## _cr11244

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### Executive Summary — Macroeconomic background
- Growth has averaged about 8 percent a year.
- 2008: real GDP growth rate 11 percent and inflation rate 22 percent.
- Fiscal stimulus of 2 percent of GDP in FY 2009/10 complemented monetary easing.
- 2010: recovery with inflation period average 2.3 percent and almost zero end-of-period inflation rates.
- External current account deficit (excluding grants) narrowed to 17 percent of GDP in 2010 from 18.6 percent in 2009.
- International reserves remain at comfortable levels.
- Major identified macroeconomic risks include shocks to agriculture and housing.
- Poverty (2006): 57 percent of the population lives below the poverty line.
- August 2010: Fitch upgraded Rwanda’s sovereign rating to ‘B’.

### Executive Summary — Financial sector reform and institutional capacity
- Since the 2005 FSAP, significant progress under the Financial Sector Development Plan (FSDP) in restructuring and modernizing the financial sector and legislative/regulatory framework.
- National Bank of Rwanda (BNR):
  - Sole regulator/supervisor for the entire financial sector except securities markets.
  - Granted legal independence—some aspects could be reinforced.
  - Improved supervisory practice and enforcement; capacity constraints remain.
- Government and BNR modernized banking, insurance, pensions, system infrastructure (monetary operations, payments systems, land and mortgage registration, insolvency and creditor rights), and systemic risk monitoring frameworks.
- Continued follow-up required to move to the next generation of reforms.

### Banking system soundness and structure (transition period)
- Restructuring and merger/acquisition activity in 2007–2008.
- System characteristics:
  - Highly concentrated but competitive in key corporate markets.
  - Eight commercial banks and four specialized financial institutions (post-2005 FSAP to 2010).
  - Foreign share of assets in 2010: 49 percent.
  - Government stake: 30 percent (highest in the EAC).
  - Five of eight banks majority foreign-owned; two with minority foreign ownership.
- Asset and credit metrics:
  - Banking assets doubled to RF 1.1 billion between 2006 and 2010.
  - NPLs declined from 26 to about 12.4 percent between 2006 and 2010.
  - Rwanda accounts for 3.3 percent of EAC bank assets.
  - Credit to GDP ratio: about 12 percent.
  - Return on assets: 0.7 percent in 2009; improved to 1.6 percent in first three quarters of 2010.
- Market concentration and competition:
  - Three largest banks account for over 60 percent of assets, loans, and deposits.
  - Loans and deposits concentrated in a few corporate/institutional clients; corporate lending concentrated in construction and mortgage sectors.
  - Most banking activity concentrated in Kigali.
  - Retail market mainly served by Banque Populaire de Rwanda (BPR); competition prompting branch expansion.
- Innovation and inclusion:
  - Agency and mobile banking emerging to increase financial inclusion and reduce retail deposit mobilization costs.
  - BNR role: set regulatory environment for mobile banking, network operators, and payments.

### Stress testing — capital adequacy and credit risk (coverage and key outcomes)
- Coverage: eight commercial banks using year-end 2008 and 2009, and end-September 2010 data.
- Capital measures used:
  - Core capitalization = Tier I / Net Assets.
  - Regulatory capitalization (CAR) = (Tier I + Tier II) / Risk-weighted Assets.
- Adjustments before testing:
  - Correcting one bank’s under-provisioning: core capitalization drops from 12.8 percent to 12.4 percent; regulatory capitalization drops from 20.3 percent to 19.7 percent.
  - Imposing a 1 percent general provision and a 5 percent watch provision reduces core capitalization to 11.6 percent and regulatory capitalization to 18.5 percent.
- Collateral shock (all collateral against classified loans worthless):
  - Core capitalization would decline to 8.3 percent.
  - Regulatory capitalization would decline to 13.3 percent.
  - Two banks would fall below 6 percent core capitalization; one of those below 3 percent.
- Sectoral shocks:
  - Housing shock (30 percent of presently good housing loans become bad):
    - Industry core capitalization reduced to 6.3 percent.
    - Regulatory capitalization reduced to 10.5 percent (still above required 10 percent).
    - Two banks’ core capitalization would fall to less than adequately capitalized.
  - Agriculture shock: ad hoc tests found little consequence for banks.
- Concentration risk:
  - A large borrower default: core capitalization of three banks would be between 6 and 10 percent.
- Resilience thresholds:
  - NPLs would have to increase by 120 percent before any bank would reach core capital insolvency.
  - Alternatively, 23 percent of currently normal and watch loans would have to become classified before any bank would reach core capital insolvency.
- Methodology note: breaking-point approach used to find level at which the first bank fails.

### Stress testing — liquidity and market risk
- Liquidity:
  - Banks are more than reasonably liquid overall; a few vulnerable to extreme deposit drops.
  - Assumed scenario: 30 percent drop in deposits at all banks (Q2 2008 experienced 33 percent).
  - Using simple liquid asset-to-total asset ratio: only one bank’s liquidity ratio drops below 20 percent.
  - Using BNR’s conservative definition (netting due to/due from banks): one bank exhausts liquidity and two others fall below 20 percent.
- Market risk:
  - Maturity mismatch: 82.6 percent of short-term liabilities fund assets with maturities greater than one year.
  - Fixed-rate loans include clauses allowing banks to change rates at their discretion; passing higher rates to customers increases credit risk.
  - FX exposure: regulatory NOP limit not more than 20 percent of capital; actual FX position to capital was 5.7 percent as of September 30, 2010.
  - FX stress: increase to RF 700 per US$ 1 (15 percent depreciation) would reduce core capitalization by 1 percent.

### Supervision, regulation, and capacity — findings and recommended enhancements
- Legal framework:
  - 2007 BNR Law and 2008 Law on Organization of Banking (LOB) strengthened BNR independence and powers.
  - Strengthened regulations on capital adequacy, liquidity, credit concentrations, corporate governance, and insider lending.
  - Remaining regulations to finalize (credit classification/provisioning, placements with banks, FX exposure limits).
- BNR staffing and capacity:
  - Turnover of qualified staff in 2008–2009; improvements underway.
  - BNR recruiting five additional banking supervision staff by end-June 2011; new compensation scheme; intensified examiner training.
  - Financial stability analysis unit established late 2010; introduction of spreadsheet-based off-site surveillance and individual loan reporting.
- Recommended regulatory enhancements:
  - Introduce a leverage ratio comparing core capital to net assets.
  - Consider requirements for general provisions for current exposures and specific provisions for watch category exposures.
  - Increase frequency of on-site examinations; largest banks on a 12-month cycle.
  - Consider using one supervisory approach (CAMELS or risk-based) sequentially for implementation efficiency.
- AML/CFT:
  - AML/CFT Law enacted in 2008 establishing FIU; FIU start-up remains to be implemented and integrated into supervision.

### Cross-border supervision, crisis management, resolution, and DGF
- Cross-border cooperation:
  - Rwanda party to multilateral MoU among EAC supervisory authorities (2008).
  - BNR carried out joint on-site inspection with Kenyan authorities; intends MoUs with home supervisors of foreign banks in Rwanda.
  - BNR should verify home supervisors’ consolidated supervision practices.
- Crisis management:
  - No formal crisis management framework; BNR has enforcement/resolution powers and has provided ad-hoc liquidity/solvency support.
  - Recommendation: formalize contingency planning framework and MoUs among local authorities covering transparent criteria for government financial support and bank resolution.
  - BNR urged to conclude MoUs with non-EAC supervisory authorities whose banks operate in Rwanda for crisis cooperation.
- Deposit Guarantee Fund (DGF):
  - Authorities intend to prepare separate DGF legislation as mandated by LOB.
  - DGF design should ensure effective bank resolution and limit coverage to household deposits.
  - Not advisable to extend DGF coverage to depositors in MFIs and SACCOs given current supervisory capacity.

### Payment systems, monetary policy, and interbank market
- Monetary policy:
  - BNR continues to use reserve money targeting.
  - Interbank transactions have increased but market remains shallow.
  - Automating payment systems should facilitate interbank transactions.
  - Greater issuance of government securities, consistent with fiscal sustainability, would support capital market development and yield-curve building.
- Payment systems findings and recommendations:
  - National Payment System Vision and Strategy needs clearer objectives and policies.
  - BNR payments department should separate policy/oversight/operations: create an “oversight unit”, a “policy and strategy unit”, and an “operations unit”.
  - Issue subsidiary directives/regulatory guidelines promptly (including correspondent agency networks and outsourcing).
  - Promote extensive use of electronic funds transfers in ACH and leverage Rwanda Integrated Payment Processing System Project to move away from Check Clearing House.
  - Mandate a switch working group with system participants and SIMTEL to address fragmentation and regain cooperative approach.
  - Technical note: limited use of cards due partly to high cost of chip-card technology versus magnetic strip.

### Access to finance, SACCOs, and SME finance
- Access metrics:
  - 14 percent of population has access to formal banking products.
  - Additional 7 percent use other formal products (MFIs, insurance).
  - 27 percent use informal products only.
- Institutions:
  - 11 MFIs (one lending-only) and 514 SACCOs (as of source).
  - MFIs and SACCOs constituted about 8.3 percent of total financial sector assets as of September 2010.
  - Umurenge SACCOs: established in each of the 416 sectors; many licensed first as deposit-takers; not all licensed for credit.
- SACCO risks and recommendations:
  - Users perceive SACCOs as government-owned; ownership and trust among members critical.
  - Most MFIs/SACCOs lack management, IT, product development, pricing, and risk management skills—contributing to poor governance and high NPLs.
  - NPL ratio for SACCOs increased from 8.4 percent to 11.2 percent between end-2009 and June 2010 (excluding Zigama CSS).
  - Recommendations: RCA and AMIR to strengthen cooperative principles and governance; BNR to urgently address supervisory void; consider creating an apex institution (without banking functions) owned by SACCOs to provide training and ensure regulatory compliance.
- SME finance:
  - Lack of long-term funds constrains SME finance.
  - Government decided to consolidate guarantee and refinancing facilities in Banque Rwandaise de Developpement Development Fund Company (BDF).
  - Transfer of the Rural Investment Facility (administered by BNR) to BDF should be completed quickly.

### Capital markets, insurance, pensions, and housing
- Capital markets:
  - Local capital market small and underdeveloped; Rwanda Stock Exchange likely to play a minor near-term role.
  - Outstanding stock of treasury bonds < 1 percent of GDP.
  - Recommendation: medium-term government debt strategy to increase issuance up to five years consistent with fiscal sustainability; consider reverse auctions for long-term bank placements by CSR and other institutional investors.
- Insurance and pensions:
  - Small but growing sectors dominated by CSR (pension) and RAMA (health).
  - More than 40 occupational pension schemes with combined size of RF 6 billion or 0.27 percent of GDP.
  - New insurance law (force March 2009) and recent pension reform designate BNR as regulator.
  - Industry compliance deadline end-March 2011 for increased capital requirements of RF 1 billion and requirement to separate life and non-life operations.
  - CSR governance weaknesses and actuarial study (2008) points to actuarial deficit of RF 260 billion by year 2030.
  - Only two BNR staff responsible for pension supervision.
  - Recommendations: enforce compliance, strengthen supervision, draft corporate governance and investment guidelines for CSR, revisit RAMA–CSR merger decision.
- Housing:
  - Key building blocks for mortgage market development in place.
  - Systematic land registration to be completed by 2012 will improve access to finance.
  - Recommendation: unify land and mortgage registration; develop property valuation capacity; allow fixed deposits from institutional investors (e.g., CSR) to channel long-term savings into banks; support SACCOs/MFIs to develop housing products for rural and low-income populations.

### Key recommendations (condensed from Table 1)
- Banking structure and stability:
  - Address shortage of qualified labor via professional training. (M/L)
  - Encourage greater contestability in retail market. (S/M)
  - Develop regulatory environment for mobile banking and payments. (S/M)
- Regulatory framework and supervision:
  - Finalize and implement pending banking regulations; add a “leverage ratio”; strengthen provisioning and penalize under-provisioning. (S)
  - Implement central information storage/archiving for supervisory actions. (S)
  - Increase frequency of on-site examinations; largest banks on a 12-month cycle. (M)
  - Ensure adequate resourcing of BSD and skills development. (M)
- Systemic liquidity and payment systems:
  - Deepen interbank markets; build liquidity forecasting capacity. (M)
  - Define objectives/policies in National Payment System Vision and Strategy; establish “policy and strategy” unit; develop strategy on SIMTEL. (S)
- Crisis management and insolvency:
  - Define contingency planning framework with transparent policies for government financial support. (S/M)
  - Review insolvency legislation to introduce a stay for secured creditors’ actions. (S)
- Access, housing, capital markets:
  - Leverage RCA and AMIR for SACCO capacity building; consider an apex institution owned by SACCOs. (M)
  - Develop house/land price tracking and one-stop mortgage registration. (S/M)
  - Prepare medium-term government debt strategy; increase issuance up to five years. (S)
  - Channel CSR and pension long-term funds into banking system via market-based mechanisms (e.g., reverse auctions). (S/M)
- Insurance and pensions governance:
  - Enforce reporting, corporate governance, audit; strengthen supervisory capacity and amend investment guidelines; revisit RAMA–CSR merger; draft CSR governance and investment guidelines and ensure CSR liquidity. (S/M)

### Risk Assessment Matrix — selected items
- Banks understating problem loans / insufficient provisioning
  - Likelihood within three years: High
  - Expected impact on financial stability if realized: Moderate
- Failure risk from SACCO expansion
  - Likelihood: High
  - Expected impact: High
- Overheating in certain sectors (commercial and housing construction)
  - Likelihood: Moderate/High
  - Expected impact: Moderate/High
- Agriculture sector problems
  - Likelihood: Moderate/High
  - Expected impact: Low/Moderate
- Development objectives conflicting with banking soundness (longer-term financing pressure)
  - Likelihood: Moderate/High
  - Expected impact: Moderate
- Bank liquidity risk
  - Likelihood: Low/Moderate
  - Expected impact: Moderate

### Supervisory assessment — Basel Core Principles (DAR) — summary
- DAR completed February–March 2011 as part of FSAP Update.
- Key weaknesses:
  - Prudential regulations based on new laws need completion.
  - Cross-border supervisory cooperation framework should be strengthened.
  - Increase frequency of on-site examinations to at least a 12-month cycle for largest banks.
  - BSD staffing and familiarity with supervisory methods and new regulations need prioritization.
- Institutional and market structure metrics:
  - Commercial banks: 8; specialized financial institutions: 4.
  - Commercial banks account for 89 percent of banking system assets.
  - Regulatory capital adequacy ratio (CAR) stood at 20.3 percent as of September 2010.
  - NPLs declined to 12 percent of gross loans in 2010.
  - Ratio of bank assets to GDP: 19.7 percent.
- Recommended action items span CP1–CP25 including legislative amendments, finalizing regulations (credit classification/provisioning, placements, FX exposure), implementing market risk standardized approach, operationalizing FIU, enhancing off-site/on-site practices, and promulgating disclosure and publication requirements.

### Selected economic and financial indicators (2007–2016) — key series (selected rows)
- Real GDP growth: 5.5, 11.2, 4.1, 7.5, 7.0, 6.8, 7.0, 6.8, 6.5, 6.5
- Consumer prices (period average): 9.1, 15.4, 10.3, 2.3, 3.9, 6.5, 5.3, 5.0, 5.0, 5.0
- Consumer prices (end of period): 6.6, 22.3, 5.7, 0.2, 7.5, 5.5, 5.0, 5.0, 5.0, 5.0
- Gross reserves (Months of imports): 4.7, 4.7, 5.4, 5.2, 5.7, 5.3, 5.4, 4.8, 4.2, 3.5
- Nominal GDP (billions of Rwanda francs) (memorandum): 2,049, 2,565, 2,964, 3,253, 3,643, 4,128, 4,652, 5,224, 5,839, 6,526
- Program exchange rate projection note: program exchange rate of RWF per US dollar of RWF571.24 for 2010 and RWF594.45 thereafter.

### Financial system structure (as of September 30, 2010) — assets (Bn RWF)
- Commercial Banks: Number 8; Assets 644
- Specialized Institutions: Number 4; Assets 81
- Microfinance Bank: Number 1; Assets 5
- MFIs and Old SACCOs: Number 10; Assets 990
- Umurenge SACCOs: Number 416; Assets n.a
- Insurance Companies: Number 8; Assets 118
- Pension Funds: Number 4; Assets 142

### EAC comparison (June 2009) — selected metrics (Rwanda highlighted)
- Regulatory Capital to risk-weighted assets: Rwanda 19.3 (Burundi 17.4; Kenya 19.7; Tanzania 18.8; Uganda 13.4; EAC 17.7)
- NPL/Total loans: Rwanda 13.4 (Burundi 13.6; Kenya 9.0; Tanzania 7.7; Uganda 4.1; EAC 9.6)
- ROA: Rwanda 0.9 (Burundi 2.5; Kenya 3.9; Tanzania 3.6; Uganda 1.0; EAC 2.4)
- Assets (Millions of US$): Rwanda 877 (Burundi 488; Kenya 16,375; Tanzania 6,933; Uganda 4,013; EAC 28,687)
- Assets/GDP: Rwanda 19.7 (Burundi 44.5; Kenya 55.4; Tanzania 33.5; Uganda 27.6; EAC 40.8)

*Source: IMF staff report — Executive Summary*

### Executive Summary ......................................................................................................

### Executive Summary

### Macroeconomic background
- Growth has averaged about 8 percent a year.
- In 2008 the economy experienced an overheating episode with 11 percent real GDP growth rate and 22 percent inflation rate.
- Fiscal policy complemented monetary easing with a large fiscal stimulus of 2 percent of GDP in FY 2009/10.
- The economy in 2010 shows recovery; inflation has remained low with 2.3 percent period average and almost zero end-of-period inflation rates.
- The external current account deficit (excluding grants) narrowed to 17 percent of GDP in 2010 from 18.6 percent in 2009.
- International reserves remain at comfortable levels.
- Major identified macroeconomic risks include shocks to agriculture and housing.
- According to the most recent data available (2006), 57 percent of the population lives below the poverty line.
- In August 2010, Fitch upgraded Rwanda’s sovereign rating to ‘B’.

### Progress in financial sector reform and institutional capacity
- Since the 2005 FSAP, significant progress has been made in restructuring and modernizing the financial sector and its legislative and regulatory framework within an extensive Financial Sector Development Plan (FSDP).
- The National Bank of Rwanda (BNR) is the sole regulator and supervisor for the entire financial sector, except securities markets, and is granted legal independence—though some aspects of its independence could be reinforced.
- The BNR has improved supervisory practice, strengthened enforcement, and taken deliberate intervention actions; capacity constraints remain and some regulations and supervisory processes can be further strengthened.
- Government and BNR leadership have modernized banking, insurance, pensions, system infrastructure (monetary operations, payments systems, land and mortgage registration, insolvency and creditor rights), and frameworks for monitoring and mitigating systemic risk.
- Continued efforts are required to follow up and transit to the next generation of reforms.

### Banking system soundness and risks
- The banking system recovered from restructuring in 2007–2008 and banks are now generally better capitalized, provisioned, and liquid.
- Banks are sufficiently capitalized to absorb a shock to their credit portfolio overall, but some banks show vulnerabilities (including large exposure risks from concentration of corporate lending).
- All banks operate within BNR liquidity requirements; a few banks are vulnerable to an extreme drop in deposits.
- BNR has a track record of dealing with emerging problems, suggesting these vulnerabilities are manageable.
- Market risks are not a major concern for FX risk or interest rate risk.

### Emerging peripheral risks: SACCO expansion and supervisory challenges
- Authorities established Umurenge Savings and Credit Cooperatives (SACCOs) in each of the 416 geographically defined sectors to accelerate rural intermediation.
- BNR is recruiting supervisors for SACCOs at district level, but supervisors and the SACCOs themselves face capacity and skills gaps in small-scale banking and risk management.
- International experience indicates SACCO success requires ownership and trust among target populations.
- Over the medium term the report recommends formation of an apex institution (without banking functions) owned by SACCOs to provide training, capacity enhancement, and ensure members meet regulatory requirements—thereby easing BNR’s supervisory burden.

### Long-term financing and capital market development
- Mobilizing more long-term stable financing is a major challenge given the small and underdeveloped local capital market.
- Banks face a large maturity gap between assets and liabilities; encouraging increased long-term lending without more stable funding would exacerbate risks.
- Insurance and pensions (notably the Caisse Sociale du Rwanda, CSR) show growing demand to invest in longer-term financial assets.
- Development of a corporate bond market is likely to be medium-term and facilitated by EAC financial integration.
- Near-term recommendation: create a market-based mechanism to channel long-term funds accumulated by CSR, other pension funds and life insurers into the banking system (for example via auctioning term deposits).

### Regional integration context
- Rwanda is signatory to the EAC Treaty and EAC Common Market Protocol; EAC partners aim for a monetary union.
- EAC collaboration includes Monetary Affairs Committee of central banks and memoranda-of-understanding on banking supervision; efforts are underway to harmonize monetary policy frameworks, banking legal/regulatory frameworks, crisis management and resolution arrangements, and to link financial market infrastructure.
- Rwanda needs to ensure consistency of domestic legislative, regulatory and operational changes with EAC commitments to avoid regulatory gaps.

### Key recommendations (Table 1: Rwanda: Key Recommendations)
- Banking Structure and Stability
  - Address shortage of qualified labor in financial sector including through dedicated professional training. (M/L)
  - Encourage greater contestability in the retail market segment. (S/M)
  - Develop appropriate regulatory environment for mobile banking and payments. (S/M)
- Regulatory Framework for Banking
  - Finalize and implement pending banking regulations. Add a “leverage ratio” to capital requirements. Strengthen provisioning requirements and penalize banks that report under-provisioning. (S)
  - Implement central information storage and archiving for supervisory actions. (S)
  - Increase frequency of on-site examinations; largest banks should be on a 12-month cycle. (M)
  - Ensure adequate resourcing of the BSD and continued skills development of supervisory staff. (M)
- Systemic Liquidity Management
  - Promote deepening of the interbank markets to foster a more informative interbank rate. (M)
  - Build additional capacity to improve liquidity forecasting. (M)
- Payment Systems
  - Clearly define objectives and policies in the National Payment System Vision and Strategy. (S)
  - Establish a “policy and strategy” unit in the National Payments System Department for continual data pulling and analysis. (S)
  - Develop a coherent strategy regarding the role of SIMTEL. (S)
- Crisis Management, Safety Nets, Bank Resolutions, and Cross-Border Issues
  - Define a contingency planning framework with objective and transparent policies and procedures for government financial support. (S/M)
- Insolvency and Creditor Rights
  - Review insolvency legislation to introduce a stay for secured creditors’ actions. (S)
- Access to Finance
  - Leverage experience and capacity of existing institutions (Rwanda Cooperative Agency and AMIR) to build capacity with SACCOs. (M)
  - Develop a sustainable and effective model for monitoring and supervision of SACCOs. (S/M)
  - Review the BRD Development Fund Company’s guarantee scheme drawing on experience in other countries. (S)
- Housing Finance
  - Develop a house price/land price tracking system using transaction data from the National Land Centre. (S)
  - Create a one-stop shop for registration of land and mortgages at the National Land Centre. (S/M)
- Capital Markets, Insurance, and Pensions
  - Prepare a medium-term government debt strategy and—in line with fiscal sustainability—increase issuance of government bonds concentrating on key maturities up to five years. (S)
  - Increase availability of long-term funds via CSR-term deposits in the banking system (reverse auction). (S/M)
  - Enforce insurance companies’ compliance with reporting requirements, corporate governance, and audit. (S)
  - Strengthen supervisory capacity in insurance especially in off- and on-sight inspection; amend investment guidelines to address differences in investment horizons for life and non-life business. (M)
  - Revisit the decision to merge RAMA and CSR. (S)
  - Draft corporate governance regulation for CSR, draft investment guidelines for CSR, and take measures to ensure CSR maintains adequate liquidity. (S)

*Source: IMF staff report — Executive Summary*

### 15. The banking system is in a period of transition following significant bank

### _cr11244 - 15. The banking system is in a period of transition following significant bank

### Banking system overview and recent evolution
- The banking system underwent significant restructuring and merger/acquisition activity in 2007 and 2008.
- System characteristics:
  - Highly concentrated but competitive in key markets.
  - Relatively efficient; performance indicators affected at banks addressing problem loans and expanding.
  - Scope for increased competition in the retail segment.
- Market composition (post-2005 FSAP to 2010):
  - Banking sector consists of eight commercial banks and four specialized financial institutions.
  - In 2010, the foreign share of assets stood at 49 percent.
  - Government maintained a 30 percent stake—the highest in the EAC—compared with 2004 when shares were 40 percent foreign and 22 percent government.
  - Five of the eight banks have majority foreign ownership; two others have minority foreign ownership.
- Banking asset and credit metrics:
  - Banking assets doubled to RF 1.1 billion between 2006 and 2010.
  - Nonperforming loans (NPLs) declined from 26 to about 12.4 percent between 2006 and 2010.
  - Rwanda makes up only 3.3 percent of EAC bank assets.
  - Credit to GDP ratio stands at about 12 percent.
  - Return on assets for the industry fell to 0.7 percent for 2009, and improved to 1.6 percent during the first three quarters of 2010.

### Market structure, concentration, and competition
- Dimensions of concentration:
  - The three largest banks account for over 60 percent of assets, loans, and deposits.
  - Loans and deposits are concentrated in a few corporate and institutional clients.
  - Corporate lending concentrated in construction and mortgage sectors; large share of retail lending to mortgage and salary-backed loans.
  - Most banking activity concentrated in Kigali.
- Trends:
  - Market entry and organic growth have reduced concentration since 2006, but Rwanda remains the most concentrated banking market in the EAC region.
  - High degree of competition in the corporate market segment.
  - Retail market still mainly served by Banque Populaire de Rwanda (BPR), but competition is prompting branch network expansion.

### Profitability, spreads, and drivers of interest spread changes
- Competition and write-offs led to a decline in profits and lower effective spreads; market stabilized in 2010.
- Decomposition of interest spread (2007–2010) identified the following drivers:
  - Higher overheads reflecting network expansion and limited skilled labor.
  - Higher write-offs and stricter enforcement of provisioning regulations.
  - Decline in profit margins through 2009.
  - Impact of lower reserves.
- Spreads as measured by net interest margin to average assets (NIMA) remain relatively high both over the past three years and within the EAC.

### Innovation and financial inclusion
- Agency and mobile banking have the potential to transform business models for serving low-income clients and reduce costs of mobilizing retail deposits.
- Mobile banking is emerging as a viable approach to increasing financial inclusion in Rwanda.
- The BNR has a central role by setting an appropriate regulatory environment for mobile banking, network operators and payments.

