Rwanda Financial Sector Development Program II.Pdf

Rwanda: Financial Sector Development Program II

October, 2012

Prepared by: A. Michael Andrews, Keith Jefferis, Robert Hannah and Paul Murgatroyd

Preface The authors wish to thank the many individuals and institutions who have provided much of the input and helped the team to crystallize its thinking and present what it understands generally reflects consensus among the most involved stakeholders on the issues addressed. In particular, we thank Ministry of Finance and Economic Planning and National Bank of Rwanda officials for the many of hours of support they provided for this work. We also wish to thank FIRST Initiative for financing the work necessary to produce the Second Financial Sector Development Plan (FSDP II) and our task manager, Gunhild Berg of the World Bank who provided overall guidance and support.

Field work was conducted during missions in March and July-August 2012 and this report reflects the situation in Rwanda as of those dates. As financial sector reforms and progress are very fast moving in Rwanda, some proposed actions will have already been implemented and some aspects of the financial sector may have changed significantly.

As with the original Financial Sector Development Plan, FSDP II is meant to be Rwanda’s plan for moving the financial sector forward, not the recommendations of the consultant team that prepared it. FSDP II provides a foundation for the financial sector strategy being prepared as part of the second Economic Development and Poverty Reduction Strategy, for implementation from 2013/14.

Contents Executive Summary ...... viii I. Introduction and Overview ...... 1 II. The Strategic Framework ...... 7 Progress Under FDSP I ...... 8 Four Main Strategies for FSDP II ...... 10 Program 1: Action Plan for Financial Inclusion ...... 11 1. Defining and Monitoring Financial Inclusion ...... 11 i. Defining Financial Inclusion...... 11 ii. Monitoring Financial Inclusion...... 12 iii. Creating Incentives to broaden and deepen financial inclusion ...... 13 2. Action Plan for Financial Education and Literacy ...... 14 i. Broadening and deepening financial literacy ...... 14 ii. Improving financial education at the nonprofessional level ...... 15 3. Promoting Products for Financial Inclusion ...... 16 i. Branchless Banking ...... 16 ii. Mobile Money Transfers...... 16 iii. Agent Networks ...... 17 iv. Trust/Escrow Accounts ...... 17 v. Data/reporting ...... 18 vi. Formalizing e-money Accounts ...... 18 vii. Mobile/Internet Banking ...... 20 viii. Agency Banking...... 20 ix. Micro insurance ...... 21 x. Micro leasing ...... 21 4. Action Plan for Strengthening the Umurenge SACCO Program ...... 22 i. Strengthening governance by consolidating Umurenge SACCOs in districts 23 ii. Establishing an effective interface between District SACCOs and branches . 24 iii. Designing strategies to improve District SACCO and branch sustainability . 24 iv. Establishing an overall coordinating system for capacity building ...... 25

v. Conducting a study to ascertain and design an effective national structure ... 26 5. Action Plan to More Effectively Supervise SACCOs/MFIs...... 27 i. Reorganizing and Financing BNR SACCO/MFI Supervision ...... 27 ii. Strengthening the SACCO/MFI legal and regulatory environment ...... 28 6. Strengthen other Entities and Programs to Better Support Access to Finance ...... 29 i. Strengthening AMIR capacity and effectiveness ...... 29 Program 2: Developing Institutions, Markets and the Supporting Infrastructure ...... 30 1. Building Capacity in the Financial Sector ...... 31 i. Rwandan Professional Standards and Training ...... 31 ii. The Role of Industry and Professional Associations ...... 31 2. Banking ...... 32 i. Increasing Competition ...... 32 ii. New Entrants ...... 32 3. Insurance ...... 33 i. Mortality (Life) Tables ...... 33 ii. Annuity Products ...... 33 iii. Taxation ...... 34 iv. Data compilation and publication ...... 34 v. Professional qualification requirements ...... 35 4. Pensions ...... 35 i. Rwanda Social Security Board ...... 36 ii. Private Pension Plans ...... 38 5. Capital Market Development ...... 39 i. Rwanda Stock Exchange...... 40 ii. Bond Market Development ...... 41 iii. Collective Investment Schemes ...... 45 6. Supporting Infrastructure ...... 45 i. Payment System ...... 45 ii. Credit Information Reporting ...... 49 iii. Creditors’ Rights and Insolvency...... 51 7. Rwanda as a Financial Services Hub ...... 52 Program 3: Investment and Savings to Transform the Economy ...... 53

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1. Long-Term Savings ...... 53 2. Increasing financing for the private sector...... 54 i. Reducing obstacles to commercial bank lending in priority areas ...... 54 ii. Increasing small enterprise financing ...... 57 iii. Increasing agricultural financing ...... 58 iv. Increasing finance for housing ...... 59 Program 4: Protecting Consumers and Maintaining Financial Stability ...... 62 1. Protecting Consumers ...... 62 2. Updating the Regulatory Framework...... 62 i. Amending Legislation—Banking ...... 63 ii. New and Revised Bank Prudential Standards ...... 64 iii. Bank Capital Adequacy ...... 64 iv. Bank Liquidity Standards ...... 67 v. Bank Provisioning Requirements ...... 67 vi. Bank Accounting and Reporting Standards ...... 68 vii. Amending Legislation—the Central Bank Law ...... 68 viii. Insurance—Revising and Enforcing the Regulatory Framework ...... 69 3. Financial Stability ...... 71 i. Contingency Planning ...... 71 ii. Building Supervisory Capacity ...... 74 III. Implementing, Monitoring and Evaluating FSDP II ...... 77 Program 1: Action Plan for Financial Inclusion ...... 78 Program 2: Developing Institutions, Markets and the Supporting Infrastructure ...... 81 Program 3: Investment and Savings to Transform the Economy ...... 85 Program 4: Protecting Consumers and Maintaining Financial Stability ...... 86 Appendix: Priority Policy Actions Matrix ...... 1 Program 1: Action Plan for Financial Inclusion ...... A1 Program 2: Developing Institutions, Markets and the Supporting Infrastructure ...... A15 Program 3: Investment and Savings to Transform the Economy ...... A22 Program 4: Protecting Consumers and Maintaining Financial Stability ...... A26

