Rwanda - Policy driven

Author: Pritish Behuria

Summary

For many years the Rwandan government showed little interest in moving beyond Basel I, which it adopted in 1998. However, in 2015, the government’s stance changed and it made a formal commitment to the rapid adoption and implementation of Basel II and III. The government’s exuberance for adopting global standards is puzzling given that Rwanda’s financial sector remains largely underdeveloped and the government is aims to become a developmental state. The motivations for the government’s position are to reduce risk in the financial sector, encourage harmonisation of financial sector regulation across the East African Community (EAC), and to develop a service-based economy, including by making Kigali a financial hub. The adoption and implementation of Basel II and III is a strategic policy priority for Rwanda’s economic leadership. The Rwandan case is an example of policy-driven adoption (Type 3).

Political economy background

Rwanda’s financial sector has grown substantially since 1994 and in recent years, it has been among the fastest growing sectors in the country. In the mid-2000s, frictions between prominent members of the ruling party (RPF) and pressure from the World Bank and IMF contributed to decisions to liberalise the financial sector. Commercial banks came close to bankruptcy and senior RPF leaders became increasingly worried about the stability of the financial sector. The government recognised its political vulnerability and excessive reliance on domestic elites in the sector and decided to rely instead on foreign investment in commercial banking. Even though the sector is liberalised today, the government remains a significant actor – both through its ownership in the largest bank and as the largest customer, with party- and military-owned enterprises remaining large recipients of loans.

 

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Basel implementation to date

Basel I standards were implemented in 1998. The Rwandan government was relatively slow in officially stating its intention to comply with the Basel Core Principles, even though it was ranked among the most compliant countries in Africa. Discussions to adopt Basel II and III started in the mid-2000s when the East African Community (EAC) argued for a common stance in relation to Basel standards. However it was only in 2015 that the government took steps to adopt and implement Basel II and III. In November 2015 the regulator issued a directive that required parallel reporting of Basel II capital requirements, and from 2018 all commercial banks in Rwanda are required to comply with several components of Basel II and III.

 

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Politics of Basel implementation

Basel adoption in Rwanda is driven by internationally-oriented politicians who have adopted a development strategy that seeks to attract foreign attention and investment in order to establish the country as a financial services hub. The Rwandan government’s uncritical stance towards Basel adoption can be interpreted either as a genuine belief in such standards or an ideological agreement with market-led reforms. The RPF’s economic leadership has taken the decision to adopt Basel standards, but the National Bank of Rwanda (BNR) is the agency charged with delivering that goal.

Financial System Stability Assessments (FSAPs) were conducted by the World Bank and IMF in 2005 and 2011, triggering rounds of regulatory reform at the central bank (BNR). The regulator has applied simple but conservative banking rules that exceed Basel capital requirements. Though some IMF and World Bank officials claim to have advised the government against implementing Basel II and III, BNR officials did not recall such advice.

In 2013, consultations between the economic leadership and the BNR led to the establishment of a Basel steering committee, paving the way for Basel II and III adoption. While the BNR has been quick to follow international standards, it faces constraints especially regarding the incorporation of operational and market risk requirements. The implementation of Basel II and III remains difficult given the capacity and technology constraints of both the BNR and the commercial banks. The political ambition to adopt Basel has not left space for receptiveness to feedback, reflecting the narrow role of the BNR in this process. BNR officials and commercial bankers all anticipate difficulties with implementing Basel.

Banks are mostly domestically-oriented. The state-owned bank has ambitions of expanding in the region in the future, but this is not on the horizon in the next few years. Pan-African banks have a substantial presence in Rwanda, but most invested primarily to maintain a footprint in the country, and their business models are domestically oriented. Nevertheless, many international banks were adjusting to Basel II and III requirements due to changes in their headquarters. While banks expressed concerns regarding the pace at which Basel standards were being adopted, they regard Basel adoptions as beneficial in the long term. Thus, there was little resistance to the implementation of Basel reforms. The process is still in its early stages in Rwanda and it will be interesting to watch for developments as Basel II and III implementation comes into force.