News Column

Microfinance Sector Soldiers On Despite Burden of Bad Loans

August 26, 2014

Peterson Tumwebaze

The microfinance sector is a key player in efforts aimed at ensuring all citizens access financial services. The sector is made up of hundreds of micro, small and medium firms, including co-operative societies that serve the grassroots.

However, things seem not to be working according to expectations with the microfinance industry suffering under the weight of non-performing loans, according to the central bank's monetary policy and financial stability statement for the year ended June 30.

The sector's bad loans were up by 7.6 per cent during the first half of the year, from 6.8 per cent at the end of December, 2013.

Central bank governor John Rwangombwa attributed the increase in loan default rate to poor performance of the sector's loan portfolio reported by some big microfinance institutions (MFIs).

This comes at a time when government is moving to strengthen the sector's capacity to make sure it achieves its 80 per cent financial inclusion target by 2017.

The declining performance also follows recent complaints by sector top players about red tape in loan recovery, saying it does not only undermine the growth of the industry, but also affects efforts towards financial inclusion.

Some of the top sector leaders indicated that the existing laws make loans expensive, resulting into a big default burden.

"It's an issue that keeps coming up every time we meet with members... they (members) want the process to be centralised," Jean Damascene Hakuzimana, the chief advocacy and communications officer at the Association of Microfinance Institutions in Rwanda (AMIR), said recently.

The microfinance industry is also currently grappling with poor managerial skills and limited financial capacity to meet its obligations, including extending credit to the rural poor.

Effect of bad loans on sector:

Sector experts say there is an urgent need to address challenges facing MFIs, especially by empowering the sector to enhance its capacity and performance.

Annoncee Kuradusenge, the chairperson of Rwanda Institute of Cooperatives Entrepreneurship and Microfinance steering committee, said supporting the sector to become more competitive should be a key priority among stakeholders.

"Though this is not something that players should worry about, there is an urgent need to address the challenge of skills gap so that the sector can serve better and become more competitive," Kuradusenge noted in an interview with Business Times.

Government recently launched the Rwanda Institute of Cooperatives Entrepreneurship and Microfinance to enhance the microfinance sector's capacity to handle financial services and promote efficiency and financial discipline.

"With such an institution in place, the sector will be become more efficient and competitive, as well as develop its safeguards to address challenges like bad loans," Kuradusenge noted.

Peter Rwema, the director of programmes at the Association of Microfinance Institutions in Rwanda, is convinced that the sector has the ability to shrug off the huge burden weighing it down.

"If there is any industry playing a critical role in the poverty alleviation campaign, as well as promoting government's programme of financial inclusion, it is the microfinance sector.

"We are working round the clock to ensure that this objective is achieved despite the challenges," Rwema noted.

Industry initiatives:

The sector is currently rolling out a new computer software (performance monitoring software application) to boost transparency and efficiency within microfinance institutions.

Government recently signed with the World Bank Group a cash deal to strengthen efforts towards financial inclusion. In the same spirit, the government and Umurenge Saccos signed a Rwf223 million deal to provide SMEs short-term loans to support youth start or expand their businesses.

Such initiatives have raised hopes that the sector could put up a stronger performance and avail more credit to small-and-medium enterprises.

The sector's total assets were up by 14.5 per cent between January and June 2014, increasing from Rwf128.7 billion to Rwf147.4 billion. This rise was mainly driven by the liquid assets and gross loans, which increased from Rwf42.1 billion to Rwf53.4 billion, and from Rwf73.5 billion to Rwf81.2 billion, respectively.

Overall, microfinance sector registered an outstanding loan book of Rwf81.2 billion with restaurants and hostels representing 35.8 per cent, followed by public works 31.2 per cent, and agriculture 12.6 per cent

However, lack of proper management tools has seen about 75 per cent of MFIs operate using manual management systems to meet their daily demands thereby affecting the sector's loan portfolio quality, according to sector experts. The microfinance sector is comprised of 493 institutions, including 13 limited companies and 480 Saccos, of which 416 are Umurenge Saccos.

The sector plays a critical role in fostering economic development by offering financial services, particularly small loans to economic agents with limited access to commercial banks services.

For more stories on investments and markets, please see HispanicBusiness' Finance Channel

Source: AllAfrica

Story Tools Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters