The National Bank of Rwanda (BNR) says four banks dominate the banking sector despite the fact that there are eight commercial banks and one microfinance bank in the country.
Operations of those four banks represent 69.1% of the total deposits of the banking industry and 46.7% of loans.
"This may reduce the likelihood of banking sector problems, but it can also limit the possibility of resolving any possible systemic problem in case it arises," warns the regulator.
The Bank says that aggregate credit is still concentrated in mortgage and trading where restaurants and hotels get a lion's share.
The two sectors account for an average of 60.4% of the total loans to private sector during the period 2007?2010 and their shares are 29.3% and 31.1% respectively during the same period.
"The large concentration of aggregate credit in a specific economic sector of activities makes banks vulnerable to adverse developments in that sector", adds the National Bank.
This happens on the back of high non-performing loans (NPLs) in the banking sector because of high loan default practices in the country.
BNR says that net NPLs ratio without taking into account interest rates in suspense slightly decreased to 9.7% in 2010 from 11.4% in 2009.
The Deputy Governor of the Central Bank Mr. Claver Gatete says high concentration of loans in few sectors limit lending to the crucial sectors like agriculture and SMEs.
He says possible ways to achieve reduce dominance of few players is to increase competition by licensing more banks,
and upgrading large microfinance institutions into fully-fledged banking institutions.
The bank is also
consulting with the government to limit lending to mortgage to a maximum of 30% on the government's deposit facility put in place to entice commercial banks to lend to the private sector.
The facility has been mainly used to fund mortgages and equipments, the bank said.
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