The functioning of the banking sector in the country has improved in the recent past, as it has recovered   from the liquidity crunch that hit the sector earlier this year, a senior official from International Monetary Fund (IMF) has said.

"We are satisfied with the way the government handled the situation. And also  the way commercial banks are dealing with balance sheets is improving liquidity in the  system which was very tight,” Dmitry  Gershenson, the IMF Resident Representative  told Business Times on Thursday during a press briefing at the Ministry of Finance with development partners.

Gershenson also complimented efforts by government through the Central Bank to boost liquidity in the banking sector by availing long term deposits to commercial banks.

"While the amount of money used is about 3- 4 billion francs- was not that substantial, the introduction of the facility has also improved the banking system - it has had a positive impact,” he said. 

The IMF Representative’s comments come against the backdrop of a report by the IMF team in August exposing weaknesses in risk management and governance of commercial banks, that forced them to tighten credit standards leading to a decline in credit growth.

Second quarter statistics by BNR show that credit to the private sector dropped by as much as 24 percent or from Rwf94.4 billion in the first half of 2008 to Rwf71.7 billion in same period this year.

To facilitate payments and avoid credit stagnation, the Central Bank was prompted to inject sizeable amounts of liquidity into the banking industry, a process that began early this year.

While short-term liquidity conditions generally improved the report said, many banks raised interest rates to attract deposits and address maturity mismatches between their assets and liabilities.

"The banks have also generally tightened lending standards, raising the risk of a prolonged credit slump, something that has had an adverse impact on the real economy,” 

The underlying factors behind the liquidity crunch in Rwanda’s banking sector experienced at the beginning of the year, originates from a significant increase in the amount of loans extended in 2008.

Following the report, the Central Bank has moved to address the above issues including instructing all commercial banks to set up risk management departments.

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.

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