Rwanda is mulling over the establishment of a credit guarantee fund to encourage commercial banks to increase lending to the mining sector.
Minister of State for Mining Evode Imena says the development of mining projects has been hampered by commercial banks’ reluctance to extend credit facilities to the sector, owing to its high inherent risk.
The envisaged guarantee fund will cushion banks against this risk, thus encourage funding to the sector.
“Growth of the mining sector is being held back by access to finance challenges. We believe a credit guarantee fund is likely to see banks increase lending to the sector,” says Imena.
He adds that the concept of a guarantee fund has already been developed and is being reviewed by the Ministry of Finance and Economic Planning.
The credit guarantee fund, which will be established with the help of the World Bank, will have an initial capital base of $40-million.
The fund’s objective is to stimulate lending to the mining sector by reassuring lenders that, in the event of default, the fund will provide compensation for part of the loss incurred.
The fund is deemed necessary, owing to the high rate of loan applications from mining project developers rejected by commercial banks. Mining is a capital-intensive sector and it can take many years for returns on investments to be recouped.
According to the National Bank of Rwanda’s 2015 Monetary Policy and Financial Stability Statement, commercial banks rejected 96% of loan applications received from the mining sector that year, up from 68% in 2014. Notably, one bank extended over 70% of all loans to the mining sector.
Besides the sector’s inherent risk, commercial banks are also reluctant to extend loans to mine project developers, owing to a lack of high- quality feasibility studies that give a clear picture of the quality of mineral projects to inform the profitability of a mining venture.