The Central Bank should strengthen the functioning of the banking system and improve on banking supervision as key mitigating factors for the sector to survive the on-going financial downturn, International Monetary Fund (IMF) says.

The IMF report released late last week said that weaknesses in risk management and corporate governance must be addressed.

The report said that these shortages are exposing weaknesses in risk management and governance of commercial banks, forcing them to tighten credit standards and leading to a decline in credit growth.

To facilitate payments and avoid credit stagnation, the Central Bank has injected sizable amounts of liquidity into the banking industry. The process begun early this year. 

However, the IMF says that despite abundant liquidity in the banking sector, credit growth stagnated.  

"Additional policy adjustments may be required should the world economic crisis and its impact on Rwanda worsen beyond current expectations or should the domestic banking situation deteriorate further,” the report says.

Second quarter statistics by BNR show that credit to the private sector dropped by as much as 24 percent or from Rwf94.4 billion in the first half of 2008 to Rwf71.7 billion in same period this year.

The IMF report states that while short-term liquidity conditions generally improved, many banks raised interest rates to attract deposits and address maturity mismatches between their assets and liabilities.

The banks have also generally tightened lending standards, raising the risk of a prolonged credit slump, something that has had an adverse impact on the real economy.

According to the IMF report, the Central Bank should improve its staffing capacity and supervisory and monitoring tools.

François Kanimba, governor of BNR attributed the current troubles in the banking industry to lack of risk departments to specifically handle risk management in banks.

"Right now we are shifting our focus on how banks manage risks. This is a work in progress and this problem is common in most developing countries,” he said.

In March this year the Central Bank introduced facilities aimed at increasing bank liquidity and promote lending to the private sector but the IMF says the strategies were barely used.

The IMF report follows last month’s visit by the institution’s staff to assess Rwanda’s performance for last year under Poverty Reduction and Growth Facility (PRGF) program.

Despite the short falls in the banking sector, IMF team noted that the program performance was broadly satisfactory, citing the 2008 double digit economic growth of 11.2 economic that exceeded government target. 

A separate recent mission by the Monetary and Capital Markets Department from the same institution also found significant shortcomings in commercial banks’ credit risk management, corporate governance, and weaknesses in bank supervision due to staffing shortages.

However the Central Bank has agreed to address the existing problems.

In a bid to encourage longer –term investment lending to sustain economic growth, the BNR will make a limited transfer of some government’s deposits to commercial banks, a move that was approved by the IMF team.

The team also welcomed efforts by some banks and the Rwanda Development Bank to directly borrow from international multilateral financial institutions.

It also recommended that the BNR establish a system to monitor external private sector debt.

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