Acronyms

ABS - Asset Backed Securities ACH - Automated Clearing House AFF - Access to Finance Forums AFR - Access to Finance Rwanda AMIR - Association of Microfinance Institutions in Rwanda AML/CFT - Anti-Money Laundering/Countering the Financing of Terrorism ASSAR - Association des Assureurs de Rwanda ATM - Automated Teller Machine BCR - Commercial Bank of Rwanda BDF - BRD Development Fund BNR - National Bank of Rwanda BRD - Rwanda Development Bank CAMELS - Capital adequacy, Asset quality, Management, Earnings, Liquidity, Sensitivity to market risk CAR - Capital Adequacy Ratio CET1 - Common Equity Tier 1 CIS - Collective Investment Scheme CMA - Capital Markets Authority CoP - Certificate of Proficiency CRB - Credit Reference Bureau CSD - Central Securities Depository CSR - Caisse Sociale du Rwanda DC - Defined Contribution DB - Defined Benefit DRC - Democratic Republic of the Congo DVP - Delivery Versus Payment EAC - East African Community East AFRITAC - East African Regional Technical Assistance Centre EDPRS2 - Second Economic Development and Poverty Reduction Strategy EFT - Electronic Funds Transfer ELF - Extraordinary Liquidity Facility EU - European Union FSAP - Financial Sector Assessment Program FSB - Financial Stability Board FSCC - Financial Sector Coordinating Committee FSD - Financial Stability Directorate FSDP I - First Financial Sector Development Program FSDP II - Second Financial Sector Development Program FSDS - Financial Sector Development Secretariat

GDP - Gross Domestic Product HLSC - High Level Steering Committee ICAAP - Internal Capital Adequacy Assessment Process ID - Identification IFRS - International Financial Reporting Standards IMF - International Monetary Fund IT - Information Technology KCB - Kenya Commercial Bank KYC - Know Your Customer LMO - Law on Microfinance Organizations LOB - Law on Banking MINAGRI - Ministry of Agriculture MINECOFIN - Ministry of Finance and Economic Planning MINALOC - Ministry of Local Government MINICOM - Ministry of Industry and Trade MIS - Management Information System MFI - Microfinance Institution MMI - Military Medical Insurance MMT - Mobile Money Transfer MMO - Mobile Money Operator MOJ - Ministry of Justice MTN - Medium Term Note NISR - National Institute of Statistics Rwanda NPS - National Payment System OTC - Over-the-counter POS - Point of Sale PPP - Public Private Partnerships P2P - Person to Person RAMA - La Rwandaise d’Assurance Maladie RBA - Rwanda Bankers Association RBS - Risk-Based Supervision RCA - Rwanda Cooperative Association RDB - Rwanda Development Board REIT - Real Estate Investment Trust RHA - Rwanda Housing Authority RIPPS - Rwanda Integrated Payment Processing System RSE - Rwanda Stock Exchange RSSB - Rwanda Social Security Board RTGS - Real Time Gross Settlement RWF - Rwandan Francs SACCO - Savings and Credit Cooperative SFB - School of Finance and Banking

SITI - Securities Industry Training Institute SLA - Service Level Agreement SPV - Special Purpose Vehicle TCU - Technical Coordination Unit UPI - Unique Property Identifier UOB - Urwego Opportunity Bank UPBR - Union des Banque Populaires du Rwanda USD - United States Dollar VSLA - Village Savings and Loan Associations VUP - Vision Umurenge Program 7YGP - Seven Year Government Plan

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EXECUTIVE SUMMARY

This second Financial Sector Development Program (FSDP II) follows from the highly successful FSDP I, adopted in 2008, which helped catalyze a dramatic increase from 47 to 72 percent of the population with access to financial services, placing Rwanda well on track to reach 80 percent by 2017, the period covered by this program. Perhaps less noticeably but equally importantly, since FSDP I the major regulatory and institutional elements of a developed financial sector have been put in place. A range of bank and non-bank deposit-taking institutions, insurance companies and capital markets firms are providing an expanding variety of products and services, positioning the financial sector to contribute to meeting the economic cluster targets of Vision 2020, intended to transform Rwanda into a middle-income country. Relatively few of the targets are financial sector specific, but a vibrant financial sector is crucial to achieving almost all economic and social objectives.

Two main drivers underlying FSDP II are a focus on soundness and stability, and positioning Rwanda within the prospective common market for financial services in the East African Community (EAC). The overarching vision of FSDP II continues unchanged from FSDP I: to develop a stable and sound financial sector that is sufficiently deep and broad, capable of efficiently mobilising and allocating resources to address the development needs of the economy and reduce poverty. FSDP II comprises four main programs:  Financial inclusion  Developing financial institutions, markets and the supporting infrastructure  Investment and savings to transform the economy  Protecting consumers and maintaining financial stability Reflecting prior accomplishments, FSDP II is less about the creation of institutions and markets, and more about building from a sound base to expand outreach, efficiency and innovation, and integration in the EAC. Many of the actions and objectives have been derived from the Financial Sector Assessment Program Update completed in 2011, which provided a useful stock-take and reform agenda.

1. Action Plan for Financial Inclusion

Defining and Monitoring Financial Inclusion The FinScope definition of inclusion will be refined and expanded to more fully capture semi- formal providers such as Village Savings and Loan Associations (VSLA). Monitoring will be enhanced, where possible to provide disaggregated data by gender and age group.

National Financial Education and Financial Literacy Strategy Broadening and deepening levels of financial literacy and promoting financial education is a precondition to achieving the financial inclusion target. Five years ago, at least half of the

viii population aged 16 years and over was completely unfamiliar with basic financial concepts and products including savings accounts and current accounts. The significant increase in outreach has in part addressed this issue, but there is more to do. Based on soon to be completed studies and levering off existing initiatives such as the district Access to Finance Forums and the VSLAs, a nation-wide district-focused financial education and literacy program will be rolled out to ensure that all Rwandans obtain a basic understanding of financial concepts and products within five years. This is a key element of the financial inclusion strategy, as having access to products and services is only one part of financial inclusion. Perhaps more importantly, individuals require sufficient understanding of financial concepts to make effective use of the available products to meet their needs.

In addition to the basic financial literacy and education program, an Institute of Entrepreneurship, Cooperatives and Microfinance will be established to provide mid-level financial training. There is currently a large gap between the supply of individuals with technical financial training and the demands throughout the economy. One of the primary constraints to expanding the financing provided to small enterprises is the small number of entrepreneurs capable of providing potential lenders with financial records, projections and business plans. Cooperatives and microfinance institutions (MFIs), particularly savings and credit cooperative (SACCOs), have an unmet need for cashiers, clerks and loans officers with basic financial training. These needs will be addressed by the Institute.