### Stress testing — capital adequacy and credit risk
- Data and scope:
  - Stress testing focused on the eight commercial banks using year-end 2008 and 2009, and end-September 2010 data.
  - Two capital measures used: core capitalization (Tier I divided by net assets) and Rwanda’s regulatory capitalization (Tier I plus Tier II on a risk-weighted asset basis).
- Adjustments to capital before testing:
  - Correcting for one bank’s under-provisioning: core capitalization drops from 12.8 percent to 12.4 percent; regulatory capitalization drops from 20.3 percent to 19.7 percent.
  - Imposing a 1 percent general provision and a 5 percent watch provision reduces core capitalization to 11.6 percent and regulatory capitalization to 18.5 percent.
- Collateral shock (conservative assumption: all collateral against classified loans worthless):
  - Core capitalization would decline to 8.3 percent.
  - Regulatory capitalization would decline to 13.3 percent.
  - With these adjustments, two banks fell below 6 percent core capitalization and one of those fell below 3 percent.
- Sectoral shocks:
  - Housing shock (assumption: 30 percent of presently good housing loans become bad):
    - Industry core capitalization reduced to 6.3 percent.
    - Regulatory capitalization reduced to 10.5 percent (still above the required 10 percent).
    - Core capitalization for two banks would fall to less than adequately capitalized.
  - Agriculture shock: ad hoc tests found little consequence from a shock to agriculture.
- Concentration risk:
  - A large borrower default would keep banks slightly above minimum regulatory capital ratios; core capitalization of three banks would be between 6 and 10 percent.
- Resilience thresholds:
  - NPLs would have to increase by 120 percent before any bank would reach core capital insolvency.
  - Alternatively, 23 percent of all currently considered normal and watch loans would have to become classified before any bank would reach core capital insolvency.
- Note on methodology:
  - Breaking-point approach used to find the level at which the first bank fails, using the average provisioning ratio consistent with "Introduction to Applied Stress Testing" by Martin Cihak.

### Stress testing — liquidity and market risk
- Liquidity:
  - Rwandan commercial banks are more than reasonably liquid, but a few are vulnerable to an extreme drop in deposits.
  - Assumed scenario: 30 percent drop in deposits at all banks (the drop experienced in Q2 2008 was 33 percent).
  - Using a standard liquid asset-to-total asset ratio: only one bank would have its liquidity ratio drop below 20 percent.
  - Using the BNR’s more conservative definition of liquid assets related to deposits: one bank would exhaust liquidity and two others would fall below 20 percent.
- Market risk:
  - Assets and liabilities are mismatched by maturity: 82.6 percent of short-term liabilities are funding assets with maturities greater than one year.
  - Fixed rate loans include a clause allowing banks to change the rate at their discretion; passing on higher interest rates to customers increases credit risk.
  - FX exposure: FX net open position limit of not more than 20 percent of capital; actual FX position to capital was 5.7 percent as of September 30, 2010.
  - Stress test: an increase in the FX rate to RF 700 to US$ 1 (representing a 15 percent depreciation) would reduce core capitalization by only 1 percent.

### Supervision, regulation, and capacity
- Legal and regulatory framework:
  - 2007 BNR Law and 2008 Law on organization of banking (LOB) strengthened the legal framework and convey independence of the BNR.
  - Strengthened regulations now in place on capital adequacy, liquidity, credit concentrations, corporate governance, and insider lending.
  - Authorities working within EAC committees to harmonize legislative and regulatory frameworks and attain greater Basel Core Principles compliance.
- BNR staffing and capacity:
  - BNR suffered turnover of qualified staff in 2008 and 2009; improvements underway in recruiting, training, and equipping examiners.
  - BNR recruiting an additional five staff for banking supervision by end June 2011, introducing a new compensation scheme, and intensifying training of bank examiners.
  - BNR introduced a financial stability analysis unit in late 2010; defining work plan and intends to use FSAP analysis framework; introduced spreadsheet-based off-site surveillance including individual loan reporting.
- Recommended regulatory enhancements:
  - Introduce a leverage ratio comparing core capital to net assets as a check on capital adequacy (and consistent with future Basel III).
  - Consider requirements for general provisions for current (normal) exposures and specific provisions for watch category exposures.
- Supervisory approach:
  - BNR employs both a risk-based supervision (RBS) framework and a CAMELS approach; recommendation to use one approach rather than both, with sequencing suggesting implementing a sound CAMELS system before the broader risk-based approach.
- AML/CFT:
  - AML/CFT Law enacted in 2008 establishing a Financial Investigation Unit (FIU) to receive suspicious transaction reports; FIU start-up remains to be implemented.

### Cross-border supervision, crisis management, and resolution
- Cross-border cooperation:
  - Rwanda is party to the multilateral MoU among EAC supervisory authorities signed in 2008.
  - BNR has carried out joint on-site inspection with Kenyan authorities and intends to enter into MoUs with home supervisors of foreign banks operating in Rwanda.
  - BNR seeks home supervisor approval for establishment of banking subsidiaries/branches and should verify how home supervisors practice consolidated supervision.
- Crisis management and contingency planning:
  - No formal crisis management framework in place, but BNR has ample enforcement and resolution powers and has provided ad-hoc liquidity and solvency support.
  - Recommendation: formalize collaboration among local authorities via an MoU covering contingency planning, crisis management, and transparent criteria for assisting/resolving problem banks.
  - BNR urged to conclude MoUs with non-EAC supervisory authorities whose banks operate in Rwanda to spell out cooperation on crisis contingency planning and crisis management.
- Deposit guarantee fund (DGF):
  - Authorities intend to prepare separate DGF legislation as mandated by the LOB.
  - If progressed, DGF design should ensure an effective bank resolution process and limit coverage to household deposits.
  - Given current supervisory capacity, it is not advisable to extend DGF coverage to depositors in MFIs and SACCOs.

### Financial sector infrastructure and liquidity facilities
- Lender-of-last-resort (LOLR) and liquidity facilities:
  - BNR has an adequate lender-of-last-resort facility including market operations and discount window lending.
  - In March 2009, an emergency lending facility was established; in August 2009, the Government created a longer-term facility at the BNR.
  - Both the emergency facility and the longer-term government-created facility are no longer necessary and should be closed.

*Source: IMF staff and BNR data as presented in the document.*

### 41. The BNR continues to use reserve money targeting. A further deepening of the

### 41. The BNR continues to use reserve money targeting. A further deepening of the

### Monetary policy and interbank market
- Findings:
  - The BNR continues to use reserve money targeting.
  - Interbank market transactions have increased, but the market remains shallow.
  - The BNR’s work on automating its payment system should facilitate interbank transactions.
  - Greater issuances of government securities―consistent with fiscal sustainability―would support development of a capital market.
  - Greater depth in the market for government securities, combined with a longer maturity structure, should help build a yield curve and enhance the monetary policy transmission mechanism.
- Policy implications / recommendations:
  - Further deepen the interbank market to strengthen the monetary transmission mechanism and improve individual bank capacity in liquidity management.
  - Increase issuance of government securities, consistent with fiscal sustainability, and extend maturities to help establish a fuller yield curve.

### Payment Systems
- Findings:
  - The National Payment System Vision and Strategy brings stakeholders together but needs further strengthening; objectives and policies need clearer definition.
  - Effective policy design and BNR oversight require ongoing assessment of payment system developments.
  - The BNR’s payments system department organizational structure should be strengthened with separation of policy and oversight functions.
    - An “oversight unit” should focus on behavior and compliance of operators.
    - A “policy and strategy unit” should define general policy and strengthen the clearing process.
    - An “operations unit” should focus on daily operational management.
  - Following the new Payments Systems Law, remaining subsidiary central bank directives and regulatory guidelines need to be issued without delay.
  - Additional subsidiary directives and regulatory guidelines are needed for correspondent agency networks (branchless banking services) and outsourcing of payment system functions.
  - The Automated Transfer System will assist in resolving existing payment system weaknesses, but efforts are required to encourage extensive use of electronic funds transfers in the automated clearing house (ACH).
  - The Rwanda Integrated Payment Processing System Project deploys an integrated processing infrastructure comprising the real-time-gross-settlement system, the automated clearing house, and the central securities depository into an automated transfer system and presents an opportunity to move away from the Check Clearing House.
  - A coherent strategy is needed regarding SIMTEL and the use of cards given rapid mobile technology advances and the relatively small local market for formal payment services.
    - Fragmentation of the payment systems landscape will negatively impact quality, cost, efficiency and outreach.
    - Development of parallel switches by commercial banks reflects mistrust toward SIMTEL.
- Policy implications / recommendations:
  - Mandate creation of a switch working group comprising representatives of system participants and SIMTEL to cooperate on common issues and revive a cooperative approach.
  - Issue remaining subsidiary directives and regulatory guidelines promptly (including for correspondent agency networks and outsourcing).
  - Promote extensive use of electronic funds transfers in ACH and leverage the Rwanda Integrated Payment Processing System Project to phase out the Check Clearing House.
- Technical note:
  - There has been limited use of cards (debit, automatic teller machine, and credit cards), partly due to the high cost related to the technology chosen—chip cards rather than magnetic strip.

