Central Bank Governor Mr. François Kanimba has spoken out on the new monetary policy  and financial stability statement  for the year 2010.In an exclusive interview with The New Times’ Fred Oluoch-Ojiwah.  Kanimba gives an overview of how the new policy will likely impact the economy during the course of the fiscal year 2010.

Excerpts  

Early this year  Government had upwardly revised the per capita income projections for Vision 2020. I am very sure that such a move must have had your inputs in your capacity as a fiscal policy technocrat of the Government. Could you shed more light on this revision?

What happened is that during the Kivu Government retreat, while we were going through the achievements in implementing the vision 2020 targets, it came to our attention that in some sectors we were even ahead of objectives which we were targeting for 2020.

This means that there was a need  to update the Vision 2020 programme by taking advantage of these updates. This was the decision reached.

But at the same time it also came to our realization that the targeted a per capita income of $900 by the year 2020 which was benchmarked with various  middle income countries such as Singapore has since changed.

These new realities has necessitated that upward review. However I must point out that we have not completed this exercise. It will be completed during the course of this year.

When is the Credit Reference Bureau launching?

What we agreed with the service provider is May 2010.So far they have not communicated any change in their action plans.

When you see how banking is perceived. I have spoken to one or two bankers and they intimate to me that sharing of information by credit bureaus will pose challenges as this will be a new norm within the sector.

The working of the credit reference bureau will address a number of things. It will mainly assist banks to make a better assessment of the credit worthiness of applicants seeking loans. It is on the benefit of the public, the banks and the Central bank as well.

So if all of us have an interest in having such kind of new service I cannot understand a bank officer complaining about a perceived fear touching on breach of private secrecy to clients.

In any case according to the law governing the credit reference bureau, any individual who wants to be analysed will be required to provide his consent before a bank is obligated to share such information with other players.

You are saying that consent should be sought before analysis and information is gathered and even shared? These things are hardly known as we speak by sections of the public.

Absolutely. That is extremely important. However I would like to put a note of caution here. If for any reason one does not think that he or she  has no interest to disclose  his or her  credit history to the bureau it is a risk on his or her side in which he or she stand to lose accessing credit.

This is because lack of information about a person’s  history will render him or her  more risky in the eye of the bankers. In that case such a situation can result in refusal by bankers to advance such a person  credit. So those who will decline to be analysed that will be termed as an individual risk based on choice.

Some commercial bankers who analyse risk whom I spoke to who say  that the Central Bank is not playing its part by availing timely information (Inter bank rates) to commercial banks to enable them assess risk in real time.

What kind of information are they talking about?
If you are talking about inter bank rates, these are collected and made available to them on a daily basis. In fact we have created a kind of information exchange which is availed on a daily basis. But I think that  the timely information these officers you spoke to are alluding to has something to do with the current public credit registry managed by the Central Bank.

If that is the case I can say that I fully agree and I concur with the officers you spoke to regarding this observation. I know that it is a point  which the Central Bank needs to work on urgently.

However the good news is that at the moment  we have been engaging in reviewing the operations of this registry. With support from USAID we will be able from June this year to have everything back on track.That will complement the activities of the private Credit Reference Bureau.

There is a 26.7% increment of external budget support in the policy statement. From $410 Million the projection shot  up to $590 Million. These are basically grants. But  Rwanda projects itself as a country which has a vision of doing away with aid. So the new monetary statement tends to go against this thinking.

There is no contradiction between having a vision of being less dependent on aid and temporarily benefitting from an increment on the same aid. What is important is how this temporary advantage we have as support is utilized.How do we utilize such resources over a period of time before we attain self reliance? That is the whole essence of this issue you are talking about.

Your new policy measure has  two liquidity boosting facilities.There is the Central Bank 3 to 12 month refinancing mechanism and Government’s 5 year long term deposit facility. How do these facilities work?

The purpose of the 3 to 12 month facility is to rebuild to a uniform manner the liquidity level within the banking system. There are some banks which are over liquid while others are under liquid.

What happens is that for those with very fragile liquidity position they continue to pay for longer term deposits at very high interest rates. I would give an example of a huge deposit by an insurance company.

Some of the banks would continue to pay them at 13 to 14 percent. This is partly the explanation as to why banks have not started to reduce lending rates to clients.

This is because they reason that they continue to pay high rates to attract big depositors. Now what the central bank is trying to do is to encourage the banks which are still such fragile liquidity conditions to use the Central Bank facility at a lower cost while continuing with attracting speculative deposits at very high rates which distorts the markets.

So from time to time what we do is to simply look at when  a big deposit with a bank  is on the  verge of being called to maturity at very high interest rates. To encourage this bank not to roll out this deposit we issue the liquidity boost in the market. However the way we do that we simply communicate to all the banks that we are issuing for instance a Rwf 3 billion facility for a say 3 to 12 months.

