Since 2017, Rwanda’s financial sector has undergone significant legal and regulatory reforms in order to create a smooth setting for different players in the sector.  As such, the National Bank of Rwanda (the Central Bank), in 2020, adopted regulation n° 33/2020 of 08/06/2020 governing mortgage refinance companies. This regulation introduces a legal framework for a new form of business structure whose purpose is to promote sustainable mortgage refinance business and setting regulatory requirements for mortgage refinance companies. The regulation defines a mortgage refinancing company (MRC) as a non-deposit taking financial institution licensed to conduct mortgage refinancing businesses.

The introduction of MRC is mainly aimed at increasing the liquidity within the mortgage sector and accessibility of mortgage credit facilities in Rwanda, reducing costs connected to mortgage and driving the country’s vision for affordable housing. The interest and risks associated with the business of mortgage refinancing attracts the regulatory and supervisory arm of the Central Bank.

The regulation prohibits conducting of mortgage refinance business without a license and prescribes requirements for the MRC’s principal line of business of refinancing mortgages to borrowers on the security of mortgage assets and other qualified collaterals. It sets the capital requirements for the MRC, including its minimum paid-up capital. The instrument specifies the types of collateral that a borrower can pledge for the MRC’s advances, and the discount that the MRC shall apply in determining how much it can lend against any qualified collateral. It also prescribes procedures for the management of the MRC’s interest rate risk and its permissible activities.

Article 4 of the regulation provides for the required capital that a mortgage refinance company should at least have.  It states that an applicant proposing to carry out the mortgage refinancing business shall have a minimum paid up cash capital of not less than Rwf15 billion unless provided otherwise by the Central Bank. In addition to this, the applicant has to demonstrate the ability to maintain its capital funds, unimpaired by losses at the prescribed minimum amount at all times and comply with the ongoing capital adequacy.

The regulatory authority that issues the license to a mortgage refinancing company is the Central Bank. Once the MRC satisfies the requirements and obtains the license, it is allowed to engage in the following businesses:

1.  Refinancing or purchasing of eligible mortgage loans;

2.  Investment in debt securities issued by the Government of Rwanda or any guaranteed debt and term deposits;

3.  Providing fully secured long term financing to primary mortgage lenders for financing of eligible mortgages loans;  

4.      Issuing bonds, notes and other financial instruments for purposes of meeting its objectives as well as any other activities that may be approved by the Central Bank.

The licensing so granted may be revoked by the Central Bank if, among others, the MRC:

1. Has not commenced operations within six (6) months from the date on which the license was granted;

2. Has ceased operating for a period of more than one month;

3. Has obtained the license through incorrect statements or fraudulent means;

4.  the parent company is undergoing liquidation;

5.  It no longer meets the applicable licensing criteria.

It is important to note, however, that an MRC is prohibited to engage in the businesses of wholesale or retail trade, including import or export trade;  acquire or hold, directly or indirectly, any part of the share capital of, or otherwise have a beneficial interest in, any financial, commercial, agricultural, industrial or other undertaking where the value of the mortgage refinance company’s interest would exceed the aggregate 25 per cent of the core capital of that mortgage refinance company or purchase non-performing loans or mortgages.

To ensure effective governance and management of an MRC, the regulation requires that administration of an MRC be vested in a Board of Directors which is constituted in accordance with prescribed requirements. The minimum number of Directors on the Board is seven and two thirds of those must be independent. For one to be a member of the Board, they must meet pre-established regulatory requirements including mixed skills and experience, and are approved by the Central Bank. The Board must comprise various committees including audit, credit and risk management committees.

Much like the governance and management, shareholding in an MRC is not liberalized. In this regard, the regulation provides that a natural person including his or her related party or a body corporate including its related party owned or controlled by one person other than a reputable financial institution or a reputable public company authorized by the Central Bank (with the exception of the Government of Rwanda and its institutions and foreign governments, international governmental institutions, international financial institutions) shall not directly or indirectly own or acquire more than 25 per cent of the shares of a mortgage refinance company.

Despite the intended objective of the regulation with regard to affordable housing, one is of the view that there is, at the outset, a need for mortgage financing companies that are later on supplemented by mortgage refinancing. If mortgages are still financed by commercial banks on the basis of usual commercial rates, then the intended objective of affordable housing may be impaired. Importantly, a mortgage bank (a category of bank that may be licensed in Rwanda as envisaged by articles 3 and 4 of regulation n° 2310/2018 – 00013 [614] of 27/12/2018 of the National Bank of Rwanda on licensing conditions of banks) would serve better compared to mortgage refinancing companies that re-finance mortgages financed by commercial banks.

Ultimately, financial institutions that are currently financing mortgage will benefit from the mortgage refinancing projects by finding liquidity through selling mortgage loans on their portfolio. There will be no, at least in the view of the author, tangible benefit on borrowers especially in terms of lowering interest rates.

Mortgage owners should be considered so that they may benefit from this new legal framework. The idea of a mortgage bank should be operationalised for them to finance mortgages that are refinanced by MRC later.

The writer is a Banking and Finance lawyer and Senior Associate at CM ADVOCATES. The views expressed in this article are of the writer.

Email:  protogene@cmadvocates.rw