In a move to boost the local credit market, the International Finance Corporation (IFC) and the Central Bank on Tuesday signed an agreement that will enable the former to provide local currency loans to support private sector growth.
The initiative will provide a platform for the development of the commercial swap market in the country to facilitate the deepening of the financial market through IFC’s swap deals with international banks.
“This agreement will enable IFC to provide loans…to Rwanda’s emerging private sector. It will create more opportunities for the private sector to promote sustainable economic growth,” said Janamitra Devan, the IFC’s Vice President for Financial and Private Sector Development.
Officials said that since there are no banks able to provide such long term swaps currently, the Central Bank will give Rwandan francs to IFC in exchange of international currency until a commercial swap market develops.
Devan, who signed the agreement on behalf of IFC, said access to long-term local currency will enable IFC to extend long-term loans to companies that do not generate foreign exchange revenue.
The investment arm of the World Bank Group said the new financing tool will also help local firms to hedge against foreign exchange risks associated with borrowing in international currencies.
Devan also observed that swaps are a critical part of a robust financial system that is essential for sustainable economic development.
“Robust financial systems are vital for economic development because they help to mobilise funds and channel the funds to sectors that most need the financing,” he said, referring to sectors such as infrastructure.
François Kanimba, the Governor of the National Bank of Rwanda said that the deal will supplement government’s efforts to boost liquidity in the banking system.
“This facility is going to address the issue of long-term lending that was made extremely complicated by the liquidity crunch our banks faced at the beginning of this year,” Kanimba said.
Official statistics show that in first six months of this year credit to the private sector dropped by as much as 24 percent to Rwf71.7billion from Rwf94.4 billion in the same period in 2008.
The Governor noted that despite government’s efforts to encourage banks to continue lending on a long-term basis by setting up a deposit facility in commercial banks, the facility is not enough.
“The amount of money we can inject in the economy is still limited. This arrangement is going to achieve more efficiently, the same objectives we have been trying to achieve since the liquidity crunch occurred,” Kanimba said.