Products for Financial Inclusion A key element of the financial inclusion strategy is creating an enabling environment for financial institutions and other competitors to provide a broader range of low-cost financial services to households. This includes savings and deposit products for historically excluded clients, mobile money transfers (MMT), mobile and internet banking, agent banking, micro insurance and micro leasing. Much of the innovation has come from non-traditional players— mobile phone operators, or new entrants to the Rwandan banking market rolling out agency banking models, which highlights the importance of an outward looking policy.

The rapid growth in MMT agent networks and customers is evidence that the current regulatory framework is working well. Nevertheless, some further enhancements are required. First, interoperability—the ability to transfer from one network to another—is required by regulation but not yet operational. This will ensure that Rwandans can transfer to subscribers of all MMT networks in the country, and in the longer term, throughout the EAC. Enactment of the Trust Law will allow greater protection for customer balances in MMT accounts by making more robust the current escrow account arrangements. In turn, this will facilitate recognizing that many subscribers use MMT balances as de facto savings accounts.

Agency banking arrangements are now being rolled out across the country, facilitating account opening for potential customers in areas that may not support a bank service outlet.

Future Direction of the SACCO and Microfinance Sector The Unmerge SACCOs, together with older SACCOs and MFIs have contributed substantially to increasing financial inclusion, mobilizing savings and contributing to financial development. The first phase of the program for strengthening Umurenge SACCOs focuses on achieving sustainability and financial soundness in the short term under the intensive oversight of the National Bank of Rwanda (BNR). Following extensive dialogue with Umurenge SACCO members, financially sound Umurenge SACCOs are expected to form District SACCOs. Members of sound older SACCOs will also have the opportunity to also become part of District SACCOs. This consolidation will establish 30 institutions that will be the focal points for the development of standardized systems and policies, facilitating the roll-out of a shared information technology platform to support the sector.

A technical oversight steering committee composed of the key public sector stakeholders will be established to coordinate capacity building and technical assistance to SACCOs and MFIs. The committee, supported by a substantial donor-funded secretariat will have responsibility for designing and implementing the full program. This will provide a crucial contribution to the success of the District SACCO consolidation, as extensive assistance will be required to support the development of strategies, business plans, policies and their operational implementation. Training and capacity building for staff and board members will focus on putting the required governance structures in place to safeguard member deposits. MFIs and older SACCOs will also receive support through this coordinated approach, which will encompass programs offered by the Rwanda Cooperative Association (RAC), the Association of Microfinance in Rwanda (AMIR), donors and other capacity building and technical assistance to meet specific needs identified by stakeholders and coordinated through the committee. AMIR, under an appropriate business plan, can play an important role in assisting MFI members not receiving the intensive support dedicated to Umurenge SACCOs. Assistance to the District SACCOs to become financially sound and well managed is the most important element in creating a strong national SACCO system.

The second phase will result in the establishment of a national structure to link the District SACCOs. Success is dependent on the District SACCOs themselves demonstrating that they are financially sustainable as well as an appropriate design for the national structure. It will provide products and services which the District SACCOs require to better serve their members, without itself becoming a competitor to the SACCOs. Extensive preparation and planning will be undertaken to select and implement the most appropriate national structure, which will be regulated and supervised by the BNR.

Reorganization of BNR oversight and enhancement of the prudential regime is another component of the program to strengthen the SACCO and MFI sector. BNR support for Umurenge SACCOs through the stationing of two supervisors in every district will continue through the consolidation to District SACCOs, and then in a phased manner will transition to three supervisors in each province, supported by a strengthened off-site supervision function in

Kigali. Enhanced reporting and analysis, especially as the District SACCOs develop their governance capacities, will help to streamline supervision while maintaining effective oversight. BNR will also use transitional rules as appropriate to protect member deposits and maintain soundness as the consolidation program progresses.

2. Developing Institutions, Markets and the Supporting Infrastructure

Building Capacity in the Financial Sector The shortage of qualified graduates to enter the financial services industry and of experienced financial services professionals is a serious constraint to financial sector efficiency and growth. Although degree programs provide a foundation for entry level positions, graduates require additional specific training for their profession. Rwandan institutes and associations such as the Rwanda Bankers Association, the Association des Assurers du Rwanda and the Institute of Certified Public Accountants of Rwanda have been encouraged to adopt standards and programs for professional certifications based on existing regional and international programs. This avoids the complication and expense of developing specific Rwandan standards and programs, and more importantly results in accreditations recognized elsewhere in the EAC and the world.

Financial sector associations and institutions are encouraged to partner with educational institutions for delivery of professional programs rather than building separate training institutes. Common elements in financial sector accreditation programs such as introductory accounting and financial management can be more efficiently delivered through a small number of partner educational institutions rather than through sector specific institutes. This also offers the potential to develop these partner institutions, which could include the School of Finance and Banking , the faculty of statistics and actuarial science of the National University of Rwanda, the Kigali Institute of Management and the Centre for Business Studies, into regional players, potentially drawing students from the Democratic Republic of the Congo, Burundi, and elsewhere in the EAC.

Banks The Rwandan banking sector remains liquid and very well capitalized. The BNR will continue to strike an appropriate balance in its supervision and regulation between protecting consumers and financial stability, and encouraging innovation. The sector has been growing rapidly, with consumers benefitting from the very large increase in outreach—over 100 new physical service locations over the last five years, as well as automated teller machines (ATMs) and card products and the newly introduced agency banking model. Preference will be given to institutions offering a new business model—for example a focus on small and medium sized business—or global reach—in considering potential new entrants to the banking market. New banks using similar business models to the incumbents may not increase competition, and Rwandan banks need to build scale to achieve efficiencies to compete within the region and more broadly.

Insurance Insurance industry performance has improved since the adoption of new legislation in 2009. Further refinement of the regulatory regime will be introduced to foster its development, including completion of the separation of life and non-life businesses, and revisions to capital, solvency and investment rules. Rwanda-specific mortality (life) tables will be developed to foster development of life insurance and annuity products.

Pensions Rwanda Social Security Board (RSSB), the largest Rwandan financial institution, will be provided with enhanced autonomy and accountability to enable it to effectively manage the investment portfolio. As capital markets develop, the RSSB will become a major purchaser of bonds and equities, as these long term assets are well suited to its long term liabilities, and more liquid than the current real-estate dominated portfolio.

