The National Bank of Rwanda (BNR) has lessened the reserve requirement ratio, as one of the ways of increasing liquidity on the market.
François Kanimba, Governor, BNR said early this week that in order to provide the banking industry with more liquidity, “with effect from February 6, 2009, the central bank reduced the reserve requirement ratio from eight percent to five percent”.
The governor was speaking at the launch of the monetary policy and financial review statement on Tuesday at Prime Holdings.
Slashing of the reserve requirement ratio by a three point means that all short term government treasury bills maturing in 2009 will not be automatically rolled out.
The reserve requirement is the amount of funds that a depository institution must hold in reserve against specified deposit liabilities.
Decreasing the ratios would lead to an increase in the monetary supply, leaving depositories with excess reserves. This can also induce an expansion of bank credit and deposit levels and a decline in interest rates.
According to Kanimba’s statement, the excess liquidity observed in 2007 has been declining over 2008. The statement also says that interest rates in money markets took an upward trend since the last quarter of 2008.
Statistics from BNR also show that total borrowing by the BNR from commercial banks, stood at Rwf58.6 billion at the end of December 2007 and fell to Rwf16.6 billion at the end of December 2008.
Rwanda’s is estimated to have registered a Gross Domestic Product (GDP) growth of 11.2 percent last year. With such growth and increased investment inflows into the economy, the central bank says that the monetary management in 2009 needs to centre on maintaining adequate liquidity in the banking industry.
The above strategies of condensing the reserve requirement ratio and allowing investors to retain the treasury bills past their maturity date also follow BNR’s review of its policy rate in January.
“Based on the liquidity conditions at the end of the 2008 and bearing in mind that stimulating domestic savings is one of the policy responses, BNR reviewed its policy rate in January 2009 by increasing it from eight to nine percent and reducing the width of the inter bank corridor from three percent to two percent,” the statement read.
According to Kanimba, recent developments in the financial sector highlight the importance of implementing bold strategies to mobilize ways of increasing the capacity of the domestic financial system.
He says that this would put the economy in position to meet the increasing demand of credit to finance big investment projects.
The effects of the global financial trends according to the statement include, decline in commodity prices and demand slowdown in Foreign Direct Investment (FDI), decline in None Government Organisation’s (NGO) transmission transfers and remittances from Rwandans in diaspora. It also noted a possible decline in official transfers through budget support.