Why investors will have to wait a bit longer for municipal bonds

The local bourse has over the past year attracted a lot of interest, especially following the issuance of the different government and corporate bonds that have all been oversubscribed. This development underlines the huge potential of the stock market as a source of development finance for government and the private sector. The Capital Markets Authority (CMA) and the Ministry of Local government have been planning municipal bond issuance for about three years now, but it was not until April this year that enabling guidelines and regulations were published by the Office of the Prime Minister. Through a municipal bond issue, a district can borrow from individuals or private firms and repay with interest after a specified period thereby reducing reliance on central government for funding. On the other hand, SMEs can sell shares to the public on the alternative market segment to raise investment capital instead of acquiring expensive loans from banks. However, as the government reaps the benefits that the Rwanda Stock Exchange presents; the private sector (read SMEs) and local governments are noticeably absent despite the enabling laws in place. To make matters worse, when Business Times asked a number of district mayors, most of them were either not aware of the operationability of the bonds or haven’t prioritised the idea in their development plans. “Much as we were sensitised about it, I don’t know of any district that has expressed interest in a municipal bond issue to raise development finance,” said Jacques Rutsinga, Kamonyi District mayor. Rutsinga, however, said it is a good idea since it shows them how they could raise money without depending on the annual national budget allocations. “There are projects the district is undertaking that can benefit from such a bond issuance,” he noted. Some of the projects Rutsinga pointed out mainly included infrastructure like the construction of roads or markets which would create flourishing economic activities for people in the district. “These projects are always there and can be funded at once if we used bonds rather than wait for government funding,” he said. Unfortunately, Rutsinga just like other mayors we interviewed doesn’t see any of the issuances happening during this financial year or in the next. This is despite the fact that the Capital Markets Authority has been sensitising the 30 district mayors on how they can plan municipal bonds, and how they stand to gain. “We took local government leaders through what it takes to issue a bond, and are still working with them on the matter,” Robert Mathu, the CMA executive director, said. He, however, said he can’t know which district is interested, noting that the local governments work with the local government and finance ministries on financial management prior to issuing. But it looks like there is a lot to be done to make that a reality. Leandre Karekezi, the Gisagara District mayor, said CMA officials only talked to them about municipal bonds last year, but “we didn’t learn anything on how it all works”. The City of Kigali mayor, Fidel Ndayisaba, recently said a municipal bond issue is not in the city plans this financial year. However, Philbert Mugisha, the Nyamagabe District mayor, said the district council is discussing the possibility of issuing a municipal bond. “We are still discussing which projects to finance using the bonds, but this will be after meeting officials from the National Bank of Rwanda (BNR) and Ministry of Finance,” he said. The lack of enthusiasm on the prospect explains quite a lot on the performance of the fixed income securities segment at the Rwanda Stock Exchange, which sector players say is inactive because of low awareness levels. A paltry Rwf57 million was traded in bonds in eight transactions during the first half of this year from five bonds listed at the bourse, according to central bank figures. This year, the government resumed its debt issuance programme with quarterly Treasury bond issuance to finance infrastructure projects in its current budget. Municipal bonds too, have constantly been talked about and would fetch similar interest or more as the previous bonds considering Rwanda’s strong investor confidence and impressive credit rating. However, most districts seem not to understand how they can raise development funds through municipal bond issuance. “We don’t have any information on the projects districts would like to finance using the bonds. If local governments want to issue bonds, they should not stay in their offices. “They should come to Kigali and talk to brokers,” advised Shehzad Noordally, the chief executive officer of CDH Capital, a brokerage firm. Noordally noted that information about municipal bonds was not being disseminated well, saying if this mistake is not corrected, districts may never issue any bonds. “When you go to Gisenyi, for example, there are district infrastructure projects that can benefit from a bond issue. But local government have not invited us to visit such projects and advise them how they can use the stock market to raise money to implement them,” he said. He advised districts to work as private sector bodies in order to have a sense of responsibility on managing the projects and servicing the bonds. Mathu, however, urged brokers to visit districts to ‘sell’ them the idea and advise them on how to go about the process. “Capital markets require disclosure and following a process. That is why for us we started with the sensitisation of the mayors then asked them if they have projects that could be funded using the bond issuance,” Mathu noted. “Therefore, brokers should ask districts about potential projects and advise them accordingly, and not the other way round.”

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Why investors will have to wait a bit longer for municipal bonds