11 things you need to start a loan business in Rwanda

Rwanda’s financial sector is thriving, opening exciting possibilities for those who want to start a loan business. Rwanda has made remarkable strides in getting people access to financial services.

An impressive 89% of adults in Rwanda can now use financial tools, making it one of the top performers in Africa.

This progress is driven by clever mobile money options, used by 38% of adults, and Umurenge SACCOs, which are local savings and loan groups used by 33% of the population.

Thanks to these innovations, the number of Rwandans who don’t have access to financial services has reduced significantly. But there’s still a chance to grow this even further, and a well-planned loan business can play a key role in filling the gaps and meeting the various financial needs of Rwandans.

Before you dive in, it’s important to understand the lay of the land. Here’s a helpful guide to get you started with the 11 essential things you need to launch a successful loan business in Rwanda.

You need to have a target market

Your target audience are the ones who put the “business” in loan business. Finding a target market is very crucial for your loan business because different borrower groups have different financial needs.

Small businesses might require working capital loans, while individuals might need personal loans for education or emergencies. Knowing your target market allows you to create loan products, interest rates, and repayment structures to their specific needs.

In addition, certain demographics may have a higher risk of defaulting on loans. Check out the categories of low-risk borrowers you as a lender should target. So focusing on a specific market is actually very strategic because then, you can assess risk factors more effectively and set appropriate lending terms.

Here are some factors to consider when defining your target market for your loan business in Rwanda:

• Loan size: Will you offer microloans, small business loans, or larger loans for mortgages or project financing?
• Borrower type: Will you target individuals, small businesses, or a specific industry (e.g., agriculture, education)?
• Location: Will you operate nationwide or focus on a specific region?
• Financial literacy: Will your loan products require a certain level of financial literacy from borrowers?

Decide on your business models

Having a target market is key, but how will you actually operate your loan business?

Here’s where your business model comes in. It defines how you’ll generate revenue and deliver loan products to your target audience. If you don’t know yet, here’s how to choose the right lending model.

Some common business models for loan businesses in Rwanda to consider include:

• Traditional microfinance model: This model focuses on providing small loans to individuals and groups, often in rural areas. Relies on group guarantees (where borrowers are responsible for each other’s repayments) to manage risk. Repayment is typically collected in frequent installments. It often works with Savings and Credit Cooperatives (SACCOs) for loan disbursement and collection.

• Mobile money lending: This model uses mobile money platforms for loan applications, approvals, and repayments, offers quick and convenient access to credit, particularly for financially excluded borrowers or even digitally savvy borrowers. It also requires clever ways to assess borrowers’ risk of not repaying the loan, since it can be harder to track people using mobile money/ USSD.

• Peer-to-peer (P2P) lending: This model connects lenders directly with borrowers through an online platform. You would facilitate the process and earn fees on successful loan transactions. P2P lending requires a strong regulatory framework to protect investors and prevent fraud.

• Payday loan model: This caters to employed individuals by offering short-term loans to be repaid from their upcoming salary.

You can find more models to consider in this article. The best model for you will depend on your target market, risk tolerance, and access to capital. So think hard on factors like: Startup costs, regulatory requirements, technology needs, and profitability.

Confirm what you makes you stand out in the market from others

Rwanda’s financial sector is full of innovation, so you’ll need a strong answer to why someone should choose your loan business over the competition.

To come up with a viable answer, you need to figure out these things first:

Are your loan products special in any way to your target market? Maybe niche loans for women-owned businesses or eco-friendly ventures.

Can you provide a more personalized and efficient loan application process compared to competitors?

Do you use technology to speed up the loan origination process, offer mobile loan applications, or support your borrowers in learning about their finances in any way?

Can you offer more attractive interest rates or lower fees than existing lenders? As at February, 2024, the National Bank of Rwanda base interest rate is 7.5% and the standard interest rate is 8% above bank rate.

Are you targeting an underserved niche market that other lenders overlook, like microloans for rural farmers or student loans?

Does making profit motivate you do you have a strong social impact mission?

Answer these questions and your unique selling points will begin to take shape. Meantime, here’s more ways to differentiate your loan products in a crowded market.

You need to decide what channels you’ll use to reach customers

Choosing the best channels depends on your target market’s demographics, location, and preferred communication methods.

They may be tech-savvy and active on social media. They may also prefer different ways to receive information such as via phone calls, SMS, email, or face-to-face meetings.

Here are some popular outreach channels to consider in Rwanda:

• Mobile money platforms: Since mobile money is widely used in Rwanda, integrating with these platforms could be a powerful way to reach borrowers and facilitate loan applications.

• Savings and Credit Cooperatives (SACCOs): Partnering with existing local savings and loan groups can provide access to a vast network of potential borrowers and use their established trust within communities.

• Field agents: For rural areas or populations with limited digital access, deploying field agents to explain loan products and answer questions can be highly effective.

You need capital

You would need capital to cover your startup costs and initial loan disbursements. If you’re in no way related to Dangote or Otedola, here are some ways to secure the funding you need for your loan business in Rwanda:

• Personal investment: If you have personal savings, you can use them to fund your startup costs.

• Loans from banks or microfinance institutions: Banks and microfinance institutions may offer loans specifically for businesses in the financial sector.

• Angel investors or venture capital: You could pitch your business plan to angel investors or venture capitalists seeking to invest in promising Rwandan startups.

• Grants: Government agencies or NGOs might offer grants to support financial inclusion initiatives, especially if your business targets underserved communities.

• Peer-to-peer (P2P) lending platforms: For P2P lending models, you could potentially raise capital through platforms that connect businesses with lenders.

How much you would need all depends on number 2, your business model.

