MICROCAPITAL STORY: Rwanda's Microfinance Industry Struggles with Low Portfolio Qualities

The growth of Rwanda’s microfinance industry is impeded by hundreds of thousands of borrowers who have failed to service their loans, contributing to high non-performing loan portfolio percentages in microfinance institutions (MFIs), it was reported in All Africa. MFI’s in Rwanda are currently dealing with poor loan repayment from their clients as a result of diverting loan funds to meet their personal needs instead of using them for the proposed investment. A number of Rwandan officials have commented on the situation, acknowledging that this is a serious problem in Rwanda. Gideon Kayinamura, a member of Rwandan Parliament advises that it is important for clients and lenders to come to a roundtable and fully understand the transactions before loans can be disbursed and Prosper Nyirumuringa, director of the Microfinance Development and Financing Fund of Rwanda Development Bank (BRD), advised MFI management to introduce officers who will be responsible for following up on the actual spending of loan money so that the expected investment returns are achieved. A variety of studies and surveys have identified key challenges and deficiencies in Rwanda’s microfinance industry that contribute to some of the low portfolio qualities of MFIs.

The Financial Sector Development Programme (FSDP) was launched in Rwanda in 2006 as a result of a World Bank/International Monetary Fund (IMF) Financial Sector Assessment Program (FSAP) which identified a number of deficiencies in the Rwandan financial sector. These challenges included wide interest rate spreads, poor savings rate, scarcity of long term capital, and a malfunctioning payment system. Since the launch of the FSDP microfinance has been promoted as a means through which Rwanda can become a middle income country by 2020, part of Rwanda’s Vision 2020 initiative. Additionally, a 2005 study highlighted a “bad credit culture” as one of the main challenges to Rwanda’s microfinance sector, stemming from the large amount of international aid and donations after the 1994 genocide which mixed loans and grants and distorted the market. The study stated that MFIs are still struggling to introduce a culture of repayment and that this is combined with not practicing “industry best practices” to cumulatively contribute to a low portfolio quality in Rwanda.

A survey entitled, FinScope Rwanda 2008 which was prepared for the Central Bank by the FinMark Trust, a South African non-profit organization, concluded that only 14 percent of the Rwandan population above 18 years of age use banks. Central Bank Governor, Francois Kanimba, commented on the survey results, saying “The assessment highlighted serious weaknesses including a narrow and shallow Rwandan financial sector system, an oligopolistic banking sector, a very low penetration of insurance services as well as undiversified financial products.”

There are currently only seven MFIs operating in Rwanda which report to the Mix Market, with a total of 44 thousand active borrowers, three of which have had a portfolio at risk greater than 30 days ratio of nine percent or over in the last three years. Additionally, the Food and Agriculture Organization’s Rural Finance Group reported in 2007 that there are 149 peoples’ banks, a handful of savings and credit cooperatives and MFIs and possibly thousands of small savings and credit associations’ (SCAs). Additionally, in 2005 121 MFIs had been approved registration for microfinance.