Financial sector support to the private sector’s long-term plans

Outline: The role of the financial sector in supporting private sector development Challenges of the Rwanda financial sector How they are being addressed What is the role of development partners?

The role of the financial sector in private sector development Domestic capital formation is fundamental to any country’s economic development and effective financial institutions are a prerequisite. Financial sector promotes private sector development through these pillars: Enhances savings mobilisation and efficient allocation of resources into productive investments hence increasing productivity

The role of Financial sector- contd Facilitating trade, capital flows in form of FDI and remittances from abroad Intermediating between savers and users of capital thus reducing transaction costs Increased access to financial services reduce informal sector business transactions

Financial sector challenges in Rwanda Very limited access to banking and other financial services outside Kigali and the provincial towns: Commercial banks have a combined 38 branches only all located in towns Insurance products are undiversified and its penetration is still very low MFI’s which should play a significant role in filling the gap have been marred by a weak financial base, and inadequate management

Challenges in the Financial sector Narrow, shallow, non-competitive financial sector- Financial depth measured by M2: GDP of 18.1%, credit to private sector: GDP of 10.9% are still low even by sub Saharan Africa levels Poor saving culture Lack of long-term resources for funding investments due to undeveloped debt and equity market Inadequate capitalisation.

Challenges-contd Undeveloped Payment system infrastructure Weak legal and regulatory framework for the NBFI Poor quality, and culture of auditing and accounting in most organisations. Low level of human and institutional capacity

What is being done? Rwanda government has developed a financial sector development plan (FSDP) whose vision is: To develop a stable and sound financial sector that is sufficiently deep and broad, capable of mobilising and allocating resources to address the development needs of the economy and reduce poverty.

Specific objectives Enhance access and affordability of banking and other financial services Develop an efficient, competitive banking sector with a diversified array of financial instruments Enhance savings mobilisation by introducing appropriate instruments, developing institutions and providing incentives for long-term savings Facilitate development of long-term financing instruments and an efficient capital market

Specific objectives- contd Develop appropriate policy, legal, regulatory and institutional framework for contractual saving Institutions Develop sufficient institutional and human capacity to deal with the challenges of the sector

The scope of FSDP Banking sector, specialised lenders and MFI Contractual savings industry Long-term finance and capital markets Payment system infrastructure

Policy geared to increase Access to banking services: Strengthen Banking and MFI sector through adequate capitalisation, improved regulation and Institutional capacity building through Bankers association and Umbrella MFI. Establish deposit guarantee schemes for banks and MFIs UBPR to operate like a de facto commercial bank while maintaining those aspects regarding cooperative principles

Access- contd BHR to Issue mortgage backed bonds to raise long term capital Banks including BHR to develop mortgage savings accounts BHR to organise the property market sector, real estate evaluation Banks to continue to develop leasing products

Access- contd BRD to attract new equity shareholders as long as it maintains its mission Continue to raise debt capital from external sources( AfDB,IFC,EIB) on long term to be able to on-lend locally BRD will diversify its loan portfolio to minimise risk while investing in all targeted key economic sectors. BRD to design bonds backed by good loans as a vehicle to raise more capital

Development of Long term Finance and capital markets Develop Long term government bonds to build a yield curve by securitizing Govt Debt to CSR and reissue the existing stock of TBills on a longer term. Create a sound and facilitating environment, legal, regulatory and operational guidelines for an OTC market and for issuance of corporate and municipal bonds Establish a Capital Markets advisory council Enact the company Act and Accountants bill

Long-term finance -contd Facilitate creation of private pension funds and mutual trust funds by establishing a legal and regulatory framework and inbuilt tax incentives. Increase penetration of CSR to include the self employed Consolidate regulation of Contractual savings institution ( Insurance and Pension) into a department of BNR, specifically charged with that responsibility

Development of Payment system Establish National payment council to develop and implement a national payment strategy. legislation on use of electronic payment, once the payment infrastructure is fully operational. Strengthen Simtel to accomplish its task of providing an electronic payment platform

The role of the development partners Financial and technical support to the financial sector reform agenda including institutional capacity building. Financial contribution to establishing the MFI deposit guarantee fund Extend long term credit lines to Rwandan Financial Institutions for on-lending. Provision of credit risk guarantee on corporate and municipal bonds, at least during the initial period. Financial support towards public education in the area of finance and entrepreneurship.

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