To boost liquidity levels in the local credit market, the International Finance Corporation (IFC) and the National Bank of Rwanda (BNR) last week, signed an agreement that will enable the former to provide local currency loans to support private sector growth. 

Specifically, the IFC will deposit international currency at the Central Bank in exchange for an equivalent in Rwandan francs under the terms of the treasury bills.

The process will be carried out until Rwanda develops a commercial swap market, officials said.

According to the agreement, IFC can either lend directly or through banks which are committed to Small and Medium Enterprises (SMEs) financing. 

François Kanimba, the Governor of the BNR underscored that the initiative is a step towards the development of Rwanda’s financial market as it will create competition in the local credit market.

"The amount will depend on the absorption capacity of the market. There is no limit. It is also going to address the issue of long term financing lending which was complicated by the liquidity crunch,” the Francois Kanimba told Business Times in an interview shortly after signing the agreement.

The Governor said that with BNR offering relatively low interest Treasury bills to IFC, it is likely that a section of the business community in particular corporate companies will prefer dealing with IFC directly. He said the Central Bank T. bills offered attract rates in the range of 7 to 8 percent.

"When this happens, it is going to introduce some competition in the market because when IFC lends directly to corporate companies, banks will wake up due to competition.

This can have a positive impact on lending rates that banks are applying to borrowers,” Kanimba said. 

The arrangement is also expected to increase credit to the private sector. Credit to the private sector had stagnated at the beginning of the year. 

"The amount of money we can inject in the economy is still limited. This arrangement is going to achieve more efficiently, the same objectives we have been trying to achieve since the liquidity crunch occurred,” Kanimba said.
In a parallel interview Steve Caley, the Managing Director FINA Bank, who also doubles as the Chairman of the National Banker’s Association hailed the agreement, saying that it will boost liquidity levels in the banking sector.

He said it will also help local firms to hedge against foreign exchange risks associated with borrowing in international currencies.

However, Caley said that banks would prefer IFC to work with them instead of dealing with customers directly as it would give banks more confidence to be able to lend for long term projects.

"It would make it easier for us to lend rather than IFC lending to our customers almost as a competitor. Let us not forget that at the moment, the issue is not that we do not have liquidity. The issue is that we do not have liquidity to be able to commit to long-term lending,” he argued.

Caley also argued that with IFC dealing with customers directly, it is likely to generate unhealthy competition within the banking industry as banks may be forced rush into offering credit without proper risk management.

"We might end up competing with each other to the extent of issuing loans that are not 100 percent credit worthy. This would bring a degree of stress to our portfolios down the road,” he observed.  

While it is important to develop a local commercial swap market, the banker observed that Rwanda’s economy is still relatively young for the product.

"You need a more mature and much deeper economy to be able to do this. One of the reasons the banks have not been able to do it themselves is that there has not been to some degree the expertise need,”

Caley also mentioned that banks have limited resources with a substantial amount being reserved for domestic liquidity.

"There is not the pool of funds for a commercial bank to be able to tie up! I do not think it is something that an economy of this size and financial sector can do independently. This is why the move by the Central bank is very welcome and necessary.”

Janamitra Devan, IFC’s Vice President for Financial and Private Sector Development, observed that the facility will avail more liquidity to enable local SMEs and the private sector to benefit right from the market.

"It creates a better and more competitive environment with efficiency required for the financial sector,” he said.

Devan signed the agreement on behalf of IFC, also highlighted that the initiative will provide a platform for the development of the commercial swap market in the country.

"No swap has even taken place! This is part of the learning process of how swaps actually work in international markets. We hope this will eventually spread to other swap arrangements as well,” he said.

According to Devan, Swaps are also critical for development of a robust financial system that is essential for creating sustainable economic development.

"It will evolve when there is greater and more trade. Right now the local companies do not have access to foreign exchange and that is why we basically conducted this swap,” he said, pointing out that the availability of credit will create a more vibrant private sector.

"The private sector is still very nascent in Rwanda and availability of credit is critical for success of the private sector.” 

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