAE have been improving during the past two years with BNR quoting the figure at 8.3 percent in September 2013, 7.4 percent December 2013 and 10.9 percent in September last year.

Naibo said they were creating efficiencies in terms of the use of the available banking channels in order to ensure they reduce the number of branches required, staffs and therefore manage their costs more effectively. This, he said would enable them mobilize cheaper deposits thus making them profitable.

He added that the use of the Credit Reference Bureau by banks had enabled the non-performing loans to go down which means that if banks are not losing too much on bad debt, then they are becoming more profitable without charging high interest rates.

In five years, sector analysts expect the situation to have normalized in that many Rwandans will be dependent on banking services. People will rely on more efficient channels like the use ATMs, mobile and internet banking therefore reducing the use of cash.

According to Naibo, the banking sector has vast opportunities by show of the so many 75 percent of Rwandans that remain under- banked.

BNR governor, John Rwangombwa projected in the monetary policy press meeting last month that the financial sector would grow by 9. 2 percent in 2014 up from eight per cent in 2013. Endi