Will local banks raise the new minimum capital requirement?

Local banks will be required to raise their minimum capital from the current Rwf 5b to Rwf 20b according to a new draft licensing regulation for the sector.

This presents commercial banks a task to raise the capital fourfold which most admit is quite an uphill task.

The transition period has been set at 5 years.

The revision of the draft regulation has since passed necessary steps and stages including consultations among sector players.

It is likely to take effect in the coming year when it’s gazetted.

The current minimum capital requirements were set in 2008 which the Central Bank is behind current market conditions and factors.

Peace Uwase Masozera, the executive director in charge of financial stability at the National Bank of Rwanda, told The New Timesthat the revision was necessary to ensure that banks have sufficient capital base to finance the needs of the economy.

“Existing licensing conditions were set in 2008. Market conditions have changed significantly since then. The increase in minimum capital requirements is largely driven by the need to ensure that banks have a sufficient capital base to finance the needs of the economy. The increase will have a 5 year transition period,”

 Banks that do not currently meet the Frw 20 billion capital requirement will be required to build this up to Rwf 15 billion in the next three years and ultimately to Rwf 20 billion by the fifth year.

She explained that the regulation for banks has four categories to allow operators to comply depending on their business lines and capital; commercial banks, development banks, cooperative banks and mortgage banks.

“The revised licensing regulation for banks has 4 categories of banks - commercial banks - Rwf 20 billion minimum capital requirement, development banks - Rwf 50 billion, cooperative banks - Rwf 10 billion and mortgage banks - Rwf 10 billion,”

Consequently, microfinance banks will not be governed by the banking law requirements and will be supervised by the microfinance law.

“Microfinance banks will no longer be subjected to banking law requirements and will be supervised under the Microfinance Law which best suits their line of activity. This too will have a 5 year transition period,” Uwase told this paper.

The revision of regulation is not only targeting the banking sector and will also affect insurers.

Insurers will also be required to raise their minimum capital requirement to Rwf 2 billion for life insurers and Rwf 3 billion for general insurers.

“We also reviewed the licensing requirements for insurers increasing the minimum capital from Rwf1 billion to Rwf 2 billion for life insurers and Rwf 3 billion for general insurers,” she explained.

The regulator also created two new categories for insurers - Health Maintenance Organisations with a minimum capital requirement of Rwf 500 million and reinsurers with Rwf 5 billion.

This aims to address an existing gap in terms of the types of insurance businesses needed to licence for the development of the sector.

Some experts have said this could lead to acquisitions, mergers or downgrading of banks in the sector.

This, they say, will be because of difficulties in raising capital considering the performance of local banks.

For instance, with 17 players in the sector, Rwanda’s banking sector assets stand at Rwf 2824 billion which some say could do better.

The performance of the sector has also often been significantly low compared to peers in the region. For instance, in the first half of 2018, the local players (17 of them) jointly registered a net profit of Rwf22.9bn, Rwf13.4bn going to one player.

Beyond profitability, non-performing loans and losses have also featured severally in the local sector.

For instance, a review of individual bank’s performance shows that some banks had non-performing loans as high as 15 per cent.

Experts say this could lead potential investors and financiers to shy away from further funding the operators to enable them raise capital.

However, bankers say that the 5 year period is adequate to raise the capital.

Commercial Bank of Africa Rwanda (CBA) Chief Executive Linah Higiro told The New Times that, since the Capital Adequacy Ratio is higher than the prudential guideline, most commercial banks are set to meet the capital demands.

“Commercial banking is at 21.4 per cent higher than the prudential guideline of 15 per cent. BNR has provided for a 5 year capital injection plan which most commercial banks will manage,” she said.

This, she said, will eventually see banks increase financing to the private sector.

“The additional capital also allows for the local market to handle large ticket transactions without looking to the region,” Higiro added.

 George Odhiambo, the Managing Director of KCB Rwanda, told The New Timesthat the majority of local banks are likely to raise the capital given the transition period given.

He said that most players are likely to mobilise the capital from shareholders and net profits.

In the event of mergers and acquisition, he said it is unlikely to be a consequence of inability to raise the minimum capital requirements.

“Among our concerns during the consultation phase was the rationale of the sudden steep increase of capital which, as explained, was necessary in light of some developments such as the drop of the value of the Franc against the Dollar over the years by about 30 per cent,” he said.

He also noted that the development will have positive effects on the local market in the long run as banks will be better placed to support the economy through lending.

“In the short-term, however, there are going to be serious conversations in most banks’ boardrooms as we try to convince our shareholders and investors why they should  raise more funds,” he said.