Even the vibrant media which always reserves its front pages for political stories has shifted to the widespread financial crisis that has led to the fall and collapse of some big financial institutions in the US.

And yet these are US companies, Rwandans (especially the business community) are ardently monitoring the situation despite some struggling to figure out its origin and its impact. Its genesis is August 2007 when the US sub-prime mortgage market was affected by the fall in housing prices.

Due borrowers’ limited debt experience and failure to meet guidelines for Fannie Mae and Freddie Mac, US government supported enterprises, which work with mortgage lenders to help people get lower housing costs and better access to home financing, there was high perceived risk of default on these mortgages.

These loans were later securitised into mortgage-backed securities and sold to some investors guaranteeing that both the principal and interest on the underlying loan would be paid regardless of whether the borrower actually repaid. But it was due to speculative motives that they would increase in value.

Then, came the credit default swaps (CDS) written on sub-prime mortgage securities which were over rated and sold to banks, investment banks, insurance companies among others.
The risk of default was transferred from the holder to the seller of the swap. Since these swaps are not regulated and in incense offer no insurance, default to financial institutions increased.

The cause of woos in both the credit and financial markets is because banks and other investors lost billions of dollars which they writing off their balance sheets.

The biggest issue now is liquidity because banks do not have enough cash to provide loans anymore, thus forcing major central banks to bail them out and increase liquidity in the market.

Worry

The International Monetary Fund (IMF) in its twice-yearly report predicts a mild recession saying that there is a one-in-four chance of a full-blown global recession over the next 12 months.

In Rwanda though, the Executive Director of capital Markets Advisory Council (CMAC) Robert Mathu said, since our capital market is still at infant stage and it is not correlated to the international markets, it is hard to experience the impact.

He however hastened to note that if it persists, the recession in developed countries may eventually slow the demand for our exports, because we depend heavily on the Asian market for our exports.

The Asians trade directly with America and Europe meaning low demand from the American and European market would have an impact on some of our major exports. 

Contact: gahamanyi1@gmail.com