Understanding Basel norms in Rwandan banking sector

Dr Jaya Shukla Strong Financial sector provides base for strong economy. Rwanda’s financial sector is dominated by Commercial Banks accounting for 66.6% of the total assets of the sector. The National Bank of Rwanda (BNR) supervises banking sector through the risk based supervision framework for onsite/offsite surveillance. The supervisory tools used in supervising banks include: offsite surveillance methodologies such as CAMELS (Capital Adequacy, Asset quality, Management quality, Earnings, Liquidity, and Sensitivity to market risk), onsite inspections and Risk Based Supervision. To make banking sector match international standards on credit/ risks introduced by Banking Committee on Banking Supervision, BNR had to develop a roadmap for implementation of Basel Norms. BNR has created a steering committee in charge of development of Basel II/III framework. Committee has been working together with the International Monetary Fund (IMF) on the development of new capital adequacy regulations for banks. So what is Basel framework? In 1988, the Basel Committee on Banking Supervision (BCBS) in city of Basel located in Switzerland published a set of minimum capital requirements for banks. These were known as Basel I. Basel I focused almost entirely on credit risk (default risk) - the risk of counter party failure. It includes capital requirements and risk weights for banks only. It ignored operational and market risk. So, Basel II was introduced in 2004. It framed guidelines for capital adequacy (with more refined definitions), risk management (Market Risk and Operational Risk) and disclosure requirements. In 2008 global financial crisis was considered to happen due to weakness of Basel II norms. In Basel II framework any explicit regulation on the debt that banks could take was not considered. It also ignored systemic risk of banks. To do away with shortcomings of Basel II, Basel III norms were proposed in 2010. Basel III guidelines aim to promote a more resilient banking system by focussing on four banking parameters- capital, leverage, funding and liquidity. Deadline to implement Basel III has been expanded to 2019. Implications for Rwanda Rwanda being developing country will face challenges in implementing those norms with same standards and precision as in developed countries. Moreover some of those norms are meant for developed economies. These norms when implemented by developing countries will affect their credit or loan activities vital for their country’s program of development. For implementation of Basel II developing countries are likely to face technical challenge in managing, supervising new products and new norms based on Basel framework. As per Financial Stability Institute’s 2004 survey non-Basel-Committee countries expected training on Basel II-related topics including training of supervisory staff in developing countries. According to the report by B20 group of businesses, Basel III sets capital and liquidity requirements meant for US and European economies. It will affect the supply and cost of credit in developing economies. *The Business 20 (B20) is a forum through which the private sector produces policy recommendations for the annual meeting of the Group of 20 (G20) leaders). Dr Jaya Shukla, ACOD Agriculture and Resource Economics Jomo Kenyatta University of Agriculture and Technology, Kigali Campus

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Understanding Basel norms in Rwandan banking sector