National Bank of Rwanda (BNR) has made proposals to force banks to increase their core capital.
A draft policy circulated to all banks in September, which is meant to strengthen liquidity in the sector, is awaiting review up by the board of the central bank.
It proposes to increase the minimal core capital for commercial banks fourfold or 300 per cent from Rwf5 billion ($5.6 million) to Rwf20 billion ($22.6 million).
The policy passed by BNR will witness will witness the sharpest increase in banks’ core capital in the region.
Tanzania and Uganda settled at 200 per cent and 150 per cent respectively, as regulators sought to protect public deposits and investments.
“The proposed increase in core capital is based on the financing needs of the economy,” said Uwase Masozera, the executive director in charge of financial stability at the National Bank of Rwanda (BNR).
After the banks add their input, the regulations will be presented to the board to be passed and gazetted.
Rwanda has 16 licensed banks and each will be required to have $22.6 million in shareholders’ funds.
According to the central bank, in the first three years after the publication of the regulations, banks will have to build up their core capital to Rwf15 billion ($17.2 million) then add up the remaining Rwf5 billion (5.7 million) in the next two years.
A dozen banks have strong core capital positions, leaving the executives of the other four considering the idea of calling for fresh capital injections to meet the new requirements.
The four banks need a combined $40.7 million fresh core capital to comply over the next five years after the new regulations are gazetted.
According to the central bank, in the first three years after the publication of the policy, the banks will build their core capital to RwF15 billion ($17.2 million) and an additional Rwf5 billion (5.7 million) in the remaining two years after the publication of the policy.
Industry sources say the move by BNR is to create well capitalised banks that can finance big-ticket projects, as pressure from foreign debt increases.
“Today, some banks are limited by how much capital they have in being able to finance development projects in the country,” a senior banker privy to ongoing consultations told The EastAfrican.
“The new core capital requirement also means that the central bank will not be licensing small banks to just crowd the market. This is a case of saying we want strong banks.”
Based on their financial results in the six months ending June, 2018 financial results, Commercial Bank of Africa (Rwanda), Development Bank of Rwanda (BRD), Access Bank Rwanda and Guaranty Trust Bank Rwanda shareholders will have to dig deeper into their pockets to raise capital.
The Kenyan mid-tier CBA acquired Crane Bank Rwanda from Uganda’s DFCU Bank last year, but the new capital requirement would compel the shareholders to inject an additional $20.2 million, as the bank’s core capital is $2.7 million.
The BRD, where the Rwanda government and Rwanda Social Security Board — a public pension scheme — have controlling stakes, will need to fork out an additional Rwf5.5 billion ($6.4 million) to build their equity up to $57.7 million, which is the minimal core capital for a development bank in Rwanda.
Access Bank Rwanda shareholders, too, will have to look for an additional Rwf6.9 billion ($8 million) to boost their equity while the owners of Guaranty Trust Bank Rwanda will have to pump in an additional Rwf12 billion ($13.8 million), to reach the proposed threshold.
A bank chief executive said the regulator could be sending signals of consolidation that it wants the banking sector, crowding out small banks, which could close operation if they fail to raise the money in the five years.
Experts warn that the new capital requirement will make it difficult for new banks to enter the Rwanda market as they have to find the minimal core capital immediately.
According to the experts, the newest banks in the market are reporting low return on equity and assets and low profitability and so could find it difficult to persuade shareholders to pumping fresh equity in order to meet the new regulation.
The banking industry’s average return on equity was 9.5 per cent while the average return on assets averaged 1.6 per cent, which may make it difficult for bank executives to persuade shareholders to raise the $22.6 million to meet the proposed capital target.
Some bank chief executives are suggesting the regulator raise the minimal paid-up capital for commercial banks to $57.7 million in order to push out small players distorting the market.
They argue that the Rwandan economy is driven by the agriculture and services sectors, which require long-term financing.
“Instead of having 16 banks, we need only seven for this small market. The seven strong banks can easily fund big-card projects like Bugesera International Airport,” one banker said.
While the date when the proposed law setting the minimal core capital will come into effect remains unknown, unlike in Kenya where the legislature plays a critical role in the banking industry, in Rwanda the central bank board has the final say when it comes to passing or rejecting draft regulations for the sector.
Source: East African