### Insolvency and creditor rights
- Findings:
  - Considerable progress in reforming legal and regulatory framework for creditor rights and insolvency.
  - A new law allows a range of assets to be used as loan collateral, with potential to expand access to finance, but has had limited impact as banks continue to favor real estate as collateral.
  - Virtually all credit extended by financial institutions is secured, creating a lack of incentives for debtors and creditors to use the insolvency framework.
  - The new insolvency legislation could be usefully amended by introducing a stay for secured creditor actions.
  - Additional efforts are needed to make the new credit reference bureau in Rwanda fully operational and effective.
- Policy implications / recommendations:
  - Consider amending insolvency legislation to introduce a stay for secured creditor actions to increase use of insolvency framework.
  - Ensure the credit reference bureau becomes fully operational and effective; supervision should ensure consistency, homogeneity, and completeness of information provided by financial institutions and incorporate other entities (e.g., utilities, telecommunications) as providers of information.

### IV. Development issues

#### A. Access to finance
- Findings:
  - Only 14 percent of the Rwandan population has access to formal banking products.
  - An additional 7 percent use other formal products such as loans from microfinance institutions (MFIs) or insurance products.
  - 27 percent use informal products only.
  - There exist 11 MFIs of which one is lending-only and 514 SACCOs.
  - As of September 2010, MFIs and SACCOs constituted about 8.3 percent of total financial sector assets.
  - The new SACCOs have been licensed first as deposit-takers; not all have yet been granted licenses for offering credit.
  - The government strategy to establish savings and credit cooperatives in each of the 416 geographically defined sectors of Rwanda (Umurenge SACCOs) faces significant challenges and risks.
  - Users perceive SACCOs to be owned by the government; establishing trust and member ownership ethos is important.
  - Most MFIs and SACCOs lack essential skills in management, IT, product development, pricing, and risk management, contributing to poor governance and high NPLs.
  - The NPL ratio for SACCOs increased from 8.4 percent to 11.2 percent between end-2009 and June 2010 (excluding Zigama CSS).
- Policy implications / recommendations:
  - RCA and AMIR should help ensure cooperative principles, governance arrangements, and provide training to loan officers and managers.
  - Urgently address the supervisory void; BNR plans to establish supervision of SACCOs at the district level.
  - Consider creation of an apex institution without banking functions owned by the SACCOs to provide training, capacity enhancement, and ensure regulatory compliance.
  - Develop affordable products tailored to rural needs and a legal and regulatory framework to allow such development.
  - To mitigate supervision burden, ensure BNR and other authorities complete necessary training and capacity building for supervising new institutions.
- Implementation note:
  - A sustainability assessment is being undertaken by an expert; risk that a substantial number might fail or require BNR intervention, which could jeopardize public confidence.

#### A. (continued) SME finance
- Findings:
  - Lack of long-term funds for on-lending and bankable projects has constrained SME finance.
  - Government decided to consolidate guarantee and refinancing facilities in one institution—the Banque Rwandaise de Developpement Development Fund Company (BDF).
  - Planned transfer to BDF of the Rural Investment Facility (administered by the BNR) should be completed quickly to ensure SME access to funds.
- Policy implications / recommendations:
  - Complete transfer of Rural Investment Facility to BDF promptly.
  - Ensure activities and exposures of the BDF are appropriately governed.

#### B. Capital markets
- Findings:
  - Mobilization of long-term stable financing is challenged by a small and underdeveloped local capital market.
  - The opening of the Rwanda Stock Exchange is likely to play only a minor role in the near future.
  - Outstanding stock of treasury bonds is small at less than 1 percent of GDP.
  - A larger stock of government bonds, consistent with a sound medium-term debt management strategy, could enable market deepening and allow a fuller yield curve up to five years to develop and serve as benchmark for pricing risk.
  - Insurance companies and pension funds show positive cash flows and rising demand for long-term assets.
  - Extensive use of collateral to secure bank loans to corporates de facto subordinates bond investors to secured creditors, impeding corporate bond market development.
- Policy implications / recommendations:
  - Increase government issuance activity, particularly in longer maturities, consistent with fiscal sustainability and debt management strategy.
  - Consider alternative investment vehicles: longer-term placements in the banking sector using reverse auctions, investments in PPPs, and regional integration with the EAC capital markets.
  - Leverage demand from insurance companies and pension funds to develop long-term placement opportunities.

#### C. Pensions and insurance
- Findings:
  - Pensions industry and insurance sector are small but growing; both face limited investment opportunities.
  - Dominated by government-run institutions: pension fund CSR and health care insurer/provider RAMA.
  - There are another eight insurance companies; more than 40 occupational pension schemes with combined size of RF 6 billion or 0.27 percent of GDP.
  - New insurance law (came into force in March 2009) and recently adopted pension reform law designate the BNR as the regulator.
  - Industry had until end-March 2011 to comply with increased capital requirements of RF 1 billion and requirement of operating life and non-life business lines in separate companies.
  - Several companies have yet to comply, which may result in consolidation or specialization.
  - BNR has seven staff dedicated to supervision of insurance companies but has yet to develop fully offsite and onsite inspection capabilities.
  - CSR shows governance weaknesses; past audits reference procedural matters, investment strategy, and poor population coverage.
  - According to the BNR, solvency assessment based on an actuarial study prepared in 2008 points to an actuarial deficit of RF 260 billion by year 2030.
  - Only two BNR staff are responsible for pension supervision.
- Policy implications / recommendations:
  - Enforce compliance with existing regulation and strengthen BNR supervision capacity.
  - Encourage development of separate investment guidelines for life and non-life insurance entities; investment guidelines should be backed by a sound actuarial study.
  - Pay particular attention to strengthening governance arrangements of the CSR; set investment guidelines for CSR and RAMA and ensure CSR maintains adequate liquidity.
  - Consider encouraging mergers of smaller occupational pension funds managed by insurance companies to achieve economies of scale (e.g., sector-based provident fund).
  - Revisit decision to merge RAMA and CSR due to potential negative consequences for capital market functioning and incompatibility of business lines; merging would exacerbate concentration in the investor base and jeopardize competition.
  - Assess options to expand long-term asset availability for CSR and other institutional investors: longer-term bank placements, increased government securities, infrastructure investment, and PPPs.

#### D. Housing
- Findings:
  - Key building blocks for mortgage market development are in place.
  - Systematic registrations of land, to be completed by 2012, will improve prospects for access to finance for rural population and SMEs.
  - Land registration (National Land Center) and mortgage registration (Rwanda Development Board) should be unified to create efficiency savings and reduce fraud risk.
  - Developing reliable measures for land and house prices and improving property valuation capacity are priorities for risk management.
  - A priority is establishing an appropriate mechanism to channel long-term savings accumulated in other parts of the financial system into banks, given maturity mismatch and shallow capital market.
  - The easiest approach would be to allow fixed deposits from the CSR and other institutional investors.
  - The microfinance/SACCO sector should develop housing finance products targeted at rural and lower income populations using different underwriting techniques from traditional mortgages.
- Policy implications / recommendations:
  - Unify land and mortgage registration processes.
  - Develop property valuation capacity and reliable price measures.
  - Allow fixed deposits from institutional investors (e.g., CSR) to channel long-term savings into banks.
  - Encourage SACCOs and MFIs to develop tailored housing finance products for rural and low-income groups.

### Appendix I. Rwanda: Risk Assessment Matrix (selected items)
- Overall level of concern and identified risks (likelihood within three years; expected impact on financial stability):
  - Banks may be understating problem loans and insufficiently provisioning for expected losses
    - Likelihood of Occurrence Within Three Years: High
    - Expected Impact on Financial Stability if Risk Realized: Moderate
    - Notes: Not all commercial banks are fully provisioned, but over the past three years compliance has improved. Current capitalization of banks presently is reasonable even when adjustments are made for under-provisioning and Rwanda’s lack of a general or watch provision.
  - New type of nonbank depository (SACCOS) results in some or many institution failures
    - Likelihood: High
    - Expected Impact: High
    - Notes: Government has established SACCOs in all districts; regulation is in place but BNR lacks trained supervisors and SACCOs lack trained managers. Failure of any financial institution can lead to public confidence problems and liquidity/credibility issues.
  - Over heating of certain sectors of the economy
    - Likelihood: Moderate/High
    - Expected Impact: Moderate/High
    - Notes: Real GDP growth is high; commercial and housing construction shows strong growth with inadequate use and occupancy. Banks can withstand a 30 percent shock to housing loans, but system is vulnerable due to CSR’s direct investment in housing.
  - Problems in agriculture sector
    - Likelihood: Moderate/High
    - Expected Impact: Low/Moderate
    - Notes: Economy and exports substantially dependent on agriculture; stress tests do not show commercial banks highly vulnerable to agriculture shocks, but data limitations exist.
  - Development objectives in conflict with safe and sound banking
    - Likelihood: Moderate/High
    - Expected Impact: Moderate
    - Notes: Government pressure to shift to longer-term financing and encourage housing construction/mortgage financing; accessing international capital markets for infrastructure funding bears risk if projects not properly prepared.
  - Bank liquidity
    - Likelihood: Low/Moderate
    - Expected Impact: Moderate
    - Notes: Commercial banks experienced liquidity problems when some institutional depositors withdrew deposits in 2009. Unlike in 2009, banks now are more than reasonably liquid and appear able to withstand substantial deposit withdrawals.