You need a brand

To attract borrowers, you need to build trust, and to do that, you need a strong brand. Essentially, building a strong brand rests on 4 key pillars:

• A memorable brand name: Choose a name that is memorable, reflects your values, and is easy to pronounce and spell in any of the popularly spoken languages in Rwanda including Kinyarwanda, Swahili, French, or English.

• Logo: A professional and visually appealing logo for your target market to remember you by.

• Message: Clear and concise messaging that aligns with the needs and expectations of your target audience.

• Customer service: Never compromise on exceptional customer service to create a positive brand experience and build trust.

You may also want to consider adding Rwandan cultural elements into your branding to inspire a sense of connection with the local community.

You need a team

Not just any team. For your loan business in Rwanda, you would need individuals with expertise in finance, loan processing, risk assessment, and compliance for smooth operations.

Your team members should also have a deep understanding of the Rwandan financial landscape and your target market, committed to building positive relationships with your customers.

Some key roles you may consider hiring for, depending on the size of your business and complexity of your loan product, include loan officers, underwriters, support team, financial analysts, marketing specialists., etc.

You need solid tech for credit scoring and other tasks in the loan origination process

You need to protect your startup loan business at all costs, and nothing is worse than starting out with serial loan defaulters and fraudsters. This is why you need a loan management software that manages the entire credit lifecycle, from application processing and credit decisions to disbursements, repayments, and collections.

Using a loan management software will enable faster loan processing, reduce your exposure to risks, improve operational efficiency, and provide your customers with a faster and more convenient loan application experience.

Fortunately, Lendsqr is that loan management software you can use to scale your lending operations in Rwanda with more than half the cost of building your own lending technology.

Lendsqr is a full-service LaaS platform that incorporates most of the top-notch features you could ever want to have in a loan management software. Best of all, it’s free to start using it. One of such features is Adjutor, our API platform that focuses on offering credit decision and KYC validation APIs to aid lenders in making informed decisions.

Lendsqr also integrates with multiple credit bureaus including CRC credit bureau, CreditRegistry, TransUnion, etc, which is available to all lenders for use.

Featured read: How to set up CRC credit bureau for Lendsqr

You need access to payments providers for repayments and disbursement

You’re dealing with giving and collecting money, so having reliable payment partners matters a great deal. It offers borrowers convenient options for receiving loan funds and making repayments. Likewise, partnering with established payment providers can be more cost-effective than managing your own disbursement and collection systems. Not to mention, it allows faster loan disbursements and timely collection of repayments.

• Mobile money platforms: You can partner with mobile money providers like MTN Mobile Money or Airtel Money. These platforms are widely used in Rwanda and offer convenient mobile wallets for disbursements and repayments.

• Banks: Partner with Rwandan banks to offer bank account transfers for loan disbursements and allow for direct debits or standing orders for automated repayments.

• Payment gateways: Consider integrating with payment gateways such as Paystack, Flutterwave, etc, that can facilitate online loan applications and repayments through various methods like debit/credit cards or mobile wallets. Here’s how to use Paystack for loan repayments on Lendsqr.

Be sure to consider partners with broad reach and large user base, their transaction fees, integration capabilities, and security measures.

Featured read: Paystack vs. Flutterwave which is better for loan collection

You need to be a company to do this

In Rwanda, you cannot operate a loan business as an individual. You’ll need to register your business as a legal entity to operate formally and comply with regulations. The RDB website provides clear guidelines on company incorporation procedures. Here are some key aspects to consider:

Minimum share capital

The minimum share capital required varies depending on the category of Non-Deposit Taking Financial Institution (NDFI) you choose to operate under. The RDB categorizes NDFIs based on factors like the size of their operations, the types of financial services they offer, and the risk profile of their target audience.

• Category I NDFIs, which covers mortgage finance activities, refinancing services, and development finance institutions, require a minimum share capital of 100,000,000 Rwandan francs ($76,719.50 USD based on the exchange rate as of May 23, 2024).
• Category II NDFIs covers credit services only, finance lease, credit guarantee services, peer-to-peer lending, factoring business and any other financial services that may be determined by the Central Bank.. The minimum share capital requirement for Category II NDFIs is 50,000,000 RWF ( $38,359.75 USD).
• Category III NDFIs, which covers money lending, pawnshop, hire purchase or Buy Now Pay Later and any other financial services that may be determined by the Central Bank, require a minimum share capital of 30,000,000 RWF ($23,015.85 USD).
• Category IV covers:
  • Saving and Credit Association (Ibimina) that have mobilized at least Frw 500 million funds in circulation among group members.
  • Buy Now and Pay Later products that charge interests are accommodated.
  • Money lenders lending to only individuals not legal entities are accommodated with capital of Frw 30 million.
  • Peer to peer lending (crowdfunding).
  • Pawnshops, and
  • Debt councilors

Your company’s long-term goals and target market

A higher capital base allows you to offer a wider range of loan products and services, potentially attracting a larger client base. But, it also means increased operational costs. Carefully analyze your business plan and target market to choose the best category for your NDFI.

Finally, you must be licensed

The National Bank of Rwanda (BNR) acts as the gatekeeper for financial institutions. To operate as a lender, you’ll need to obtain a license from the BNR. This process involves submitting a comprehensive application package containing various documents as outlined by the BNR. We already outlined how you can obtain a lending license in Rwanda in this article here.

Now, you’re ready to start a loan business in Rwanda

Rwanda presents a unique and exciting opportunity for those looking to make their marke in its lending landscape. By following these 11 steps, you can turn your vision of a loan business into reality, and empower Rwandan individuals and businesses to achieve their goals.

Remember, this list is a starting point, so make sure you seek legal experts make sure your business complies with all the egulations and you’re set up for long term success. Meanwhile, if you’d like to know more about Lendsqr loan management system, simply reach out to us at [email protected].