Financial Sector Overview
The Economic Context
After recovering from the 1994 genocide, Rwanda today has one of the highest economic growth rates in Africa. Whereas it stood at 4.7% over the period 1994-2000, the average annual GDP growth rate was 7.0% between 2012 and 2018, a level significantly higher than the sub-Saharan average (3.6%). The improvement in economic governance has had positive effects on growth and earned the country first place in the 2018 in World Bank Africa Country Policy and Institutional Assessment ranking. Public investment, the main driver of the transformation, rose from 8.7% of GDP in the early 2000s to 11.8% on average in recent years. Income per capita more than tripled between 2000 and 2018, from USD 225 to 787 and the level of poverty fell sharply from 60.4% of the population in 2001 to 38.2% in 2017. According to the World Bank’s Doing Business ranking, the country was among the best performing economies in 2019 in terms of business environment, occupying 2nd position at the African level and 38th globally (52nd in 2012) out of 190 economies. However, the economy remains highly dependent on the agricultural sector, which, although representing 29% of GDP and involving almost 66.1% of the population, is still very unproductive. In addition, instability in the Great Lakes region poses a potential risk to the country’s medium and long-term economic prospects. In order to progress towards the sustainable development goals, the authorities have developed a national transformation strategy for the 2017-2024 period. It is part of an even more ambitious roadmap, Vision 2050, which will enable Rwanda to achieve upper middle-income country status by 2035 and that of high-income country by 2050. Vision 2020 already had the ambition of moving Rwanda to the status of a middle-income country by 2020. It has enabled the country to position itself on an irreversible development trajectory.
In June 2018, the sector comprised 16 banks, 473 microfinance institutions, 16 insurance companies and 11 pension funds (including one Compulsory Pension Scheme and 10 Voluntary Pension Schemes). A credit reference office (TransUnion) shares credit information with the main players to facilitate decision-making in the granting of loans. The financial system, representing 53.2% of GDP in 2018, remains dominated by the banking sector, which accumulates 65.5% of total assets.
The Central Bank recently restructured the sector’s regulation into two distinct areas: one relating to prudential regulation and the other devoted to the conduct of the financial markets. This new framework reflects the Central Bank’s commitment to promoting financial inclusion and protecting consumers.
Structure of the Banking Market – The banking sector remains concentrated, with the five largest banks holding 64.6% (2017) of total banking assets, which increased by 9.8% year-on-year to RWF 2,824 billion (USD 3.1 billion), or 35.8% of GDP (June 2018). This increase remains moderate compared to 2017 (12.9%), due to the slowdown in the growth of loans granted by the banking sector, the main component of banking assets.
Structure of Banking Sector Loans and Deposits – Loans and advances represent 57.7% of banking assets. They increased by 7.8% (14.4% for the same period in 2017) to RWF 1,630 billion (USD 1.8 billion). Moderate growth in outstanding loans from the banking sector reflects bad debt write-offs and the slowdown in new lending due to new credit conditions and the rise in non-performing loans. Bank credit to the private sector fell from 20% of GDP in 2015 to 19.8% of GDP in 2017. On the other hand, deposits increased by 9.5% to reach RWF 1,834 billion (about USD 2 billion). Term and demand deposits represent 41% and 59%, respectively, of total deposits. In addition, the shortage of long-term resources constitutes an obstacle to financing long-term investment. Indeed, about 98.5% of total term deposits have a maximum maturity of one year. As part of long-term savings mobilisation policies, the revised income tax law (in April 2018) abolished the 15% withholding tax applied to the products of term deposits with a maturity of more than one year.
Lending and Borrowing Interest Rates – The new monetary policy framework has set a medium-term overall inflation target of 5%, with an inflation corridor of ± 3 percentage points. Since 2016, the Central Bank has embarked on a policy of reducing excess reserves in the banking system, by ensuring that interbank rates are aligned with key rates. The Monetary Policy Committee, therefore, reduced the key rate from 5.5% to 5% in order to support bank financing of the economy and bring overall inflation back within the established range. The borrowing rate fell slightly, from 17.2% in 2016 to 16.9% in 2018.