*Source: IMF staff report excerpt (content unit: _cr11244 - 41. The BNR continues to use reserve money targeting. A further deepening of the)*

### APPENDIX II: RWANDA: REPORT ON OBSERVANCE OF STANDARDS AND CODES OF THE

### APPENDIX II: RWANDA: REPORT ON OBSERVANCE OF STANDARDS AND CODES OF THE BASEL CORE PRINCIPLES FOR EFFECTIVE BANKING SUPERVISION

### Summary and Methodology
- The Detailed Assessment Report (DAR) on implementation of the Basel Core Principles (BCP) in Rwanda was completed during February to March 2011 as part of a Financial Sector Assessment Program (FSAP) Update by the IMF and World Bank.
- The Rwandan authorities have enacted new laws governing the central bank, banking, and countering the abuse of financial services, providing the National Bank of Rwanda (BNR) with powers for regulatory intervention.
- Key weaknesses identified:
  - (i) Prudential regulations based on the new laws need to be completed soon.
  - (ii) The framework for cross-border supervisory cooperation should be further strengthened.
  - (iii) Frequency of on-site examinations should be increased to have at least the largest banks on a 12-month cycle.
  - (iv) BNR supervision staff should stay intimately familiar with supervisory methods, procedures, and the new laws and regulations.
- Assessment basis:
  - Performed according to the Core Principles (CPs) Methodology.
  - Based solely on laws, supervisory requirements, and practices in place at the time of assessment.
  - Assessor team: Richard Hands (consultant to the World Bank) and Jan Rein Pruntel (consultant to the IMF).

### Institutional and Market Structure — Overview
- Legal framework:
  - The 2007 BNR Law and the 2008 Law on the Organization of Banking (LOB) provide the basic legal framework.
  - BNR mission includes “to enhance and maintain a stable and competitive financial system without any exclusion.”
  - BNR empowered to issue regulations implementing LOB; no other authorities currently involved in banking supervision.
  - New laws on capital markets and money laundering/terrorist financing foresee a Capital Markets Authority and a Financial Investigations Unit (FIU); both not yet operational.
- Market structure and metrics:
  - Eight commercial banks and four specialized financial institutions (including one microfinance bank).
  - Commercial banks account for 89 percent of banking system assets; specialized financial institutions account for 11 percent.
  - The three largest banks together hold over sixty percent of banks’ assets.
  - Regulatory capital adequacy ratio (CAR) stood at 20.3 percent as of September 2010.
  - Nonperforming loans (NPL) declined to 12 percent of gross loans in 2010.
  - Ratio of bank assets to GDP: 19.7 percent (Rwanda has the shallowest banking sector in the EAC).
  - Almost half of banking system assets are held by foreign banks; Rwandan banks have no operations abroad.
- System evolution:
  - Post-1994 genocide: about 50 percent of gross loans were non-performing; restructuring, merger/acquisition activity continued into 2010.
  - Three banks wholly acquired by foreign institutions; three sought foreign partners; one Kenyan bank established a de novo presence.

### Preconditions for Effective Banking Supervision
- Macroeconomic and institutional context:
  - High growth and macroeconomic stability over the last decade; poverty remains high (57 percent below national poverty line in 2006).
  - BNR monetary operations relatively basic; payment system development nascent; foreign exchange operations recently liberalized.
  - Fiscal policy slightly expansionary but deficit projected to be reduced this fiscal year.
  - Resilience to external shocks improved due to prudent policies, debt relief, and concessional borrowing.
- Legal, accounting, and judicial supports:
  - Legal and regulatory framework supportive; modern accounting framework; accounting profession of high integrity.
  - Specialized commercial courts introduced to improve collateral realization processes.
  - Banks required to prepare financial statements in accordance with IFRS; annual accounts must be audited; quarterly financial statements subject to review by external auditors.
  - Major international accountancy firms present and employed by most banks.
- Crisis management and official support:
  - No formal crisis management framework; BNR has ample enforcement and resolution powers and has acted decisively (though sometimes with delay).
  - Collaboration between BNR and MINECOFIN enhanced via regular and ad-hoc meetings; no formal coordination arrangement in the event of insolvency—problem banks handled ad hoc.
  - Recommendation: reinforce collaboration in a memorandum of understanding (MoU) and engage home country authorities on crisis-contingency planning.
  - No pre-designed official financial support to insolvent but viable banks; government historically ready in principle to provide solvency support on an ad-hoc basis.
  - Authorities intend to prepare separate legislation on a deposit guarantee fund (DGF) as mandated by the LOB.

### Main Findings (by CP clusters)
- Objectives, Independence, Powers, Resources, and Cooperation (CP 1)
  - BNR should prioritize capacity development of its Banking Supervision Department (BSD), particularly training.
  - BNR employs eight bank inspectors (excluding managers), average experience about two years, responsible for supervising eight commercial banks and four other bank-type institutions.
  - Staff familiarity with supervisory methods and rapidly renewed laws/regulations is a concern.
- Licensing and Structure (CPs 2–5)
  - No explicit legal provision limiting deposit taking from the public to licensed institutions — identified as a major loophole to be urgently closed.
  - BNR should strengthen processes for licensing foreign-owned banks (example: did not verify whether a home supervisor practices global consolidated supervision and did not perform due diligence on the acquiring bank’s financial strength).
- Prudential Regulations and Requirements (CPs 6–18)
  - Key regulations introduced, substantially implementing 2005 recommendations: strengthened regulations on capital adequacy, liquidity, credit concentrations, corporate governance, insider lending; Risk Management Guidelines introduced (CP7).
  - Several regulations remain to be finalized and published: credit classification and provisioning; placements with banks; foreign exchange exposure limits.
  - Capital adequacy:
    - Minimum CAR: 15 percent; capital adequacy requirement generally conforms to Basel I.
    - BNR does not yet apply a capital charge for market risk (CP6).
    - BNR plans to expand rules to incorporate the Market Risk Amendment; assessors recommend implementing the Standardized Approach to market risk in the short term and making completion of foreign exchange exposure limits regulation a priority (CP13).
  - BNR indicates it is in the process of fully implementing Basel II; assessors advise focusing on consolidating existing supervisory methods first.
  - Gap noted on Country and Transfer Risk; BNR plans guidelines and reporting forms by mid- to end-2011; draft regulation on placements with banks should be implemented to plug the gap (CP12).
  - AML/CFT:
    - Law enacted in 2008 establishing FIU; FIU not yet operational.
    - Further actions needed: start-up of the FIU, guidance to banks, training for bank employees and BNR inspectors, inclusion of AML/CFT in BNR inspections.
- Methods of Ongoing Banking Supervision (CPs 19–21)
  - Increase frequency of on-site examinations to have at least the largest banks on a 12-month cycle; current intervals can run up to two years.
  - BNR should ensure operational risks (including IT) and AML/CFT are properly addressed in on-site and off-site work.
  - Off-site work should use qualitative information (board minutes, auditors’ reports); consider annual meetings with each bank’s internal auditors.
  - Supervisory actions should be well documented and filed accessibly; transition to a more advanced information system expected to be completed in 2011 for centralized data storage and better monitoring.
- Accounting and Disclosure (CP 22)
  - All banks required to prepare accounts in accordance with IFRS; quarterly accounts published in two widely circulating newspapers.
  - No requirement for full audited annual report and accounts to be made available in bank premises or on bank websites.
- Corrective and Remedial Powers (CP 23)
  - LOB provides suitable enforcement powers: appoint special commissioner, limit activities, withdraw license, suspend/dismiss board members and managers, impose monetary penalties.
  - Capital adequacy regulation provides for prompt corrective action for undercapitalized banks.
  - Recommendation: clarify in LOB that appeals against BNR sanctions/penalties do not suspend those measures.
- Consolidated and Cross-Border Supervision (CPs 24–25)
  - BNR party to multilateral MOU among EAC supervisory authorities (signed 2008) and has taken steps to strengthen cross-border supervision but needs further expansion.
  - BNR seeks home supervisor approval for foreign-owned subsidiaries/branches but should verify whether the home supervisor practices consolidated supervision and establish effective cooperative arrangements for ongoing supervision.

