The asset quality and profitability of the microfinance sector in Rwanda has deteriorated due to a surge in loan defaults.
The overall ratio of non-performing loans in microfinance to total loans was 12.3 per cent as of June 2017, almost double the 7.5 per cent recorded for the same period last year, according to the National Bank of Rwanda (BNR).
The central bank attributed this to haphazard procedures in credit approval processes, which led to a drastic loss of Rwf3.6 billion ($4.3 million) made by microfinance institutions as at June 2017.
One microfinance institution bore the brunt of the defaults due to “inadequate loan management.”
BNR and the association of microfinance institutions in Rwanda declined to provide details about the company.
“One MFI had a loan that went bad and because of that, it had to make significant provisions to service that loan, which affected not only its performance but the entire sector on a consolidated basis,” Peace Masozera Uwase, the director general of financial stability directorate at BNR, said.
The MFI is said to have lent Rwf2 billion ($2.4 million) to a local construction co-operative which did not pay up.
This mismanaged loan also affected the general growth of microfinance deposits, which had slumped to 5.9 per cent by June 2017, from 20.1 per cent registered in the same period last year.
The executive director of the Association of Microfinance Institutions of Rwanda, Mr Peter Rwema, said the entire microfinance sector is dealing with bad loans due to prolonged drought, which affected farmers, who make up majority of clients.
“Many microfinance institutions had to write off many loans because their clients simply could not pay. Farmers rarely provide collateral. They experienced prolonged drought and yet they were expected to repay loans from the sale of their harvest,” Mr Rwema said.
“Microfinance institutions have to restructure credit provision and make it more flexible for clients to repay, otherwise the situation (default) will remain the same.
“We also urge government to invest more in climate change management so that we can use such tools to analyse credit provision,” he added.
The central bank also reported a slowdown in lending to farmers due to increasing non-performing loans in the agriculture sector.
Rwanda has 154 microfinance institutions operating across the country, accounting for 6.3 per cent of the total assets in the financial assets portfolio.