Rwanda’s banking sector is bracing for a major disruption following a juicy deal between two financial giants; a Kenyan and a top British American investment banker.
Experts in the sector are anxious about this deal and argue that if it goes through as highly anticipated, then it will most likely shake the core of Rwanda’s commercial banking sector.
Former CEO of Barclays Plc, Bob Diamond, and his partner, Ashish Thakar, both partners in a finance vehicle known as Atlas Mara Group created in 2013, are in the process of sealing a high stakes deal with Kenyan top banker Dr. James Mwangi, CEO of Equity Group Holdings Ltd.
Among those waiting for conclusion of this deal includes Dr. Diane Karusisi, CEO of BK Group- Rwanda’s number one commercial banker for last 3 years, a former senior technocrat of the government of Rwanda for over 7 years and former fixed income trader at Credit Suisse.
Others on the lookout are; Maurice Toroitich, first CEO of KCB Rwanda and currently CEO for last 2 years at BPR, Hannington Namara, CEO Equity Bank Rwanda, a former top executive at BCR now I&M Bank Rwanda for over 8 years.
Another banker upbeat about this new deal is Robin Bairstow, a former top executive of Standard Chartered Bank for over 15 years whose executive corner as CEO I&M Bank Rwanda is at I&M Bank House.
Of course, the governor of Central Bank of Rwanda,.John Rwangombwa, is naturally a person of interest in this deal.
In our analysis, we will attempt to show how with signing of the deal the long arm of Dr. James Mwangi, with capacity, political connection, financial muscle and rich experience, is very keen on orchestrating a radical change in Rwandan banking sector starting from the year 2020.
Dr. Mwangi will very likely disrupt the status quo before end of year 2020 at the back of Bob Diamond’s exit.
One of the very likely effects of the deal is that a merged BPR and Equity Bank Rwanda entity will most likely give BK a run for its money in the market.
As for I&M Bank Rwanda, it is an almost foregone conclusion that it will be relegated to third position from second position.
It all started with a story early last year that Atlas Mara Group was drastically scaling down their businesses in Africa and Rwanda included.
US$105million Mergers and Acquisition Deal
In Rwanda, Atlas Mara Group are majority owners of BPR- Rwanda’s biggest bank in terms of brand legacy and national footprint. Whoever controls BPR has capacity of radically changing the face of banking in Rwanda.
However, Atlas Mara’s 5-year stint in Rwanda did not shake the market properly. And so, Atlas Mara’s exit from Rwanda and other markets is meant to be fairly straight forward; which is to sell its stakes to Kenya’s top home grown banker emerging as undisputed shaker of commercial banking in East and Central Africa.
Those familiar with the deal say it is designed as a complex swap estimated at slightly more than US$105 million.
In April 2019, it was agreed that Equity Group Holdings Ltd, was meant to takeover operations in 4 countries of stakes held by Atlas Mara Group.
At the time, Atlas Mara was meant to bow out of the 4 countries including Rwanda. In exchange, Atlas Mara was entitled to take up a 6.3% in Equity Group Holdings Ltd.
“While there is no assurance that the potential transaction will be concluded on the terms previously announced, the parties continue to be engaged in discussions, with the objective to reach mutually-acceptable terms as soon as practicable in early 2020,” Atlas Mara said in a statement early this year.
Experts are saying that Bob’s exit from various African markets Rwanda included may have misjudged the caliber of competition generally as well as the related intricacies and nuances of these markets.
That said, the deal is meant to scale down Atlas Mara operations in Nigeria, Botswana and Zimbabwe after exiting in Rwanda, Tanzania, Zambia and Mozambique.
Effects of Consolidated Equity Bank Rwanda
Our focus is top 4 commercial banks that according BNR holds more than 55% of entire industry assets.
Rwanda has only one large commercial bank- the BK Group. The rest of 8 licensed banks can be said to be mid-sized entities earning between US$0.5 million annually to US$6.0 million annually.
The mid-sized entities are; I&M Bank Rwanda second biggest bank, BPR the biggest by national foot print and supposedly 7th in the roll call and Equity Bank Rwanda 4th on the roll call.
BPR a mid-sized bank created in 1975 has assets worth over US$320 million with shareholder funds of more than US$50 million earning over US$1 million in revenues annually.
BPR will therefore be swallowed completely by Equity Bank Rwanda, a smaller mid-sized bank created in 2011 with assets in excess of US$133 million earning revenues of over US$400,000 annually.
Of course, that kind of maneuver, is only possible due to the muscled nature of its parent firm Equity Group Holdings Ltd founded in 1984- Kenya’s best bank with over 12 million customers with an asset base of more than US$5 billion earning revenues of over US$200 million annually employing over 9,000 staff and operating across East and Central Africa.
The newly consolidated Equity Bank Rwanda is meant to have assets in excess of US$450 million with earnings of US$1.5 million annually.
Therefore, a consolidated BPR-Equity Bank entity cannot in any way be called a large commercial bank in Rwanda but a hybrid between a mid-sized and large bank.
BPR brand is meant to disappear from the market in the same way BCR disappeared from the market in 2012 when I&M Bank from Kenya came into it.
The new change will give Equity Bank Rwanda the biggest footprint in the local commercial banking sector. BPR boasts of 200 branch-networks with over 100 ATMs and employing over 1,000 staff.
Another fact is that Equity Bank Rwanda after its consolidation is meant to be right behind BK the undisputed market leader in terms of asset base.
BK with an asset base of US$1 billion with annual earnings of US$30 million is listed at the Rwanda Stock Exchange (RSE). Its loan book stands at US$640 million with client deposits of US$600 million.