Financial Soundness of the Banking Sector – In order to comply with Basel II/III standards, the Central Bank adopted Regulations No. 06/2017 and 07/2017 of 19 May 2017 relating, respectively, to capital and bank liquidity requirements. The Rwandan banking sector is generally well capitalised, liquid and profitable, in accordance with the regulatory requirements in force. Leverage and equity ratios remained above the regulatory minimums of 6% and 15%, respectively. The short-term liquidity ratio and the long-term structural liquidity ratio are above the minimum prudential requirement of 100. Asset quality has also improved. The bad debt ratio has decreased, due mainly to the write-off of bad debts initiated to clean up balance sheets. The ratio of non-performing loans decreased from 8.2% in June 2017 to 6.9% in June 2018. On the other hand, provisions increased by 39% between 2017 and 2018, following the implementation of IFRS 9 in January 2018. Bank profitability remains positive. Return on assets (ROA) and return on equity (ROE) stood at 1.9 and 11.2%, respectively, in 2018. Since 2015, the loan-to-deposit ratio has remained above 90%. It stood at 94% in 2018, indicating a good level of financial intermediation.
According to the World Bank’s Global Findex, financial inclusion has made significant progress in Rwanda. Since 2014, the proportion of adults with an account has increased from 18.8% to 50% in 2017, a level above the sub-Saharan average (42,6%).
The expansion of activities related to mobile money, savings and credit cooperatives in Umurenges (U-SACCO) and the rise of e-commerce have encouraged this progress. The proportion of adults with a mobile money account has increased by about 72%, while digital payment transactions have increased by 42%.
Notwithstanding these positive results, additional efforts remain to be made in order to consolidate these achievements. Financial institutions recorded a decline, both in terms of account ownership (-3,7%) and use of the services offered (-26% and -4% for savings and loans, respectively). According to the IMF, the agricultural sector receives less than 2% of formal financing. One of the barriers to financial inclusion is the predominance of informal finance. About 72% of adults (57% in 2012) use informal mechanisms such as savings groups (VSLA or SILC) and traditional informal systems known as Rotating Savings and Credit Associations (tontine) or credit shops. However, these informal finance mechanisms serve as a transmission and transition belt to formal finance. In addition, these informal mechanisms do not only concern the financially excluded population, since 76% of individuals who have formal financial products are also involved in informal finance. In order to strengthen people’s confidence in the formal financial system, the authorities have taken several measures, including the establishment of a Deposit Guarantee Fund (Law No. 31/2015 of 05/06/2015) and a vast campaign of financial education of the population. The guarantee fund initiative also aims to protect small depositors against the risk of loss that would result from the bankruptcy of a bank or microfinance institution.
The microfinance sector comprises 19 microfinance institutions incorporated as limited liability companies, 438 savings and credit cooperatives (SACCO), including 416 U-SACCOs and 22 other SACCOs (not Umurenges). In 2018, the sector had 3,779,860 customers (or 54% of the adult population). Sector assets represent 6.6% of total assets in the financial sector. They reached RWF 283 billion (USD 307.8 million) in June 2018, an increase of 14.3% year-on-year. Deposits (81.9% of total liabilities) remain the main source of funding for the sector. Capital and liquidity levels remain adequate, and capital and liquidity ratios have remained within the required prudential minimums of 15% and 30%, respectively. They reached 32.5% (32.1% for U-SACCOs) and 103.3%, respectively, in June 2018. After deteriorating in 2017, sector asset quality improved relatively in 2018. The total ratio of non-performing loans fell from 12.3% in June 2017 to 8% in June 2018. This is a more pronounced reduction in MFIs with limited liability (from 20.9% to 8.7%) than in U-SACCOs (from 13% to 12.4%). The decline in non-performing loans is due to the write-off of bad debts, especially in limited liability MFIs, and to the improvement of economic performance in the agricultural sector. Sector profitability remained positive in 2018. It had posted negative values in 2017 (-0.1% and -0.3%, respectively, for ROA and ROE), following the poor performance of the sector loan portfolio.
Nevertheless, the dynamism provided by U-SACCOs has not addressed the challenges of low portfolio quality, which remains one of the main challenges to be met. MFIs have limited capacity in risk management. Despite its recent improvement, the non-performing loan ratio remains above the maximum threshold of 5% generally accepted in microfinance. In addition, the financial products and services offered are not always suitable for various segments of the population, especially farmers, whose investments generally require relatively longer term financing, and young people. MFIs offer very few innovative products, a situation that puts them at a disadvantage in competition with other financial institutions. Their connection to electronic payment systems remains limited, which hinders their reach in rural areas, a situation aggravated by the still insufficient basic socioeconomic infrastructure. In December 2016, only one MFI offered electronic payments, such as mobile banking services and ATM cards. Although MFIs and SACCOs have taken initiatives to partner with banks and payment service providers to offer electronic payments, the limited technological infrastructure and organisational capacity of MFIs and SACCOs hamper their full participation in the payment system. To this end, government and development partners have launched computerisation projects for SACCOs via a shared platform.
