The East African country is in a booming phase. Innovations in the financial sector have played a significant role in catapulting Rwanda’s economy. Economic growth has ballooned at an average of 7.2% per year.
Mobile banking, communication networks development and growth-oriented policies have seen the country’s financial sector fostering growth in the economy. Rwanda is one of the fastest-growing nations in Africa. Significant progress has been made, considering the political landscape the country was coming from, post the horrific 1994 genocide.
Progress in the financial sector
Growth of digital banking
Various initiatives have been put in place to promote a cashless financial system. Rwanda Banking Association introduced an online cheque clearing platform, thus further bolstering development towards a cashless economy. Most banks have embraced and adopted mobile and internet banking initiatives.
Digital banking has allowed for reduced operational costs for financial institutions as fewer resources are used. This has allowed for the extension of financial sector services to previously marginalized communities. A branchless banking system has also benefited customers with increased conveniences.
High scale financial inclusion
An efficient financial system facilitates the fluid flow of money from those in excess to those in deficit. It also fosters greater participation by the unbanked members of society. The surge in internet users has enabled the attainment of both these financial sector performance traits.
The growing participation of telecoms companies with offerings of advanced and fast 4G LTE 8 broadband and fibre optic networks in Rwanda has contributed to the wide-scale growth of the financial sector.
This has resulted in Rwanda reaching a 100% mobile coverage milestone. Mobile banking services, which banks in Rwanda have integrated into their operations, continue to drive progress towards financial inclusion.
Growth in financial assets
A significant increase in financial sector assets and liquidity was prompted by increased financial inclusion and digitization of the financial system. Year-on-year growth to June 2020 for liquid assets grew by 18% higher than 2019 figures for the banking sector.
A financial sector with highly liquid financial institutions is evidence of stability. In the event of systematic shocks, the sector will be better positioned to carry losses.
A stable financial sector also serves to attract foreign investments and as such Rwanda sits among the most investment-worthy countries on the continent.
Open market competition
Rwanda’s banking sector is dominated by three major banks: Bank of Kigali, Banque Populaire du Rwanda (BPR) and Development Bank of Rwanda (BRD). The three major banks that host 60% in market share were creating an unfair competition landscape with other small banks.
Customers were exposed to the unfair competitive environment which existed. Digitalization through the internet and mobile banking has allowed for an open market competition as customer reach is no longer confined to geographical presence.
High investment costs to set up and manage physical branches favoured big and established banks. The new banking approach has rewarded entities with efficient and reliable digital systems. Even small banking institutions have improved their market share at a lower cost.
The age of technology in Rwanda has necessitated new ways to compete that have greatly benefited customers as the innovation drive propelled economic growth and development.
The inevitable challenges of technology-based improvements bring certain pitfalls.
Security systems to curb cyber-security threats are still underdeveloped in Africa. With the growing trend in digitalization on the continent, the rate of cybercrime and corruption has surged. Financial institutions face the highest risk as financial activity from both the informal and formal sectors increase.
Losses of Rwf257 million (US$282,700) were incurred in the financial sector in Rwanda due to cybercrimes. The lag in adapting, to the high rate of technological penetration as well as low ICT budgets are some of the factors contributing to cyber vulnerability in Rwanda.
High government public debt
Increased fiscal policy commitments and debt servicing limit the government’s ability to invest in infrastructure and create fiscal space for emerging challenges. Positive gains have been realized by the growth of the fourth industrial revolution (digitalization). However, great challenges have emerged that have called for IT infrastructure to become a budget priority just like health and education.
This has strained fiscal space significantly. Rwanda surpassed its safe Debt-to-GDP ratio of 65% in 2020 amid increased health expenditure and low tax revenues brought about by COVID-19.
This brings into question the country’s ability to maintain IT growth and improvement in the economy.
Other factors complementing financial sector growth
Interest rates, inflation and money supply all play significant roles in the overall performance of the financial sector. An expansionary monetary policy promotes investments and business activity in the economy.
Rwanda is among countries with low lending interest rates in Africa, trailing close to the region’s best, South Africa. The economy managed to record growth rates during the Covid-19 pandemic regardless of the slowdown in production.
However, the slowdown led to lower growth than previously recorded and came about as a result of a weak currency exchange rate to the US dollar.
The export market was highly disrupted by the pandemic with the aviation industry having to shut down for the greater duration of the year. These macro-economic fundamentals are to a larger extent significant to financial sector performance than technological advancements, although the impact of the latter cannot be understated.
Industry-specific factors also have a role in the performance of the financial sector. Issues such as the surge in Non-Performing Loans (NPLs) and a poor capital adequacy banking structure are much destructive regardless of the technological strides made. A notable example is the 2003/04 Zimbabwean banking crisis.
The high growth trends brought by IT innovations pose great systemic risks to which banks have to be well prepared and capitalized. The banking sector in Rwanda has proven to be stable as it managed to surpass the regulatory capital adequacy ratio of 15%.
Technological advancements have been embraced at a fast pace in Africa. Massive positive outcomes are being realised and banking efficiency is significantly improving. The financial sector in Rwanda has benefited appreciably to such effect, with more financial inclusion and increased financial participation by the informal sector.
The positive outcomes complemented by the sublime macro and microeconomic policy initiatives have helped position Rwanda’s financial sector as a force to contend with on the continent.