### Recommended Action Plan — Selected Items (condensed from Table 1)
- CP1 (Objectives, Independence, Powers, Transparency, and Cooperation)
  - Expedite publication of aggregate banking industry performance data and supervisory information.
  - Invest in BSD capacity development.
  - Specify grounds for dismissal of governor/board members in BNR Law and require public disclosure of reasons for dismissal.
  - Limit liability of BNR board members and staff to actions conducted in bad faith.
  - Establish information sharing with home supervisors and effective arrangements with FIU.
  - Consider enhancing secrecy provisions in BNR Law and LOB to allow BNR to refuse to supply information without court order or parliamentary mandate.
- CP2–CP5 (Permissible Activities, Licensing, Ownership Transfer, Major Acquisitions)
  - Amend LOB to explicitly limit deposit taking from the public to licensed institutions.
  - Verify home supervisors’ exercise of consolidated supervision for applicants and conduct due diligence on acquiring banks.
  - Consider defining “substantial” shareholders in LOB or regulation.
  - Ensure major investment regulation addresses undue risk and managerial/organizational capacity.
- CP6–CP13 (Capital, Risk Management, Credit, Country/Transfer, Market Risk)
  - Consider introducing a “leverage” ratio and possibly making it a regulatory requirement.
  - Reconsider mandatory committee structures for governance; require internal capital adequacy plans.
  - Finalize draft regulation on credit classification and provisioning; consider provisions for loan loss provisions on watch category credits and general provisions on current exposures.
  - Introduce off-site reporting on sectoral, collateral, and geographic concentrations.
  - Expedite implementation of draft regulation on bank placements and foreign-exchange exposure; develop country and transfer risk guidelines.
  - Introduce Market Risk Amendment provisions initially on standardized approaches.
- CP14–CP18 (Liquidity, Operational, Interest Rate, Internal Control, AML/CFT)
  - Introduce formal reporting of foreign currency liquidity and expand maturity ladder reporting detail.
  - Implement draft regulation on business continuity management and require timely reporting of “material adverse events.”
  - Design and implement reporting on interest rate risk in the banking book.
  - Implement AML/CFT Law effectively: start FIU, provide guidance and training, and include AML/CFT in inspections.
- CP19–CP21 (Supervisory Approach, Techniques, Reporting)
  - Ensure supervisory actions are well documented and filed accessibly.
  - Consider focusing on either risk-based supervision or CAMELS methodology for efficiency gains.
  - Increase frequency of on-site examinations so largest banks are on a 12-month cycle.
  - Hold annual meetings with banks’ internal auditors; ensure examination report QA does not unduly delay sharing findings.
  - Require prudential returns on interest rate risk; consider external auditors’ annual certification of prudential returns and their duty to inform BNR of adverse developments.
- CP22–CP25 (Accounting/Disclosure, Corrective Powers, Consolidated/Home-Host)
  - Promulgate regulation on publication of information by banks to encompass internet disclosure and published IFRS annual reports.
  - Amend filing deadline for annual accounts reporting package with BNR from June 30 to April 30.
  - Make explicit that appeals against BNR sanctions do not suspend those measures; prefer appeals to a permanent financial court rather than ad hoc committee.
  - Establish cooperative arrangements with relevant foreign supervisors (including Banking Commission of the West African Monetary Union) and clarify consent requirements for subsidiaries as well as branches; assess home supervisors’ consolidated supervision practices and report significant events to home supervisors.

*Source: APPENDIX II: RWANDA: REPORT ON OBSERVANCE OF STANDARDS AND CODES — BASEL CORE PRINCIPLES FOR EFFECTIVE BANKING SUPERVISION*

### 88. The authorities have indicated that they are in agreement with the conclusions

### _cr11244 - 88. The authorities have indicated that they are in agreement with the conclusions

### Authorities' response
- The authorities have indicated that they are in agreement with the conclusions and recommendations of the BCP assessment.
- They intend to consider numerous recommendations and develop an action plan for their implementation.

### Selected economic and financial indicators (2007–2016) — key series
- Real GDP growth: 5.5, 11.2, 4.1, 7.5, 7.0, 6.8, 7.0, 6.8, 6.5, 6.5
- Real GDP (per capita): 3.3, 8.9, 2.0, 5.3, 4.8, 4.6, 4.8, 4.6, 4.3, 4.3
- GDP deflator: 13.2, 12.6, 11.0, 2.1, 4.7, 6.1, 5.3, 5.2, 4.9, 4.9
- Consumer prices (period average): 9.1, 15.4, 10.3, 2.3, 3.9, 6.5, 5.3, 5.0, 5.0, 5.0
- Consumer prices (end of period): 6.6, 22.3, 5.7, 0.2, 7.5, 5.5, 5.0, 5.0, 5.0, 5.0
- Export of goods, f.o.b (in U.S. dollars): 19.9, 51.4, -12.2, 26.5, 26.3, 9.5, 5.9, 7.9, 5.7, 9.1
- Imports of goods, f.o.b (in U.S. dollars): 30.2, 51.5, 13.5, 8.5, 29.2, -4.5, 0.2, 6.2, 6.5, 6.9
- Export volume: -0.2, 21.8, -20.0, 11.6, 5.6, 12.9, 9.4, 13.1, 10.0, 10.0
- Import volume: 31.0, 6.4, 7.4, 3.8, 14.6, 0.4, 1.7, 6.8, 6.5, 5.7
- Terms of trade (deterioration = -): 20.9, -12.8, 3.8, 8.5, 6.1, 2.0, -1.7, -4.1, -3.9, -1.9
- Net domestic assets: 7.6, 10.3, 4.9, 2.2, 7.0, 19.1, 10.0, 15.7, 15.5, 14.8
- Domestic credit: 12.0, 20.5, 3.8, 9.4, 4.7, 23.1, 5.4, 16.2, 16.0, 14.8
  - Government: 0.2, -18.1, 0.2, 2.4, -7.9, 16.2, 0.0, 0.0, 0.0, 0.0
  - Economy: 11.9, 38.6, 3.6, 7.0, 12.6, 6.9, 5.4, 16.2, 16.0, 14.8
- Broad money (M2): 30.8, 24.2, 13.1, 16.9, 16.0, 15.3, 13.7, 13.3, 12.8, 12.8
- Reserve money: 30.7, 23.5, 0.3, 12.5, 16.0, 15.3, 13.7, 13.3, 12.8, 12.8
- Velocity (GDP/M2; end of period): 5.5, 5.5, 5.6, 5.3, 5.1, 5.0, 5.0, 4.9, 4.9, 4.8
- National savings: 8.3, 9.1, 5.1, 4.2, 7.0, 7.7, 7.9, 8.2, 9.2, 10.0
- Gross investment: 20.2, 23.5, 22.4, 21.9, 25.1, 23.3, 21.8, 20.9, 20.9, 20.7
  - Private (including public enterprises): 12.4, 13.1, 12.4, 10.9, 11.1, 11.4, 11.9, 12.2, 12.5, 12.8
- Total revenue (excl. grants, percent of GDP): 12.4, 12.6, 14.9, 12.6, 13.7, 13.9, 14.3, 14.6, 14.8, 15.2
- Total expenditure and net lending (percent of GDP): 22.0, 22.6, 26.4, 25.9, 28.7, 27.4, 25.9, 24.2, 23.6, 22.8
- Capital expenditure (percent of GDP): 7.0, 8.2, 11.1, 10.2, 13.1, 13.0, 11.0, 8.8, 8.5, 8.2
- Current expenditure (percent of GDP): 14.2, 15.1, 14.5, 14.8, 14.9, 14.4, 14.4, 14.8, 14.6, 14.5
- Primary fiscal balance: -1.6, -3.3, -2.2, -5.2, -5.2, -4.6, -3.6, -4.1, -3.8, -3.1
- Domestic fiscal balance: -4.6, -5.6, -5.3, -8.1, -8.1, -6.7, -5.8, -6.2, -5.8, -4.8
- Overall fiscal balance (payment order) after grants: -1.4, -0.2, -2.2, -0.1, -4.2, -1.8, -0.9, -0.3, -0.3, -0.3
- Overall fiscal balance before grants: -9.6, -10.0, -11.5, -13.3, -15.0, -13.5, -11.6, -9.6, -8.8, -7.6
- External current account balance including official transfers: -2.2, -4.9, -7.3, -6.0, -5.2, -9.1, -5.5, -4.4, -4.5, -4.2
- External current account balance excluding official transfers: -11.9, -14.4, -17.3, -17.7, -18.1, -15.7, -13.8, -12.6, -11.7, -10.7
- External debt (end of period, percent of GDP): 15.2, 14.8, 14.8, 14.9, 17.7, 19.2, 19.0, 17.7, 16.5, 15.2
- Net present value of external debt (percent of exports of goods and services): 99.7, 98.1, 108.7, 110.7, 100.3, 91.1, 80.9 (series shows ellipsis before 99.7 in source)
- Scheduled debt service ratio (percent of exports of goods and services): 3.5, 2.1, 2.6, 3.4, 5.7, 5.0, 6.1, 7.5, 7.8, 7.1
- Gross reserves (months of imports of goods and services): 4.7, 4.7, 5.4, 5.2, 5.7, 5.3, 5.4, 4.8, 4.2, 3.5
- Gross reserves (Millions of U.S. Dollars): 552.4, 596.4, 742.2, 814.2, 899.2, 847.6, 897.2, 856.8, 804.7, 761.5
- Memorandum: Nominal GDP (billions of Rwanda francs): 2,049, 2,565, 2,964, 3,253, 3,643, 4,128, 4,652, 5,224, 5,839, 6,526
- Program exchange rate projection note: program exchange rate of RWF per US dollar of RWF571.24 for 2010 and RWF594.45 thereafter.