It has presence in the market now standing at more than 79 branches,100 ATMs more than 1,400 agents, six mobile vans and over 1,200 staff.
I&M Bank Rwanda also listed at RSE now taking up the second position previously known as BCR currently has an asset base of US$233 million earning over US$6 million annually in revenues with shareholder equity of US$30 million along with 20 branch network employing over 300 staff.
By sheer implication of the deal, I&M Bank Rwanda is meant to drop to third position in the market.
But this is a very debatable observation since I&M Bank Rwanda earns more than US$6 million annually while it is highly doubtful if the consolidated Equity Bank Rwanda after its merger with BPR will out compete I&M Bank Rwanda in terms of annual earnings in the short run.
Faustin Byishimo I&M Bank Rwanda executive director , confirmed to Taarifa this sort of scenario early this year; “The new round of competition at least in short term will be fought initially between banks in the league below US$500 million asset base not below not above this figure”.
Central Bank Adjusting Rwanda’s banking sector
Reports by BNR point to the exact nature of commercial banking in Rwanda. The sector is estimated to contribute less than 5% to Rwanda’s GDP.
Secondly the combined return on equity (ROE) and return on assets(ROA) two key measures of efficiency in banking for all Rwandan commercial banks is one of the lowest in the region estimated at less than 10% and less than 5% respectively, further pointing to the relatively conservative nature of the industry.
Banks in the region are contributing double digits to their economies. This is one of major reasons that Equity Bank Rwanda is keen on acquiring BPR to stir up things as timing is right so that the sector can do more.
Given their limited financial capacities something that BNR is very keen to correct, licensed banks in Rwanda are only able to offer basic banking products.
BNR is currently carrying our reforms in the commercial banking sector forcing the banks to significantly increase their capitalization. Once this is done then the sector will offer more services and more innovation will check in.
Technically known as Basel III capital requirements licensed commercial banks are required in the next 5 years to increase core capital to US$21 million from US$5 million.
Due to their limited capabilities many investors are not able to get assistance from local banks in a bid to exploit the very many investment opportunities in the economy.
Banks are well known to shy away from partaking in lucrative opportunities that cut across in Rwanda’s economy especially big ticket deals in infrastructure, affordable housing, natural resource exploitation, construction, energy among many others.
Major reason local banks cannot support Rwanda’s economy more robustly is lack of top notch professionals especially within middle level categories.
Many local banks lack capable officers who can originate, appraise and close many of the big deals that Rwanda is vigorously pursuing, according to investors.
The only option left for these type of investors is to source fresh cash from abroad.
In terms of retail and personal banking the situation is the same. Finscope survey states that the sector remains largely untapped. Out of approx. 4 million adult Rwandans less than 1.5 million use banking services with less than 0.5 million exclusively relying on commercial banking.
A practical indicator of the conservative nature of banking in Rwanda in the wake of the deal between Dr James Mwangi and Bob Diamond is that recently, I&M Bank Rwanda announced the re-launch of Éclair loan product.
The bank is now offering an unsecured loan 17 times the value of someone’s salary. This was positioned as something new and innovative. Of course it is in the local context due to the fact that accessing personal loans in Rwanda is a very rigorous and tedious process.
Banks require applicants to fill in more than 10 sets of documents in this era of paperless banking while approval takes more than 100 hours in this era of instant loans that takes less than 5 hours.
On Wednesday, I&M also launched a new customer segment called Ganza. This is a range of products and services that have been designed for the Micro SMEs.
“This campaign will improve our MSME offering through insuring increased partnerships and tailor made products that suit the segment,” Robin said during the launch.
Delightful customer experience is something that local banks are yet to catch up with; something informing the new products from I&M Bank Rwanda.
However, in modern banking, elsewhere, this is not something that can be termed as ground shaking deal, especially when you look at the numbers such a product is meant to address.
Rwanda in its current economic state with over 3.5 million people in its active labour force, has more than 600,000 being categorized as un-employed and over 1.7 million being categorized as being engaged in subsistence production according to official statistics by Rwanda labour force survey.
This leaves an extremely tiny component in the formal salaried category. So, in a nutshell, the new product will at most, barely scratch the surface of breaking new grounds in Rwanda’s commercial banking sector.
A more suitable banking product with potential of making more economic sense in terms of impact in the local economy lies within a youth focused niched SME product.
Rwandan youth take up bulk of more than 3.5 million active labour force and who are well known to be bearing the brunt of unemployment in the country.
But the vast majority of licensed commercial banks are very reluctant to critically look at this segment.
Rwandan youth are more attuned to new ways of appraisal for small amounts of digital loans.
New appraisal systems through algorithms being employed by digital finance firms in the region can now competently appraise an applicant’s risk profile using new tools like social media presence and uptake of data and voice usage within telecoms.
This is a departure from use of credit reference bureau widely embraced by Rwanda’s top bankers.
“We as a bank do not have any working solution meant to address that sector. It is a very risky sector according to our experience,” says Byishimo.
Previous efforts by local bankers prodded by the government of Rwanda saw the sector lose billions of francs through ill-fated Hanga Umurimo campaign in 2012.
For bankers, they would rather use their deposits to carry out safe banking.
The Banks’ conservative nature is to say that, “It is not our money. We have the duty to protect depositor’s money”.
Of course they are very right. Executives need to play it safe and protect their jobs and the name of the sector.
For bankers, 2020 is a year to watch. It either will be a year of disruption or a year to to accept defeat and be engulfed and chase own tail.