Banks in Rwanda may soon come under pressure to increase their core capital if proposals by the central bank are enforced.
A
draft policy circulated to all banks in September, which is meant to
strengthen liquidity in the sector, is awaiting review up by the
National Bank of Rwanda BNR board.
It proposes to
increase the minimal core capital for commercial banks fourfold or 300
per cent from Rwf5 billion ($5.6 million) to Rwf20 billion ($22.6
million).
The policy passed by BNR will witness will witness the sharpest increase in banks’ core capital in the region.
Tanzania
and Uganda settled at 200 per cent and 150 per cent respectively, as
regulators sought to protect public deposits and investments.
“The
proposed increase in core capital is based on the financing needs of
the economy,” said Uwase Masozera, the executive director in charge of
financial stability at the National Bank of Rwanda (BNR).
After the banks add their input, the regulations will be presented to the board to be passed and gazetted.
Rwanda has 16 licensed banks and each will be required to have $22.6 million in shareholders’ funds.
According
to the central bank, in the first three years after the publication of
the regulations, banks will have to build up their core capital to Rwf15
billion ($17.2 million) then add up the remaining Rwf5 billion (5.7
million) in the next two years.
Capital injections
A
dozen banks have strong core capital positions, leaving the executives
of the other four considering the idea of calling for fresh capital
injections to meet the new requirements.
The four banks
need a combined $40.7 million fresh core capital to comply over the
next five years after the new regulations are gazetted.
According
to the central bank, in the first three years after the publication of
the policy, the banks will build their core capital to RwF15 billion
($17.2 million) and an additional Rwf5 billion (5.7 million) in the
remaining two years after the publication of the policy.
Project funding
Industry
sources say the move by BNR is to create well capitalised banks that
can finance big-ticket projects, as pressure from foreign debt
increases.
“Today, some banks are limited by how much
capital they have in being able to finance development projects in the
country,” a senior banker privy to ongoing consultations told The EastAfrican.
“The
new core capital requirement also means that the central bank will not
be licensing small banks to just crowd the market. This is a case of
saying we want strong banks.”
Based on their financial
results in the six months ending June, 2018 financial results,
Commercial Bank of Africa (Rwanda), Development Bank of Rwanda (BRD),
Access Bank Rwanda and Guaranty Trust Bank Rwanda shareholders will have
to dig deeper into their pockets to raise capital.
The
Kenyan mid-tier CBA acquired Crane Bank Rwanda from Uganda’s DFCU Bank
last year, but the new capital requirement would compel the shareholders
to inject an additional $20.2 million, as the bank’s core capital is
$2.7 million.
The BRD, where the Rwanda government and
Rwanda Social Security Board — a public pension scheme — have
controlling stakes, will need to fork out an additional Rwf5.5 billion
($6.4 million) to build their equity up to $57.7 million, which is the
minimal core capital for a development bank in Rwanda.
Access
Bank Rwanda shareholders, too, will have to look for an additional
Rwf6.9 billion ($8 million) to boost their equity while the owners of
Guaranty Trust Bank Rwanda will have to pump in an additional Rwf12
billion ($13.8 million), to reach the proposed threshold.
A
bank chief executive said the regulator could be sending signals of
consolidation that it wants the banking sector, crowding out small
banks, which could close operation if they fail to raise the money in
the five years.
Experts warn that the new capital
requirement will make it difficult for new banks to enter the Rwanda
market as they have to find the minimal core capital immediately.
According
to the experts, the newest banks in the market are reporting low return
on equity and assets and low profitability and so could find it
difficult to persuade shareholders to pumping fresh equity in order to
meet the new regulation.
The banking industry’s
average return on equity was 9.5 per cent while the average return on
assets averaged 1.6 per cent, which may make it difficult for bank
executives to persuade shareholders to raise the $22.6 million to meet
the proposed capital target.
Profitability
Banks in the region report over 20 per cent return on equity.
Some
bank chief executives are suggesting the regulator raise the minimal
paid-up capital for commercial banks to $57.7 million in order to push
out small players distorting the market.
They argue that the Rwandan economy is driven by the agriculture and services sectors, which require long-term financing.
“Instead of having 16 banks, we need only seven for this small market. The seven strong banks can easily fund big-card projects like Bugesera International Airport,” one banker said.
“Instead of having 16 banks, we need only seven for this small market. The seven strong banks can easily fund big-card projects like Bugesera International Airport,” one banker said.
While the date
when the proposed law setting the minimal core capital will come into
effect remains unknown, unlike in Kenya where the legislature plays a
critical role in the banking industry, in Rwanda the central bank board
has the final say when it comes to passing or rejecting draft
regulations for the sector.
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