### Financial system structure (as of September 30, 2010)
- Commercial Banks: Number of institutions 8; Assets (Bn RWF) 644
- Specialized Institutions: Number of institutions 4; Assets (Bn RWF) 81
- Microfinance Bank: Number of institutions 1; Assets (Bn RWF) 5
- MFIs and Old SACCOs: Number of institutions 10; Assets (Bn RWF) 990
- Umurenge SACCOs: Number of institutions 416; Assets (Bn RWF) n.a
- Insurance Companies: Number of institutions 8; Assets (Bn RWF) 118
- Pension Funds: Number of institutions 4; Assets (Bn RWF) 142

### EAC commercial bank performance comparison (June 2009) — selected metrics
- Regulatory Capital to risk-weighted assets: Burundi 17.4, Kenya 19.7, Rwanda 19.3, Tanzania 18.8, Uganda 13.4, EAC 17.7
- Capital to assets: Burundi 10.9, Kenya 11.5, Rwanda 14.0, Tanzania 10.6, Uganda 12.0, EAC 11.8
- NPL/Total loans: Burundi 13.6, Kenya 9.0, Rwanda 13.4, Tanzania 7.7, Uganda 4.1, EAC 9.6
- ROA: Burundi 2.5, Kenya 3.9, Rwanda 0.9, Tanzania 3.6, Uganda 1.0, EAC 2.4
- ROE: Burundi 22.0, Kenya 34.0, Rwanda 6.4, Tanzania 21.2, Uganda 6.8, EAC 18.1
- NIMANA: Burundi 6.4, Kenya 10.2, Rwanda 9.7, Tanzania 8.9, Uganda 8.9, EAC 8.8
- Loans/Deposits: Burundi 120.5, Kenya 75.5, Rwanda 82.8, Tanzania 83.0, Uganda 52.5, EAC 82.9
- Liquid Assets/Assets: Burundi 39.6, Kenya 32.1, Rwanda 35.8, Tanzania 34.6, Uganda 26.4, EAC 33.7
- Assets (Millions of US$): Burundi 488, Kenya 16,375, Rwanda 877, Tanzania 6,933, Uganda 4,013, EAC 28,687
- Deposits (Millions of US$): Burundi 181, Kenya 11,940, Rwanda 605, Tanzania 4,702, Uganda 2,541, EAC 19,969
- Loans (Millions of US$): Burundi 218, Kenya 9,138, Rwanda 626, Tanzania 3,112, Uganda 1,333, EAC 14,426
- Capital (Millions of US$): Burundi 53, Kenya 2,280, Rwanda 122, Tanzania 668, Uganda 604, EAC 3,728
- Number of banks: Burundi 7, Kenya 45, Rwanda 8, Tanzania 36, Uganda 21, EAC 117
- Assets/GDP: Burundi 44.5, Kenya 55.4, Rwanda 19.7, Tanzania 33.5, Uganda 27.6, EAC 40.8

### Rwanda financial sector indicators (Dec 2006–Sep 2010) — selected series
- Growth rates (Total Assets): 80.6, 29.6, 41.2, 5.9, 2.7 (Dec-2006 to Sep-2010)
- Growth rates (Total loans): 92.1, 15.6, 6.7, 2.4, 0.5
- Growth rates (Deposits): 80.9, 28.2, 41.0, 5.4, 3.9
- Core Capital / RWA (percent): 13.0, 17.9, 16.6, 19.0, 20.3
- Core Capital / Total Asset (percent): 8.7, 11.0, 13.1, 13.0, 12.8
- NPLs / Gross Loans (percent): 25.5, 18.2, 12.6, 13.1, 12.4
- (NPLs-Interests in Suspense)/Gross Loans (percent): 18.8, 12.3, 10.3, 11.4, 10.7
- Provisions / NPLs (percent): 82.0, 78.6, 66.3, 55.2, 57.0
- Return on Average Assets (annualized, percent): 3.0, 3.2, 2.7, 0.7, 1.6
- Return on Average Equity (annualized, percent): 38.2, 31.7, 22.0, 5.0, 12.2
- Net Interest Margin (percent): 10.0, 7.6, 11.2, 9.3, 8.8
- Liquid Assets / Total Deposits (percent): 62.3, 63.7, 60.2, 65.3, 47.9
- Gross Loans / Total Deposits (percent): 70.2, 75.3, 99.5, 99.5, 79.0
- Forex Exposure / Core Capital (percent): 134.6, 89.5, 2.1, 1.9, 2.4
- Forex Assets / Forex Liabilities (percent): 100.9, 113.3, 102.6, 103.6, 103.9

### Stress test methodology (Appendix III) — framework and shocks
- Coverage: Stress tests carried out for all eight banks based on December 2008 to September 2010 data.
- Risks considered: credit, concentration, liquidity, and foreign exchange. Interest rate risk was not analyzed due to banks' contractual discretion to change interest rates.
- Adjustment: Several adjustments made to banks’ initial capital, risk-weighted assets, and net assets to correct for under-provisioning; both regulatory capital (Tier I + Tier II over risk-weighted assets) and core capital (Tier I over net assets) were used as metrics.
- Provisioning adjustments: Since Rwanda lacks general and specific provisions, both capital measures were adjusted to conform to standards applied in other EAC countries.
- Credit and concentration shock tests applied:
  - (i) a 100 percent discount on collateral;
  - (ii) a uniform increase of current NPLs;
  - (iii) the breaking point from a haircut on total standard loans;
  - (iv) increases in NPLs for the agriculture and housing sector;
  - (v) a large borrower default.
- Credit risk method: estimate additional provisions required to cover estimated loss, charge to capital; provisions calculated using the average provisioning ratio (fixed proportion of new bad loans according to MCM standard methodology); provisioning shortfall deducted from risk-weighted assets, net assets, and capital.
- Liquidity risk tests simulated:
  - (i) a 30 percent drop in deposits and effect on liquid assets-to-total assets;
  - (ii) the same 30 percent drop and effect on BNR’s liquidity ratio (conservative definition: netting due to and due from banks; results measured against 20 percent liquidity requirement).
- Foreign exchange risk tests:
  - measured impact of shocks on net open position (NOP) and capital;
  - measured revaluation gains/losses from a simultaneous depreciation/appreciation;
  - results measured against the NOP requirement (banks required to maintain a 20 percent NOP to capital position).

### Stress test results — system-level outcomes (Table 6) — selected entries
- Baseline before capital adjustments: CAR -, Core -, CAR 20.3, Core 12.8 (table layout: baseline before capital adjustments then baseline after adjustments; source shows dashes for some fields)
- Baseline after first adjustments - under provisioning: CAR 12.7, Core 19.8, 12.4 (table entries arranged across columns)
- Baseline after second adjustments - specific provisions: CAR 12.7, Core 18.8, 11.7 (notes: included adjusting for 1% general provision and 5% watch; Rwanda does not require banks to hold a general or watch provision)
- Credit risk sensitivities (selected tests and results as presented):
  - Test 1: Discount on Collateral — results include entries "11 13 21 44 13.5 8.4" (table shows multiple bank-distribution and CAR/Core values)
  - Test 2: Uniform increase in NPLs - 106% — entries "11 - 22 35 2 12.5 7.6" (breaking point approach)
  - Test 3: Haircut on good loans - 23% — entries "12 22 - 35 1 8.8 5.3"
  - Test 4: Increase in housing NPLs by 30% — entries "13 75 18.6 11.6" (table formatting shows distribution)
  - Test 5: Haircut on good housing loans by 80% — entries "33 - 1 - 35 1 9.6 5.0"
  - Test 6: Increase in agriculture NPLs by 30% — entries "12 76 18.7 11.7"
  - Test 7: Haircut on good agricultural loans by 100% — entries "13 75 17.8 11.0"
  - Test 8: Large borrower defaults — entries "33 - 11 24 2 11.0 6.8"
- Market risk:
  - Test 9: Depreciation of RWF by 15% — entries "13 75 18.7 11.6" (noted as a very severe shock illustrating FX risk in Rwanda is minimal)
- Liquidity risk (Test 10: Drop in Deposits by 30%):
  - Using simple ratios (Liq/Dep; Liq/Asset) entries include "11 - - - - 275 38.8 21.9" (distribution and ratio outcomes)
  - Using BNR definition of liquid assets (conservative; nets due to and due from banks) entries include "22 - 1- 1 6 4 25.6 14.4"
- Regulatory thresholds and notes:
  - CAR defined as Tier 1 + Tier 2 / RW A
  - Core defined as Tier 1 / Net Assets
  - BNR liquidity test measured against 20 percent liquidity requirement for Rwandan banks
  - Footnotes: breaking-point approach used to test the level at which the first bank fails (insolvent); very severe FX shock illustrated minimal FX risk; BNR definition is very conservative because it nets due to and due from banks.
- Graphical/distribution indicators in table: category ranges shown (>10%, <10%, 10%-15%, 15%-20%, >20%) for number of banks by liquidity ratio and by two capital measures (CAR and Core) with bands <3%, 3%-6%, 6%-10%.

*Source: Rwandan authorities; BNR and IMF staff estimates, calculations, and projections as presented in the source PDF.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11244.pdf_