2.1.8. Problems faced by
commercial banks in Rwanda
Rwandan Commercial banks face many constraints due to the
existence of many poor customers who are scattered. So there are problems of
savings mobilization. There are few creditworthy customers and lending is
limited by lack of collateral security by most people. Most of the customers
are illiterate other do not keep books of accounts and therefore it is
difficult to asses their creditworthiness.
Inflation discourages lending and leads to loss of real value
of money. Commercial banks are concentrated in urban areas and hence they
compete for business. They are also hindered by the shortage of communication
facilities, of trained manpower and funds to finance manpower development and
staff training. The rate of interest used to be fixed by the government and it
was sometimes high; this discourages people from borrowing money from banks.
Foreign commercial banks are sometimes faced with the problem of unfavorable
government policies e.g. taxation, nationalization (TAYEBWA B., 2007:220).
2.1.9. Financial
intermediation in rural areas in Rwanda
Commercial banking system in Rwanda is composed of the
following banks: BPR S.A, Rwanda Commercial Bank (BCR), FINA Bank, ECOBANK,
Compagnie Générale des Banques (COGEBANK), Housing Bank of
Rwanda, Kenya Commercial Bank (KCB, Urwego Opportunity bank (UOB), Access Bank
Rwanda and Bank of Kigali. Most of them serve a limited number of people
because they are located in cities especially in Kigali, except BPR S.A which
opens branches and sub-branches in rural areas and whose main goal is to offer
a full range of financial services in the urban and rural areas in a market
driven and financially sustainable way, based on cooperative characteristics.
Special attention is given to farmers, agribusiness enterprises, private
individuals and micro as well as small and medium enterprises.
The engagement of commercial banks in rural areas is very
little; this reflects, in part, the absence of
standard elements upon which lending decisions are made. Individuals,
enterprises and cooperatives lack formally registered assets which a bank can
accept as collateral. There is a lack of organization and capacity to develop
and define standard business plans and there are severe difficulties of
communication. In response to this environment for lending certain specialized
institutions have been created or strengthened to help channel financial
resources towards rural activities and the financing of SMEs. These
institutions include BRD, BPR S.A and its networks, the CDF and the
microfinance institutions (REPUBLIC OF RWANDA, 2005:47).
BRD is responsible for increasing the flow of funds to rural
areas. Given the reluctance of commercial banks to finance rural
activities and the lack of a specialized bank to finance agriculture, the
Government of Rwanda has revamped BRD to provide long-term financing of
productive investments that create employment and value added. BRD is mandated
to provide credits to agriculture, agro-industrial activities and long-term
credits to viable firms. BRD finances cooperatives and associations for loans
that are more than $10,000. The Government has recently injected BRD with RWF 3
billions to finance long-term development and address the lack of
infrastructure in the rural sector.
The approach of BRD to lending is not commensurate with
conditions in the rural area. BRD as well as commercial banks are cautious in
lending to the rural sector because during the period 1996-2000, most banks
issued loans without corresponding collaterals and against poorly evaluated
projects. This contributed to the high level of non-performing loans. As a
result of this experience, banks including BRD are tending to lend to borrowers
who can demonstrate creditworthiness according to standard banking measures and
to those who possess documented collateral. Experience elsewhere suggests that
approaches to lending have to be adjusted when dealing with small farmers in
rural areas who lack formally registered assets that can be used as collateral.
At present, bankers including staff from BRD have limited capacity to conduct
project appraisal and financial evaluation relevant to the context of poor
farmers in rural areas.
The Community Development Fund is playing an important role in
financing rural infrastructure and cooperatives. CDF is funded from the
government's annual budget (5 percent). This scheme is also supported by
donors. The main activity of CDF is to finance through grants local government
units on the basis of the presentation of project proposals. The projects are
of two categories: Public infrastructure projects: These include rural roads,
water networks, communal grain storage facilities, administration
infrastructure, health centers, and development of Marshlands (drainage) for
communal use; and projects submitted by local government units (Districts) but
utilized exclusively by local based cooperatives.
MFIs which work as commercial banks can play an important role
in providing financial products to the poor but cannot by themselves fill the
gap in financial services provision. Rwanda has recently seen a flowering of
decentralized financial institutions, which appear to have had some success in
fostering microenterprise development. A number of these institutions have
received assistance from donors in financing start-up costs. The main
advantages of the MFIs include that they accept certain risks associated with
informal activities in rural sectors that other financial institutions do not
contemplate, they offer services that are more appropriate to the poorest
members of society who do not have access to the formal financial system and
they provide assistance to newly established enterprises that have difficulty
to access credit from the formal financial sector.
The BPR S.A and its networks have had some success in
mobilizing rural savings but these funds are not all reinvested in rural
activities. BPR S.A has networks that operate as commercial banks across Rwanda
and finance rural activities. This network is still inadequate to meet the
financial needs of rural inhabitants and will continue to expand its
activities. BPR S.A accepts deposits and makes loans to members. One of the key
features of the BPR S.A is that they provide loans to cooperatives without
requiring any collateral, although collateral is required for lending to an
individual borrower. A loan recipient is required to fulfill the following 3
criteria: be a member for at least 3 months, present a bankable project and
show the capacity to pay back the loan.
BPR S.A lends some of its funds to the banking system at a
rate of 10-12 percent. Thus, BPR S.A is a net lender to the rest of the
financial sector, whilst at the same time the rural sector is still constrained
in access to finance. The low level of rural financing undertaken by UBPR is
more a reflection of the limited absorptive capacity of the real sector, due to
the lack of bankable projects, and the lack of organized cooperatives (REPUBLIC
OF RWANDA, 2005: 50).
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