Enactment of the Pension Law will establish the basis for private pension plans. This will meet the social objective of facilitating retirement savings, as well as playing an important role in mobilizing long-term savings and contributing to capital market development. BNR will put an appropriate licensing and supervision regime in place to protect consumers and ensure pension funds are able to meet their financial promises.

Capital Markets Development The capital markets legal foundation will be virtually complete when the remaining laws and regulations are put in place within the next year. Creating a government bond market and yield curve is the most important element of capital market development at this juncture. Therefore Government will establish a regular bond issuance program. The three elements of bond market development are introduction regular government bond issues to build a yield curve, broadening the investor base through the growth of contractual savings such as pensions, and promoting private sector bond issuance. To this end, large infrastructure projects or private public partnerships will be encouraged to include a domestic financing component.

New listings and increasing the number of inter-listings on the Rwanda Stock Exchange (RSE) is also a priority. Listing requirements for a “second tier” to attract smaller firms will be established by end-2012, and education and information programs are planned, including the development of an information exchange bringing business and investors together.

Supporting Infrastructure Most of the elements of the supporting infrastructure for the financial sector are in place. The major issue going forward is to expand the use of electronic payments—credit and debit cards, Automated Teller Machines, and point of sale terminals—and the linkage of the Rwandan real time gross settlement system and securities depository with the other EAC countries. Initiatives are underway in each of these areas.

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3. Investment and Savings to Transform the Economy Increasing domestic credit to the private sector from its present 13 percent of gross domestic product to 27 percent by 2017 is the most fundamentally important financial sector target relating to credit. Many of the initiatives in FSDP II will indirectly support this objective, particularly those related to increasing financial inclusion, financial literacy, and the education of potential entrepreneurs.

In the near term, completion of the electronic land registration process will improve the availability of collateral, particularly for housing, by facilitating mortgage registration. Arbitration of disputes over small loans, thus avoiding the court process, will help to reduce the costs of such loans and enhance the resolution of delinquent accounts. Greater use of the available guarantee programs will encourage banks to lend to credit-worthy enterprises and farmers who may lack a track record. Specialized training for lenders in agricultural credit and housing finance will help to roll out these products through all of the formal institutions. Increasing the supply of long-term financing, initially from the RSSB and in the longer term from development of other contractual savings institutions and products and the capital markets, will stimulate the housing finance market.

4. Protecting Consumers and Maintaining Financial Stability A new financial sector unit is being introduced in the Office of the Ombudsman. This will provide consumers with a redress mechanism to deal with the imbalance in power between financial institutions and their customers.

The regulatory framework will be updated with revisions to the banking legislation and prudential standards, and the central bank law. The separation of life and non-life insurance mandated in 2009 will be completed, with regulation revised to fully reflect this separation. The Microfinance Act will also be revised.

Formalized arrangements for crisis management will be put in place, including development of contingency plans to deal with the possible failure of a financial institution and more wide- spread financial sector turmoil. Deposit insurance for banks and MFIs will be introduced, and the BNR will implement a core training curriculum.

Priorities All the programs and sub-programs of FSDP II are important, but the most crucial are:  Broadening and deepening financial literacy  The Umurenge SACCO strengthening program  Increasing investment in small enterprises, agriculture and housing  Building capacity in the financial sector  Strengthening RSSB governance, administration, investment and risk management

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Other Critical Initiatives It is important to flag some relatively small projects with the potential have a major impact in several key areas. These projects may be overlooked as mere “plumbing,” but the enactment of a Trust Law will facilitate progress on issues as diverse as expanding the outreach of village savings programs and the growth of contractual savings such as pensions. Similarly, a project to create Rwanda-specific life (mortality) tables will enhance the ability of the RSSB to meet its promises to provide pensions and help to increase the uptake of insurance products by Rwandans.

Review of tax policy is another topic that cuts across a range of FSDP II programs and subprograms, with the potential to support diverse objectives including the growth of private pensions, bond market development and Rwanda’s competitiveness in the EAC and more broadly.

Implementation and Monitoring Implementation of FSDP II will follow the highly successful approach of FSDP I. Stakeholders with primary responsibility have been designated for all of the actions detailed in the appendix. The Financial Sector Development Secretariat of the Ministry of Finance and Economic Planning will monitor implementation, providing stakeholders with quarterly progress reports, and chair quarterly meetings to review progress, and when necessary to revise objectives or approaches in light of experience.

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I. INTRODUCTION AND OVERVIEW 1. Rwanda’s long-term development plan, as articulated in Vision 2020, seeks to transform Rwanda into a middle-income country by the year 2020. Developing an efficient, sound and inclusive financial sector is crucial to meeting the economic cluster targets of Vision 2020 and the Seven Year Government Plan (7YPG). Equally importantly, a sound and stable financial sector provides a foundation for the achievement of social and governance related objectives.

2. A growing and sound financial sector will make direct and indirect contributions to three of the four thematic areas of the second Economic Development and Poverty Reduction Strategy (EDPRS 2), under development for implementation from 2013/14:

 Economic transformation for rapid economic growth—growth of the financial sector generates direct employment and expansion of the service component of GDP, and indirectly supports growth and transformation in other sectors with financing and transactions services.  Rural development—increased financial sector outreach and access to finance improves the quality of life in rural areas and lays the foundation for growth.  Productivity and youth employment—adoption of electronic payment and transaction processing will directly improve the productivity of the financial sector as well as indirectly supporting all other sectors of the economy by reducing costs and risks; and the growing financial sector and related capacity building initiatives will expand the employment opportunities for young Rwandans.

3. This second Financial Sector Development Program (FSDP II) builds on the success of the first Financial Sector Development Program (FSDP I), adopted in 2008. FSDP I particularly focused on expanding access to credit and financial services; strengthening the legal and regulatory regime; enhancing savings mobilization; and mobilizing long-term capital for investment. Over 90 percent of the policy actions included in FSDP I were implemented, with the majority of those not implemented having been overtaken by other events. This provides confidence that the ambitious targets of FSDP II are achievable.

4. FSDP II was developed with feedback and guidance from the Financial Sector Working Group comprising representatives of the National Bank of Rwanda (BNR), Capital Markets Authority (CMA), financial institutions and related organizations, and development partners, and chaired by the Financial Sector Development Secretariat (FSDS) of the Ministry of Finance and Economic Planning (MINECOFIN). Many of the specific policy actions address stability or development weaknesses identified in the 2011 Financial Sector Assessment Program (FSAP) update undertaken by the International Monetary Fund (IMF) and World Bank.

