Central Bank Hikes Required Capital for Financial Institutions

John Rwangombwa, Governor of Central Bank(Middle) explains new changes

Effective next year, all commercial banks will have to have a minimum required paid up capital of Rwf20 billion (from Rwf5 billion).

In a new monetary policy regulation announced by Central bank on Friday, December 21, the needed paid up capital for development banks was raised to Rwf50 billion (from Rwf3 billion).

For microfinance institutions, the rate remained Rwf1.5 billion.

Meanwhile, General Insurance companies will be required to have Rwf3 billion and life insurance, Rwf2 billion.

The revised regulations also established new categories of banks- which are Cooperative Banks and Mortgage banks.

Paid up capital for Cooperative Banks and Mortgage banks was set at Rwf10 billion.

Going forward, financial institutions were given a five year transition period to build up the capital with a target of Rwf15 billion in three years and the full Rwf20 billion in five years.

The new changes also came with introduction of new categories of bank and insurance operations, different from the 2008 regulations.

Central Bank said the new monetary policy framework will focus on performance of bank interest rates rather than money in circulation and inflation rates in monitoring financial stability.

With the low saving culture in Rwanda, the changes are expected to improve the level of citizen’s savings and investments on grounds of anticipated interests to be earned from putting the money in banks and investing in business activities.

The Integrated Household Living Conditions Surveys (EICV) shows that percentage of persons aged 18 years and above with a savings account has slightly decreased from 30.0% to 29.7 % in EICV4 and EICV5 respectively.

To close this gap, Rwanda recently launched a new savings scheme ‘Ejo Heza’ that will enable low income earning Rwandans to access easy mortgage loans from just half of their long term savings.

In the meantime, Central Bank says that the shift in its monetary systems was informed by stability in Monetary Policy and Financial Stability (MPFS) and growth of the financial sector over the last decade, which has witnessed the country’s repo rate staying at 5.5% and a 6.1 % inflation average since 1997.

BNR Governor John Rwangombwa told a press briefing that the new measurements based on interest rates will be able to allow other financial institutions to control flow of money in public instead of BNR doing it.

Rwangombwa said that the link between amount of money in circulation (monetary aggregates) and sustained increase in the general price level of goods and services (inflation) has weakened thus informing the current financial trends to be adjusted.

“We are shifting because this is the current trend in the financial sector. When you look at the increase in financial actors since capital markets were introduced, we see more investment in non-bank and individuals, making decisions using on interest rates,” he said.

Changes were announced at the Monetary Policy and financial stability statement publication

Having this in mind, Rwangombwa said, the country has in the last five years developed a money market that informs any decision of the bank in influencing interest rates.

New Licensing Procedures

“With this, the board that sat yesterday took a decision to move into a new monetary policy that is forward looking, using interest rates as an operating target,” told journalists.

The shift means that the bank will not only focus on broad money in circulation and inflation rates as it has been the case, but the performance and financing of loans that will be accessed by common citizens.

Deputy Governor, Monique Nsanzabaganwa said that the intention of the shift in financial systems is to control the flow of money and the pressure of inflation on the economy.

“This new system doesn’t differ in earlier objective, but what we are doing now is a more transparent, more readable manner from the market, than what we used to do. We are now building a shift from a market depending on repo rate, which was done for years,” Nsanzabaganwa said.

Meanwhile, General insurers have three years and life insurers two years to meet the required paid up capital, according to a BNR statement.

“The transition period will start after the publication of the official gazette next year. Most of the 11 banks have the capacity to raise the funds except four banks which need to catch up to the buffer required,” Rwangombwa said.

BNR also announced changes in the name of the country’s repo rate to central bank rate as a way of clearing misconception and the mindset on how its lending policy is done.




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