That has been happening on a regular basis. Banks can get liquidity from the central bank at lower rates of say 7 percent. The intention is to stabilize interest rates on deposits to avoid distortions.

How about the 5 year facility?

In that one a bank which is funding investment loans with maturity higher than 3 years  can simply come to the Central Bank for refinancing of these loans at interest rates close to money market rates.

This is due to the fact that for this facility interest rates charged is close to 3 month Treasury Bill rates which stands currently at 8 percent which is quite reasonable.

With such kind of offers  a bank can easily lend to clients at 14 to 16 percent maximum. However banks still continue lending at higher rates. In this the intention is for banks to continue lending at longer terms.

Expound on the key pointers of the proactive policy measures meant to boost liquidity and savings for the purposes of supporting growth 

The first is to keep confidence in the banking sector with respect to liquidity. This is because in 2009 banks were ‘traumatized’ for the first time having run short of liquidity.

They thus had to get assistance from the Central Bank after a period of 5 years of being over liquid. The situation in 2008 created some ‘trauma’ and banks are not yet confident of the actions taken by Central Bank to rebuilt liquidity in the system.

So the key message during my policy statement  was  to tell them to have confidence in the monetary system in which Central Bank was ready to inject more liquidity into the system to allow players to undertake significant level of operations to lend to the economy.

I was able to say so  because the current inflation in the country is extremely low. This creates room for Central Bank to inject more liquidity into  the system without worsening inflationary pressures.

But at the same time I have to say that the liquidity crunch  in 2009 reflected a slow pace of deposits with the banks. Lending, on the other hand has been increasing thus bringing about a mismatch. So to avoid such a situation we have to be careful while managing interest rates within the money markets for the purposes of keeping deposit rates at least a level which is higher than inflation.

While maintaining this level it is also extremely important to keep the levels at such points which can enable banks to operate. There is a trade off to make but that is the purposes of a proactive monetary policy.

Talks towards establishment of the East African monetary institute as a transition body to the East African Central Bank is due to start. Is that so?

Not yet. I really don’t think that it will start in 2010.

Rwanda along with Burundi are the latest entrants to the EAC. Which means that there are still several issues it has to sort out.

Not at all. While we joined the EAC only three years ago, I think we are not any different from the other member countries in being required to implement all the EAC reforms.

What  I wanted to know is that there are convergence issues that Rwanda has to comply with.

You must know that on this topic of convergence all member countries have their own set of issues. When I look at Rwanda’s macro-economic convergence criteria  as it concerns this issue, it is not very different from that of other EAC members.

All member countries have to make significant efforts to converge. In February there was a meeting of Governors of Central Banks and Finance Ministers of member countries in Arusha. We looked at the report of the European Central Bank that was contracted to do a study on this issue of establishing a monetary union for the EAC.

The report has been validated. The next step should be to negotiate the protocol. This protocol provides for the establishment of the East African Monetary Institute as a transition mechanism for the eventual establishment of the East African Central Bank.

The East African Monetary Institute will have a significant role to play to bring the five member countries to implement the agreed convergence criteria before we establish a common currency in the region. That is the road map.

What are the time frames like?

By 2012 we shall have concluded the negotiations of the East African Monetary Union protocol which provides for the establishment of the Monetary Institute. About the exact dates of the establishment of this institute is not exactly known. However objectively I can say that we can complete the negotiation for the protocol in the coming twelve months.

Lastly let us talk about the potential entrants like Barclays,  Equity and Cooperative bank of Kenya.

None of them have made formal applications. You must be talking about the recent visit by Barclay Capital officials.  These officials were looking at normal opportunities for other investments.

They were not coming to establish a retail or corporate banking subsidiary. The same applies to Equity Bank. While I have met Mr.James Mwangi the CEO of Equity Bank several times urging him to make a move nothing concrete has matured yet.

Equity wanted to gain entry through an existing operation via Bank De Kigali but you know that public assets are not sold on a sole basis. For the case of sale of Government stakes in BK there will have to be an international tender.

There is no guarantee that Equity Bank will bag the deal. This was the message we sent to them. They were however looking at other opportunities. Since then I have not seen them coming back. Perhaps they are thinking about how to come back.

But I must say that so far I have not yet got any official application from Equity bank to start operations.

How about Cooperative Bank of Kenya?

Sometime back the Government was looking towards establishing a cooperative bank in Rwanda. Government called for technical assistance from Cooperative Bank of  Kenya.

A team of consultants came into Rwanda to conduct some studies and to make proposals. But so far this proposal has not been brought forward to establish a formal banking institution. The problem is that it cannot be a sole Government initiative alone.

The cooperative sector must join forces to have the critical mass to formulate a bank of such a nature. The Government can support and mobilize but the critical mass with the necessary shareholding structure and capital is key to its establishment.

Ojiwah@gmail.com