The effects of credit policy on bank performance: Evidence from selected Rwandan Commercial banks

Abstract

The post Genocide Rwanda’s financial sector has changed drastically, and banks’ soundness and performance has considerably improved since 2005. Further liberalization of financial sector has facilitated development of a capital market and non-banking financial institutions with entry of new private and foreign banks. Yet, the collective performance of the banking sector in helping the country to achieve its economic growth objectives remains an unexamined aspect. The aim of this paper is to investigate the effects of credit policy on bank performance using data on selected Commercial Banks. Using a triangulation of methods such as quantitative data collection, questionnaire, and review of the existing literature, the paper evaluates the banking sector performance: its deepening over time, profitability, and efficiency in the light of post-liberalisation policies. The results obtained indicate that the Rwanda’s commercial banks are getting vibrant. They tend to increase their accounts, to attract more customers and ameliorate their financial indices, thereby maximizing their profits. However, inadequate competition in the banking system has led to high spreads. Banks have unusually high and increasing average interest rate spreads and interest rate margins showing both highly poor competition and inefficiency. Bad debts still exist though declining and therefore banks should continue to improve their lending policies. The findings imply that Rwanda can accelerate its economic growth by improving its financial systems and vice versa.