Box 1. Key Recommendations From the 2011 FSAP Update  Address shortage of qualified labor in financial sector including through dedicated professional training.  Encourage greater contestability in the retail market segment.  Develop appropriate regulatory environment for mobile banking and payments.  Finalize and implement pending banking regulations, particularly those relating to credit classification and provisioning, minimum internal audit standards in banks and foreign exchange.  Implement central information storage and archiving to ensure that all supervisory actions toward banks are well documented and easily accessible.  Increase frequency of on-site examinations with a view to have at least the largest banks on a 12-month cycle.  Ensure adequate resourcing and continuing development of the skills of supervisory staff.  Promote deepening of the interbank foreign exchange and money markets.  Build additional capacity to improve liquidity forecasting.  Clearly define the objectives and policies in the National Payment System Vision and Strategy.  Establish a “policy and strategy” unit for continual pulling of data and analysis of payment system developments.  Develop a coherent strategy with regard to the role of SIMTEL.  Define contingency planning framework with transparent policies/procedures for government financial support.  Review insolvency legislation with a view to introducing a stay for secured creditors’ actions.  Leverage the experience and capacity of existing institutions, in particular Rwanda Cooperative Agency and AMIR to build capacity with the SACCOs.  Develop a sustainable and effective model for the monitoring and supervision of SACCOs. Train SACCO supervisors so that institutional capacity building is enhanced as well. Pursue the creation of an apex institution without banking functions to facilitate SACCO supervision and regulation.  Review the BRD Development Fund Company’s guarantee scheme drawing on experience in other countries.  Develop a house price/land price tracking system using transaction data from the National Land Center.  Create a one-stop shop for the registration of land and mortgages at the National Land Center.  Clean up and dispose of the Housing Bank of Rwanda loan portfolio and wind down operations.  Prepare a medium-term government debt strategy and–consistent with fiscal sustainability–increase the issuance of government bonds, concentrating on key maturities up to five years.  Increase availability of long-term funds via RRSB-term deposits in the banking system (reverse auction).  Enforce insurance companies’ compliance with reporting requirements, corporate governance, and audit.  Strengthen supervisory capacity in insurance and further develop skills in off- and on-sight inspection.  Amend investment guidelines to take into account different investment horizons between life and non-life business  Revisit the decision to merge RAMA and CSR due to potential negative consequences regarding the operation of the two institutions with very different mandates and on monopolization of the local institutional investor base.  Draft corporate governance regulation to be followed by the CSR, draft investment guidelines for the CSR, and take measures that CSR maintains adequate liquidity

5. The institutional elements of a vibrant financial sector are now in place in Rwanda, with bank and non-bank deposit-taking institutions, insurance companies and capital markets firms providing an expanding range of products and services (Table 1.)

Table 1. Rwandan formal financial sector, end-2011. Number Assets Assets Assets (RWF billions) ($ millions) (percent of GDP) Banks 13 1,083.3 1,793.5 29.2 Foreign-owned commercial banksa 6 374.3 619.7 10.1 Local privately owned commercial banksb 2 361.7 598.8 9.7 Cooperative bankc 1 156.7 259.4 7.0 Microfinance banksd 4 100.3 166.1 2.7 Development banke 1 90.1 14.9 2.4 Microfinance institutions (MFIs) 497 77.4 128.1 2.1 SACCOs 486 55.0 91.1 1.5 Of which, Umurenge SACCOS 416 29.1 48.2 0.8 MFIs 11 22.3 36.9 0.6 Insurance companies 8 143.7 237.9 3.9 Public insurersf 2 ------Private insurersg 6 ------Insurance brokers 5 ------Insurance agents 102 ------Insurance adjustors 4 ------Pension schemes 41 189.4 313.5 5.1 Rwanda Social Security Boardh 1 211.6 350.3 9.4 Private 40 ------. Listed companies (market capitalization)i 4 255.5 423.0 6.9 Stock brokers, dealers 8 ------Capital markets advisory services 2 ------Members of the Over-the-Counter Market 7 ------a. Access Bank, Banque Commercial du Rwanda, Ecobank, Equity Bank, Finabank, Kenya Commercial Bank. b. Bank of Kigali, Cogebanque,. c. Banque Populaire du Rwanda. d. Urwego Opportunity Bank, Ageseke Bank, Unguka Bank, Zigama CSS. e. Banque Rwandaise de Développement. f. Military Medical Insurance, Rwanda Health Insurance Fund. g. SONARWA, SORAS AG, SORAS Vie ltd., CORAR, COGEAR, Phoenix Assurances of Rwanda. h. Total RSSB assets includes the medical insurance fund in addition to pension assets. i. Bank of Kigali, Brasseries et Limonaderies du Rwanda, Kenya Commercial Bank, Nations Media Group. Market capitalization excludes cross-listed Kenyan companies. Note: end-2011 nominal GDP = RWF 3,709 billion; 1$ = RFW 604. Sources: BNR, CMA, RSSB.

6. The sector remains bank-dominated in terms of total assets, mobilizing savings and lending, with microfinance institutions (MFIs), particularly savings and credit cooperatives

(SACCOs), playing an important outreach role in bringing formal financial services to Rwandans not previously served by the banking sector (Table 2). The Rwanda Social Security Board (RRSB) is dominant in long term savings. In common with all of East Africa, the Rwandan insurance sector remains at an early stage of development. Private pension schemes have begun to develop in anticipation of the introduction of the legal framework, with the pending enactment of the new pension law expected to provide greater certainty and a foundation for expanding contractual savings. Enactment of the Trust Law currently being considered by Parliament will facilitate unit trusts as well as the growth of the funds management business. The Rwanda Stock Exchange (RSE) has four listed companies as well as one corporate bond issue and four issues of government treasury bonds.

Table 2. Outreach by deposit-taking institutions, end-June 2012. Service points Number of deposit Number of borrowers accounts Banks 301 1,283,466 357,971 Of which, Banque Populaire du Rwanda 118 842,831 143,374 Microfinance banks 47 98,574 84,436 Microfinance institutions 683 1,775,533 176,987 SACCOs 608 1,468,063 156,972 Of which, Umurenge SACCOs 513 1,211,726 43,433 MFIs 75 307,470 20,015 Note: Numbers of accounts and borrowers include an element of double counting as individuals and companies may have multiple accounts. Source: BNR.

