Rwanda: How growing competition is driving innovation in the banking industry

    By Dr Jaya Shukla –

    A strong banking sector is key to stable economic growth of any country.

    A competitive banking sector enhances liquidity of an economy, which promotes capital accumulation and economic growth through production and employment. Commercial banks facilitate investment through loans. The banking sector is contestable markets in developing countries with a lot of potential which needs to be explored.

    Rwanda’s economic growth has been impressive for most of the past decade averaging 8 per cent before easing to over 6 per cent in the recent years. The economy is projected to expand by about six per cent this year and 6.5 per cent next year. GDP growth was recorded at 4 per cent in the second quarter from 1.7 per cent in quarter one of 2017.

    Experts attribute Rwanda’s strong growth to robust monetary policy implemented by the National Bank of Rwanda (BNR). The central bank’s effective monetary policy has been commended by the International Monetary Fund (IMF). This policy has ensure that the local banking sector remains stabled and well capitalized, with capital adequacy ratio of 22.5 per cent above 15 per cent central bank regulatory requirement.

    As of November 2015, 17 banks were registered with the Rwandan National Bank (BNR) including 12 commercial banks, three micro-finance banks, one development bank, and one cooperative bank.

    The last few years have seen the entry of foreign banks into the Rwandan market, a development that has increased competition among commercial banks. As a result, commercial banks have embraced innovative approaches for service provision to remain competitive.

    Most local banks have a continental outlook and international correspondent banks in major cities of the world.

    There has been growth of Automatic Teller Machines (ATM) both in number and usage and commercial banks are authorised to provide loans in foreign currency. The government’s financial sector development plan has improved access to financial services and their quality in the banking sector.
    Many developments took place that promoted competitiveness of banking sector. In 2015, the Atlas Mara Group acquired majority stake in BPR and commenced the process to merge it with BRD Commercial. In addition, the Bank of Africa acquired Agaseke Bank, changing the former microfinance institution’s strategic orientation to become a commercial bank. This has increased competition in the financial sector and also increased access to finance.

    Bank performance

    BPR has been recognised as the best bank in Rwanda for the East African region at annual the Banker Africa 2017 awards. The bank has made considerable progress in innovation and technology to enhance efficiency and product development. Again, Bank of Kigali, the largest commercial bank in Rwanda in terms of assets, is the first to receive an international credit rating. It is planning to support development by investing in Rwandan SMEs and the mortgage market.

    Cogebanque is second largest bank in terms of assets. One of strategies for its performance is its innovative products through use of technology and creativity. I&M Bank is another commercial bank performing well in terms of its services and products.

    The bank focuses on delivering quality services through reliable and vigorous alternative channels such as enhanced mobile banking and electronic banking. It is working towards rolling out a financial inclusion model, which includes agency banking and other alternative banking channels that will require the bank to work more closely with local telecoms companies. Other commercial banks are also using innovation and quality service strategy to compete and acquire large customer base.

    Challenges ahead

    There is a directive on the implementation of Basel II and III norms by commercial banks. It requires its full implementation during 2017.

    Implementation of Basel norms will need banks to set aside high capital for their risky assets. Basel II/III implementation will ensure that the Banks have adequate capital (including capital conservation buffers) as indicated by the capital adequacy ratios of tier one capital minimum of 12.5 per cent and total capital of minimum of 15 per cent.

    Basel II/III implementation also aims at introducing a leverage ratio (core capital/deposit liabilities) of 8 per cent. Banks now have dual market challenge, on one hand they have to concentrate on competitiveness through innovation to get more customers on other hand they have to strengthen their supervisory capacity to deal with non-performing loans.

    The writer is a senior lecturer at Jomo Kenyatta University of Agriculture and Technology, Kigali Campus.

    Source: The New Times

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