The country has a strategy for the development of the national payment system over the 2018-2024 period, while the Central Bank continues to modernise the national payment system in terms of both wholesale and retail payments. The Rwanda Integrated Payment Processing System (RIPPS) has been updated by integrating the electronic signature and attuning SWIFT to ISO 20022 standards. Significant progress has been observed in the retail payment system, especially mobile financial services and Internet banking services. Over the last eight years, the value of electronic payments has grown from 0.3% of GDP in 2011 to 34.6% of GDP in 2019, due to the rapid adoption of new technologies and the ease of customer access to the payment system. The development of electronic payments is driven by a strong penetration of mobile telephony (about 90%). The number of subscribers to mobile financial services increased by 22% (from 9,079,983 in 2017 to 11,067,777 in 2018). The number of active subscribers grew by 24% over the same period, (from 3.7 million to 4.6 million). Mobile transactions increased by 19% in volume, from 251 million to 299.9 million, and by 31% in value, from FRW 1,385 billion to FRW 1,808 billion. The use of mobile phones in the provision of banking services has continued to gain prominence. About 10 banks and one microfinance institution offer financial services through mobile telephony. By December 2018, registered mobile banking users had increased by 59% to 1,845,584. In addition, mobile banking transactions increased by 4% in volume and 49% in value, or FRW 53 billion (USD 57 million). Online banking services have also been strengthened with the Integrated Financial Management Information System (IFMIS). Efforts have also been made in providing public services, through a platform called Rwanda Online, integrating B2G and P2G payments in the country. This platform is accessible to consumers via the Internet and accepts card and mobile payments.
One of the weaknesses of the sector remains the predominance of cash settlements in financial transactions. One of the objectives of the 2020 Master Plan, adopted in 2015, is the achievement of a cashless economy. Also, the regulatory framework for the payment system does not reflect the current realities of the financial market; the laws and regulations were mostly established in 2010. Lastly, interoperability levels remain limited for retail payment transactions.
Financing of SMEs
About 98% of Rwandan enterprises are SMEs, which contribute 41% of private sector jobs. The country has more than 186,000 active Micro, Small and Medium-sized Enterprises (MSME). The vast majority of MSMEs (92%) work in the trade and services sectors. According to the World Bank (2011), 39.3% of small businesses have access to bank financing compared to 69.7% for large companies. The majority of SMEs find it difficult to develop business plans to obtain loans from commercial banks and microfinance institutions. This situation is exacerbated by the weak capacity of promoters to collect and process market information, and the lack of technical and managerial skills. In addition, alternative financing offered by the stock market is marginal, since the latter is still in its infancy.
The Insurance Sector
The insurance sector is supervised and regulated by the Central Bank. It is made up of 14 insurance companies, including 12 private insurance companies (nine non-life insurers and three life insurers) and two public health insurance companies. The insurance sector also has 707 agents, 17 brokers and 19 adjusters. The sector is dominated by non-life insurance, which represents 82.8% of total gross premiums. Insurance sector assets reached FRW 423 billion (USD 460.6 million) in June 2018, an increase of 15% year-on-year. The increase is partly attributed to undistributed profits of public insurance. Sector assets consist mainly of investments in banks and government securities, which represent 47% and 15%, respectively, of total assets in June 2018. Investments in real assets and equities represented 10% and 11%, respectively, of total assets, levels consistent with the maximum prudential limits (30% respectively) set by the Central Bank on these asset classes. Higher premiums and investment income led to a marked improvement in sector profits, which reached RWF 17 billion (USD 18.5 million) in June 2018. Insurance sector liquidity remains comfortable: the liquidity ratio improved from 331% in June 2017 to 353% in June 2018, well above the minimum prudential requirement of 150%.
Low income and insurance product offer, due to a low level of public awareness, are the main obstacles to the development of the sector. Only 9% of adults subscribe to insurance products. The insurance penetration rate remains low, or 1.7% of GDP in 2018. In addition, proper risk pricing remains problematic due to claims fraud and the high cost of risk compensation from car insurance.