7. The BNR is the prudential supervisory authority with responsibility for banks, microfinance institutions, insurance and pensions. The Capital Markets Authority (CMA) evolved in 2011 from the capital markets advisory committee into a full-fledged market conduct regulator. The legal and regulatory framework for the financial sector is largely complete, with work ongoing on the still outstanding elements such as the law on pensions and the trust law. Experience to date has identified some areas where refinements to the legal and regulatory framework are required, and these are addressed as policy action items under FSDP II. In addition, a range of regulatory revisions have been identified for implementation as part of the East African Community (EAC) harmonization initiatives.

8. The BNR has played a key role in financial sector development in addition to its monetary policy and prudential oversight role. The BNR took the lead in the development of FSDP I, and had primary responsibility for implementation of many of the key policy actions. The BNR continues to play a broader role than most central banks in policy development, directly shaping the evolution of the Umurenge SACCOs and drafting financial sector legislation

4 such as the deposit insurance law. MINECOFIN is also a key public policy player in financial sector development, steering FSDP II, preparing policy, and overseeing financial sector legislation in areas outside of the BNR’s competencies such as capital markets. Rwanda Cooperative Association (RCA), an agency of the Ministry of Industry and Trade (MINICOM), has an ongoing oversight and policy role with SACCOs as part of its broader mandate for cooperatives, and Rwanda Development Bank (BRD) also plays a significant role.

9. Previously identified weaknesses in financial sector industry associations in Rwanda are being addressed. The Rwanda Bankers Association (RBA) has been revitalized as has the Association de Assureurs de Rwanda (ASSAR), while the Institute of Certified Public Accountants of Rwanda (ICPAR) has been considerably strengthened. The Association of Microfinance Institutions in Rwanda (AMIR) has struggled to find a sustainable business model in the rapidly evolving microfinance sector.

10. Development partners have made important contributions to financial sector development, particularly in providing technical assistance for the implementation of policy actions under FSDP I and other initiatives. One of the key challenges is coordination to ensure that various projects do not work at cross purposes. FSDP II will play an important role in aligning all financial sector technical assistance with agreed policy objectives.

11. The next chapter outlines the strategic framework and policy actions organized into four programs. All of the programs and subprograms of FSDP II are important, but the most crucial— because of their expected contribution to achieving Rwanda’s financial sector goals and targets—are highlighted in Box 2. The final chapter provides an overview of the implementation, monitoring and evaluation approach for FSDP II, which is modeled on the highly successful approach of FSDP I. The priority policy actions matrix included as an appendix prioritizes all the actions required to implement FSDP II, with designation of responsibility for completion and indicated timeframes.

Box 2. Priorities Two sub-programs of the Action Plan for Financial Inclusion have a particularly wide reach and thus are crucial if 80 percent of the adult population is to access financial services by 2017. They also link to the rural development thematic area of EDPRS2, and achieving the gross national savings rate target of 20 percent of GDP.  Broadening and deepening financial literacy is of paramount importance. Access to financial services is a crucial first step, but making effective use of financial services requires a minimum level of financial literacy, which is currently at much lower levels in rural areas.  The Umurenge SACCO strengthening program is vital to consolidate the contributions made so far by SACCOs to increasing financial inclusion, mobilizing savings and supporting economic development, particularly in rural areas not yet well served by other institutions. The program for Investment and Savings to Transform the Economy relates directly to the objective of increasing domestic credit to the private sector to 30 percent of GDP. Two of the sub-programs are especially important in supporting thematic areas of EDPRS2—economic transformation for rapid economic growth, rural development, and productivity and youth employment—and a third is central to the policy objectives of expanding the stock, quality and availability of housing for Rwandans.  Increasing finance to small enterprises, which currently employ about one-third of the private sector work force, is central to achieving rapid economic growth and providing employment opportunities for young Rwandans.  Increasing agricultural financing is vital to rural development, economic growth and employment as the sector comprises almost 32 percent of GDP and 30 percent of exports.  Increasing financing for housing through the formal financial sector will support commercially viable rental housing, developer schemes and incremental financing for small-scale renovation and expansion, indirectly contributing to meeting affordable housing demand by increasing the total stock. Few of the objectives of EDPRS2 can be achieved without a sound and vibrant financial sector, but the sub- program to build financial sector capacity is especially important in a regional context and to meeting growth and employment targets.  Building capacity in the financial sector is vital to position Rwandan institutions and markets to compete within the EAC, to provide employment opportunities for young Rwandans, and to achieve the targets of 13.5 percent annual growth in the service sector and increasing the services contribution to GDP to 55 percent. The sub-program to strengthen the largest financial institution, the RSSB, is vital to ensuring pension promises are kept and that the RSSB plays an appropriate role in financial and capital market development.  Strengthening RSSB governance, administration, investment and risk management. Two relatively small initiatives which cut across many of the financial sector programs and sub-programs will make a disproportionate contribution to broader objectives.  Enactment of the Trust Law will facilitate progress on issues as diverse as expanding the outreach of village savings programs, better safeguarding funds held by mobile money operators, the growth of pensions, introduction of collective investment schemes and development of securitization.  Creating Rwanda specific life (mortality) tables will enhance the ability of the RSSB to meet its pension obligations, increase the uptake of insurance products by enabling better pricing of life insurance, and the introduction of annuity products to help Rwandans provide for their retirement.

Review of tax policy can contribute to many of the programs and sub-programs of FSDP II, including growth of private pensions, expanding insurance coverage for Rwandans, bond market development, and Rwanda’s competitiveness in the EAC and more broadly.

II. THE STRATEGIC FRAMEWORK 12. The FSDP II overarching vision continues unchanged from FSDP I: to develop a stable and sound financial sector that is sufficiently deep and broad, capable of efficiently mobilising and allocating resources to address the development needs of the economy and reduce poverty. This provides a foundation for the contribution of the financial sector to the objectives of Vision 2020 and the 7YGP. Relatively few of the indicators and targets relate specifically to the financial sector (Table 3). However, very few of Rwanda’s goals and objectives, whether economic, social or governance related, can be achieved without a sound and well developed financial sector.

