Rwanda: Financial Sector Profile
Since the end of the civil war, Rwanda has made remarkable progress in rebuilding its economy: peace and political stability have been reestablished and sound macroeconomic and structural policies implemented, backed by substantial donor assistance. As a result, the country has enjoyed strong growth, averaging 7 percent a year since the mid-2000s, with comfortable international reserves and substantially reduced external debt levels. However, the global financial crisis and subsequent collapse in world commodity prices has led to a significant decrease in export receipts in 2009 which, combined with a domestic liquidity crisis in late 2008, contributed to a slowdown of economic activity. Real GDP growth decreased from 5.5 percent in 2007 and 11.2 percent in 2008 to 4.1 percent in 2009. GDP growth increased to 6.5 in 2010 and is projected to remain steady at 6.5 percent in 2011 and 7 percent in 2011.
Despite important economic progress, challenges remain. Poverty is widespread, aid flows continue to account for over 20 percent of national income, and external debt levels continue to be high. The economy is dominated by low productivity agriculture which accounts for over 36 percent of GDP, 80 percent of total employment and about 85 percent of the country’s exports. Costly and insufficient energy supplies, high transport costs, and low educational attainments by the labor force contribute to high business costs and continue to impede competitiveness.
Rwanda is a member of the East African Community (EAC), which also includes Burundi, Kenya, Tanzania and Uganda. EAC countries established a common Customs Union in 2005 and a Common Market in 2010, and are working towards creating a Monetary Union by 2012.
The financial sector has been growing in recent year, but financial market depth remains the lowest in the East African Community, and access of financial services is a major problem. Recent figures suggest almost 80 percent of the population does not have access to financial products.
Authorities are actively taking steps to improve access to finance and encourage the creation of new financial institutions. In May 2007, the government finalized the country’s Financial Sector Development Program (FSDP) to establish a comprehensive policy framework and a detailed action plan for developing the financial sector. The number of Savings and Credit Cooperatives (SACCOs) is increasing, with over 400 licenses recently granted. Microfinance Institutions (MFIs) have also been rapidly expanding, though many still suffer from a lack of capacity to finance themselves, develop new products, or expand their reach to rural clients.
The recent rapid expansion of MFIs and SACCOs is also raising several regulatory issues and concerns, particularly given the increase in non-performing loans in the sector, coupled with capacity constraints within the existing supervisory framework. In efforts to address these issues, a microfinance bill was submitted to parliament in July 2008 to establish a legal and regulatory framework for MFIs, while a Financial Sector Assessment Program (FSAP) update scheduled for 2011 is expected to review licensing policies regarding bank and non-bank financial institutions.
Rwanda’s banking sector experienced a liquidity crisis in late 2008 caused by a significant reduction in deposits and increase in withdrawals by major depositors, as well as an increase in opportunity costs of bank deposits due to increasing negative real interest rates in the face of rising inflation. This forced the Central Bank to intervene in January 2009 with the injection of RWF 13 billion into the country’s banking sector.
The credit crunch has, however, pushed many banks to undertake efforts to expand their depositor base and offer new and attractive incentives to the public. Banks are now actively expanding their branch networks and investing in innovative products and technologies to increase the convenience and efficiency of their services.
The government is extensively involved in the banking sector, even though majority shares in two of the country’s banks were sold in 2004. The sector is also heavily concentrated, with the four main banks accounting for about 72 percent of total assets. Banks remain generally sound and profitable despite the recent crisis, and lending rates continue to be high and persistent. However, credit remains limited to a small number of sectors, namely trade, tourism, property development and manufacturing, and banks have been cautious to resume lending to the private sector, preferring to continue focusing on high net-worth investors at the expense of small and medium-sized enterprises.
While financial supervision, oversight and regulation are weak, the government has undertaken significant reforms in recent years and banks’ soundness and performance has considerably improved since 2005.
An over-the-counter debt market was established in February 2008, and Rwanda has begun developing the necessary regulatory framework to oversee the expansion of capital markets. But, to date, the fixed income markets remains in its infancy and mostly consists of short term treasury bills and government bonds with maturities not exceeding three years. As of April 2011, Fitch gave Rwanda a rating of B for both local and foreign currency long-term debt.
While the primary market is open to all investors, including residents and non-residents that hold a domestic bank account, the investor base remains dominated by commercial banks which account for about 83 percent of total holdings. There is currently no derivatives market in the country, though plans are underway to develop one; a forward exchange market has been envisioned and authorized, but has yet to materialize.
The insurance industry is small, with only few companies active in the sector. Premiums account for 0.4 percent of GDP and total insurance assets for 1.7 percent. The sector is de facto unsupervised; however, an insurance bill, establishing the legal and regulatory framework for insurance companies, was submitted to Parliament in July 2008.
The pension industry is limited to a public pay-as-you-go system, which provides mandatory coverage to public and private sector workers in the formal sector.
Prior weaknesses in land ownership and registration, which were hampering the development of mortgage products, have been addressed, paving the way for a functioning housing finance framework.
Official remittance flows play a minor role in Rwanda’s economy, with the latest available data suggesting that annual remittances were roughly equivalent to 1 percent of GDP.
|2007||2008||2009||Average Africa 2009|
|Liquid Liabilities /GDP||n.a.||n.a.||n.a.||0,412|
|Deposit Money Bank Assets / GDP||n.a.||n.a.||n.a.||0,32|
|Other Financial Institutions Assets / GDP||n.a.||n.a.||n.a.||0,288|
|Private Credit By Deposit Money Banks and Other Financial Institutions / GDP||n.a.||n.a.||n.a.||0,272|
|Bank Credit / Bank Deposits||n.a.||n.a.||n.a.||0,728|
|Net Interest Margin||0,069||0,063||0,058||0,069|
|Stock Market Capitalization / GDP||n.a.||n.a.||n.a.||0,947|
|Remittance Inflows / GDP||0,015||n.a.||n.a.||0,237|
|Mobile Cellular Subscriptions (Per 100 People)||6,718||13,606||-||40,33|
|Private Credit Bureau Coverage (% Of Adults)||0||0||0||4,539|
|Public Credit Registry Coverge (% Of Adults)||0,2||0,3||0,4||2,575|
|Number of commercial bank branches per 100,000 adults||1,061||1,709||2,26||6|
|Depositors with commercial banks per 1000 adults||23,955||190,021||224,351||311|
|Borrowers from commercial banks per 1000 adults||6,28||26,987||30,162||87|
For statistical coherence and comparability purposes, the FSDIs are extrapolated from a limited number of sources (AfDB, IMF, OECD, WB), where a common data collection methodology was applied to all countries surveyed. For additional data from other sources, please refer to the Documents section.