KIGALI - The National Bank of Rwanda (BNR) will inject liquidity into the banking sector as a stimulus plan that will push financial institutions to unfreeze long-term loaning to the private sector.

Excess liquidity that was recorded in Rwanda’s banking industry in 2007 has been drying up since 2008, leading to a rise in interest rates that blocked a significant portion of private sector members from accessing loans.

"We have identified four categories of loans which justify why government can assist banks at least to keep sustained lending,” Francois Kanimba, Governor of BNR said in an exclusive interview with The New Times.

He said a new fund within the central bank will act as a cushion for commercial banks to extend financing to businesses that deal in mortgages, lease of machinery, commercial trucks and general investments.

On a monthly basis, Central Bank will be re-stocking commercial banks with an equivalent of what has been disbursed while financing any of the above areas.

"What we want is to encourage banks to continue granting such loans,” Kanimba said.

In February this year, the Central Bank also reduced commercial banks’ reserve requirement ratio in a move that meant to avail them with more liquidity. 

The reserve requirement ratio was reduced from eight to five percent. The central bank also advised government not to roll-over short term treasury bills at maturity.

"I think this has been extremely useful to allow banks to continue lending,” Kanimba said.

BNR chief said the underlying factors behind the liquidity crunch in Rwanda’s banking sector originates from a significant increase in the amount of loans extended in 2008.

"Banks didn’t realise that there would be a mismatch problem.” Kanimba told The New Times.  "They continued to extend long term credits to some sectors, particularly construction, using short-term deposits.”

Throughout 2008, institutions like the Social Security Fund of Rwanda and some large corporates started to implement their massive investments, cutting their deposits with commercial banks.

"This was one of the major reasons why deposits in the banking system were growing very slowly compared with the trend in the past years,”

He added that the slowdown in external inflows, which started in July 2008, due the global financial crisis automatically, affected the deposits in the banking system. 

"This is the first effect of the global crisis in the banking system which was not captured earlier,” Kanimba said.

The decline in commercial bank deposits has also been attributed to Rwanda’s high inflationary pressure realised last year, which forced people to withdraw money in order to keep the same level of consumption.

Rwanda’s annual inflation hit a record high of 23 percent in December last year.

However, the governor said that government’s continued spending has facilitated building liquidity in the banking system.

"As we are talking now, the volume of excess reserves that banks have at the central bank in my understanding are quite enough to allow banks to continue lending operations without major bottlenecks,” he explained.

The governor said that the current global economic recession has had its toll on the Rwandan economy, citing huge shortfalls in private transfers, and declining prices of minerals and coffee. 

"Prices of tin came down dramatically by approximately 40-50 percent, coffee prices have not been doing very well…even if there is some recovery,” Kanimba said.

Volumes of transfers coming through banks in the first half of 2008 averaged $110 million on a monthly basis but have now declined to $95 million in the same stretch this year.

Kanimba hopes the economy will benefit from the general decline of global prices of oil, food, intermediate goods and construction materials. This is expected to reduce Rwanda’s import bills.

Last year Rwanda’s import bills rose by 54 percent compared to 37.5 percent, causing a trade deficit of 21.3 percent.

The Central Bank hopes to maintain the stability of the Rwandan franc throughout the year in order to keep the country’s exports competitive on the global market. Last year the Franc depreciated by only two percent against the US dollar.

For full details of the interview see The New Times Monday June 29, 2008

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