Table 3. Financial sector related indicators and targets. Indicator Status Current Vision 7YGP New Target* in 2000 Status* 2020 target Target 4. Growth rate of the service 7 10.5 (average 11 None 13.5, and equal to sector (percent) 2000-2010) 55 percent of GDP 5. Domestic credit to private Not 12.8 None 27 30 sector (percent of GDP) available 6. Gross national savings 1 10.5 6 None 20 (percent of GDP) 7. Gross national investment 18 21 30 None 30 (percent of GDP) 10. Percentage of adult Not 71.8 None None 90 population accessing financial available services 11. Percentage of payment None 41.5 None None 75 transactions done electronically *From the Guidelines for the Development of Sector Strategies, 2012. Source: MINECOFIN.

13. The objectives of soundness and stability have guided the preparation of FSDP II. Recent events in Europe are a reminder that a financial sector with inadequate capital and liquidity or weaknesses in prudential oversight is ill-equipped to effectively intermediate savings to support economic growth. Thus, while few of the policy actions outlined in FSDP II relate directly to the thematic areas of EDPRS 2, insufficient focus on the key foundation issues—the legal and regulatory framework, prudential standards and effective supervision, market conduct and consumer protection—would undermine the financial sectors’ direct and indirect contribution to achieving the country’s goals. 7

14. Rwanda’s place in the emerging EAC, and particularly the prospective common market for financial services, has been another key driver for FSDP II. In many respects, the relatively recent establishment of the Rwandan legal framework and government institutions has been an advantage, as much of the Rwandan framework does not require substantial revision to reflect evolving international best practices. While technical revisions are required in many areas, the overall approach is generally sound. Nevertheless, there is a significant agenda ahead to achieve legal and regulatory harmonization, mutual recognition of supervisory authorities and professional accreditations, integration of the supporting infrastructure, and development of true regional markets.

15. Building on the foundation of FSDP I, FSDP II comprises four main strategies:

 Financial inclusion;  Developing financial institutions, markets and the supporting infrastructure;  Investment and savings to transform the economy; and  Protecting consumers and maintaining financial stability.

Progress Under FDSP I 16. The Rwandan financial sector has grown impressively since the adoption of the first Financial Sector Development Plan in 2008. Over the intervening years:

 Rwandans accessing financial services increased from 47 to 72 percent of the population  416 Umurenge SACCOS have been established  Four microfinance institutions have grown into microfinance banks  110 new bank service locations have been opened, an increase of almost 60 percent  2 new commercial banks have entered the market  Government divested a majority ownership stake in Bank of Kigali through an initial public offering,  A new electronic payment and settlement system has been introduced  Automated teller machines (ATMs) offering local interoperability and international network access have been introduced  The CMA and RSE and Central Securities Depository (CSD) have been created

17. The legal framework for financial sector oversight was modernized under FSDP I and is now largely complete with the enactment of statutes including:

 Law Governing the Central Bank of Rwanda, 2007  Law on Banking (LOB), 2008  Law on Microfinance Organizations (LMO), 2008  Insurance Law, 2009  Anti-Money Laundering Law, 2009

 Law Concerning the Payment System, 2010  Capital Markets Authority Law, 2011  Capital Markets Law, 2011  Law on Collective Investment Schemes, 2011

18. The remaining major legislation required includes the pensions law, currently under review in draft; the deposit insurance law; trust law; and leasing law. In addition, experience to date with existing legislation and evolving best practices has identified the need for revisions to the LOB and LMO, and the National Bank Law, now planned as part of FSDP II.

19. Since the adoption of FSDP I, the size of the banking system has almost tripled in nominal terms, and increased by half relative to GDP (Chart 1). This is an especially remarkable achievement given the high nominal GDP growth over the period, which illustrates the symbiotic relationship between financial sector development and economic development more broadly.

Chart 1. Banking sector total loans, deposits and assets (RWF millions-left scale)

Source: BNR, IMF.

20. Banking sector expansion is in part due to organic growth—existing banks, have grown larger—but is also due to new entrants. Kenya Commercial Bank and Equity Bank entered the market in 2008 and 2011 respectively, reflecting the increasing attractiveness of the Rwandan market to foreign investors, particularly from within the EAC. The entry of these banks was a particularly welcome development due to the innovative agency banking model which is being rolled out through a network of branches and agents across the country.

21. The Union des Banque Populaires du Rwanda (UPBR) was converted into a cooperative bank, Banque Populaire du Rwanda (BPR), in 2008. Urwego Opportunity Bank (UOB) was licensed as a microfinance bank in 2007 after more than a decade of smaller scale operation in

Rwanda. In 2010, three of the larger microfinance institutions—Ageseke Bank, Unguka Bank, Zigama Credit and Savings Society—obtained banking licenses. The legal, regulatory and institutional framework for the capital markets was largely completed, with the over-the-counter (OTC) market transformed to a full-fledged stock market. The infrastructure for financial services has been transformed through the implementation of the National Payments System Strategy, introducing electronic payments, ATMs, credit cards and point-of-sale (POS) terminals.

Four Main Strategies for FSDP II 22. The highly successful implementation of FSDP I has transformed the Rwandan financial services sector, providing a strong foundation for the next steps in its evolution. FSDP II is less about the creation of institutions and markets, and more about measures to expand outreach, efficiency and innovation. Fewer new laws and regulations are required—the focus is more on completing the gaps in the framework, fine-tuning in light of experience, and revising to keep pace with evolving best practices and the emphasis in EDPRS2 on aligning the Rwandan regime with EAC standards. With the basics already in place, the emphasis under FSDP II will be on implementation and capacity building.

23. An important lesson from FSDP I is that the rapid pace of change imposed significant burdens on the BNR and government ministries for the drafting of laws, regulations and the concomitant stakeholder consultations. In some cases drafting and enactment has outpaced the needed consultation and coordination, with the result that some laws, for instance the Mortgage Law, required revision soon after enactment. A key element of FSDP II is ensuring that stakeholders are fully consulted prior to finalization of laws, regulations and strategies affecting the financial sector to help insure that progress on a specific policy action is not undermined by unintended consequences. This will be particularly important as the EAC harmonization process continues, as law and regulations are increasingly affect by EAC requirements.

24. There are a number of relatively small initiatives, which may sometimes overlooked as “plumbing,” that will be instrumental to progress in many areas. Each is discussed in more detail in the relevant programs and sub-programs, and is included in the policy action matrix, but are of such importance that they are flagged here as high priority issues. The enactment of a Trust Law will facilitate progress on issues as diverse as expanding the outreach of village savings programs, protecting Rwandans holding mobile money balances with MTN or Tigo, the introduction of mutual funds, and the growth of contractual savings such as pensions. Similarly, a project to create Rwanda-specific life (mortality) tables will enhance the ability of the RSSB to meet it promises to provide pension, spur the development of annuity products for private retirement savings, and enhance the ability of life insurance companies to offer appropriately priced products, leading to increased insurance coverage and growth in long term savings.