The Capital Market
The development of the capital market is guided by a ten-year master plan drawn up in 2016 and adopted by the Council of Ministers in June 2017. This master plan sets out the steps that government and its partners must take in order to be able to leverage capital market financing tools to realise the full potential of the economy and enable Rwanda to become a financial centre within the East African Community. This plan also provides for support measures for businesses, generally small and informal, to improve their financial statements and strengthen their governance, while playing an essential role in mobilising long-term funds that are beneficial to economic growth and employment.
In line with efforts to stimulate the development of the capital market, the Government of Rwanda, through the National Bank of Rwanda, in fiscal year 2017-2018, successfully issued four new bonds that benefited from an average subscription of 239% and, for the first time, issued a seven-year bond with a subscription of 311%. Outstanding bonds increased from RWF 160 billion at the end of June 2017 to RWF 200 billion in 2018. The annual ranking relating to the African Bond Market Development Index, published by the African Financial Markets Initiative (AFMI), ranks Rwanda 16th out of 54 countries, up two spots from 2016.
The stock market is still in its infancy and the most recent in East Africa. It only started its activities in 2011. The number of transactions fell by 12.98% from 917 in fiscal 2016/17 to 798 in fiscal 2017/18, while the volume of transactions decreased by 60.5%. This decrease is due mainly to the absence of a new listing in fiscal year 2017-2018. Initial public offerings (IPO) are still insufficient. However, two IPOs between 2014 and 2018 raised USD 50 million.
Social Security and Private Pension
The pension sector consists of the compulsory public pension scheme, managed by the Rwanda Social Security Board (RSSB), and 10 voluntary pension schemes, with two schemes still in their early stages of development, namely the Complementary Pension Scheme (COPS) and the Personal Pension Scheme (PPS). Total compulsory scheme assets stood at RWF 749.2 billion (USD 815 million) in June 2018, or an increase of 19.2% year-on-year. This growth arises mainly from the increase in contributions (14.8%) due, particularly, to the increase in the number of contributors, from 465,579 in June 2017 to 539,441 in June 2018. Stock market shares represent the largest part (33%) of pension fund assets, and the level of contributions to the RSSB is sufficiently high in relation to the benefits paid. At the end of June 2018, the benefits paid represented 23.7% of contributions. The number of beneficiaries is much lower than that of taxpayers; this situation reflects the demographic structure of the country, where only 3% of the total population has reached retirement age, while 58% of the population is of working age. The authorities, by Ordinance No. 069/01 of 13/04/2018, were able to upgrade the minimum benefit or indemnity payable, from RWF 5,200 (USD 5.7) to RWF 13,000 (USD 14.1) per month.
Social protection coverage remains rather low: 8% in 2018; a level reflecting the small proportion of the population employed in the formal sector. Government has introduced a Long-Term Saving Scheme (LTSS), known as "Ejo heza". It consists mainly in providing retirement benefits to the population not covered by the official and dominant system. It is funded by voluntary contributions and confers entitlement to a pension, the amount of which is based on the returns from collective investments. About 30,000 people have registered for this specific scheme, since its launch in December 2018.
 NISR: National accounts 2018
 MINECOFIN: Macro-framework public dataset
 Poverty headcount ratio at national poverty lines (% of population): source NISR &/or World Bank
 World Bank: Employment in agriculture (% of total employment)
 This regulation is effective since January 2018.
 The short-term liquidity ratio and the long-term structural liquidity ratio were introduced as part of the bank liquidity requirements.
 Commonly called “Umurenge SACCOs” (Umurenge Savings and Credit Co-operatives, U-SACCOs). This is a government initiative aimed at increasing financial inclusion by strengthening rural savings, through the establishment of at least one savings and credit cooperative at the level of each third-level administrative subdivision (called sector or Umurenge) equivalent to a municipality. Implemented in 2008, this initiative has enabled more than 90% of Rwandans to live near a U-SACCO within a radius of 5 km. The services offered by U-SACCOs are used by 33% of adults (22.3% in 2012). 27% of adults have a savings product in a CSEC (21% in 2012). 57% of adults are more confident in savings held by U-SACCOs against 27% for bank savings (Finscope 2016).
 VSLA: Village Savings and Loan Association
 SILC: Savings and Internal Lending Communities
 Credit system which enables you to stock up on merchandise in a shop and to repay later.