Program 1: Action Plan for Financial Inclusion 25. Progress under FSDP I in increasing financial inclusion has positioned the country to reach the target of 90 percent by 2020. The major subprograms are: defining and monitoring financial inclusion; and the action plan for financial education and literacy.

1. Defining and Monitoring Financial Inclusion 26. Increasing financial inclusion to 80 percent by 2017 (the 5 years covered by this program) and to 90 percent by 2020, as stated in Vision 2020 is a very high priority. Progress toward reaching this target to date has been excellent, with an unprecedented increase of the financially included from 47 percent in 2008 to almost 72 percent as measured by the soon to be released FinScope 2012 study.1 Nonetheless, further increases beyond this level become increasingly challenging as much of the additional outreach required will need to target the two lowest ubudehe categories. The policy is to utilize ongoing reporting and monitoring on the supply side, creating goal-directed incentives at the district level related to overall financial inclusion with special emphasis on reaching out to women and youth, and evaluating demand- side results by conducting periodic surveys at the district and umurenge level. Financial inclusion objectives must be clearly defined, effectively monitored on both an ongoing and post evaluation basis, and built into the incentive strategies for those financial institutions that are most directly relevant to meeting the objective.

i. Defining Financial Inclusion 27. FinScope studies use a standardized methodology for defining financial inclusion which will be retained for comparative purposes. However, this definition will be further refined and expanded to more fully capture the supply-side aspects of financial inclusion to better support efforts to effectively monitor improvements on a quarterly basis. This monitoring will help to create incentives for financial institutions to enhance their strategies to broaden financial inclusion.

28. The informal tontines, ikimas, and Caisse d’entrée groups will be classified separately within a semi-formal and informal category. A new semi-formal category will include those Village Savings and Loans Associations (VSLAs), presently involving five programs2, which have registered with Ministry of Local Government (MINALOC) district authorities, and are able to prepare detailed data on “depositors” (number of participants and RWF amounts), borrowers, and number of transactions on a quarterly basis, and do or can provide this data to the districts. The new Trust Law will remove a legal obstacle making it difficult for VSLAs and informal entities to establish bank accounts in their own name.

29. These five VSLA programs, all supported by donors, already make substantial contributions to financial inclusion. Program sources indicate that on a combined basis they already involve 330,000 saver participants (nine percent of the population over 18) and 200,000

1 This progress has moved Rwanda into the top league of other African countries including South Africa (73 percent in 2011) and based on 2009 data, Uganda (70 percent), Kenya (67 percent) and Tanzania (44 percent). 2 These include Care, Norwegian People’s Aid, CHF (formerly Cooperative Housing Foundation), Plan, and Catholic Relief Services. 11 borrowers. Many of these participants are unlikely to have an individual account with a formal financial institution because they are often located in villages relatively hard to reach from the Umurenge. Moreover, these programs combine the financial aspects with significant emphasis on deepening financial literacy. For example, one such program utilizes 48 organizer/trainers to provide a 10 month training program to all participants.

Policy actions— bringing qualified VSLAs more fully into the financial inclusion strategy  Broaden the BNR Umurenge financial mapping to include the semi-formal VSLA programs that can report VSLA MIS data to the districts  Provide BNR with a copy of the quarterly data provided to the districts by qualified VSLA programs  Encourage establishing a donor-funded small central unit to continue to monitor data and provide limited assistance for individual village VSLA programs when the donors move on to other villages

30. Other supply side financial inclusion indicators that will monitored by the BNR, broken down by gender to the extent feasible on a quarterly basis by district, include: i) number of active depositors and borrowers at BNR registered institutions; ii) number of cellphone banking participants; iii) number of insurance policies (including micro-insurance): iv) value of combined financial institution deposits and loans; v) number and value of small enterprise and agricultural loans (needed for another purpose); and vi) number of financial institution deposit transactions. BNR will take steps to ensure that all licensed financial institutions (including Umurenge SACCOs and MFIs) will have the ability to provide the required data when it can be produced without adding significant cost.

ii. Monitoring Financial Inclusion 31. BNR will take steps to ensure that all licensed financial institutions (including Umurenge SACCOs) and qualified semi-formal VSLA programs submit the required data no less often than quarterly. BNR will prepare a summary on the monitored indicators quarterly and submit it to MINECOFIN and MINALOC.

32. As the quality of financial inclusion is an important dimension, using an account is just as important as having one. However, measures of quality are difficult to capture on a regular ongoing basis. The number of financial institution deposit transactions is an indicator of the quality of inclusion that can be monitored on a regular basis given existing and planned financial institution management information system (MIS) capabilities.

Policy actions— post-evaluation of broadening and improving the quality of financial inclusion

 Analyze results of FinScope 2012 from a policy perspective as well as to measure changes in access since 20083  Expand focus of 2015 FinScope to break out semi-formal from informal institutions and to better address quality of financial inclusion aspects  Utilize future household surveys to examine data relevant to quality of financial inclusion

iii. Creating Incentives to broaden and deepen financial inclusion 33. District quarterly reports on financial inclusion by type of financial institution will include carefully selected data related only to broadening financial inclusion. They will be reviewed each quarter by district Access to Finance Forums, with a focus on ideas for improving results. Confidentiality will be respected so no data allowing the identification of individuals will be used for monitoring purposes and in the discussions on progress.

34. Those indicators associated with deposits and saving should be particularly emphasized as they are the most important element in financial inclusion for the majority of participants. The value of loans and, if necessary to preserve secrecy, value of deposits will be provided only for the district as a whole, not by financial institution. Any pressure to create incentives for individual financial institutions to expand the value of loans will be avoided as it creates potentially serious risks associated with NPLs, especially for institutions whose credit administration skills are still being developed. Performance contracts for SACCO managers will include progress on financial inclusion indicators other than the value of loans to provide incentives to focus on this arena. A report on progress by district and province toward financial inclusion targets will be prepared by MINECOFIN on an annual basis.

35. The district-based Access to Finance Forums (AFF), while an important initiative, are not yet fully operationalized. As they will be playing a key link in implementing the strategies for both deepening financial inclusion and delivery of financial literacy outreach, the program needs technical support to establish the AFF organizationally on an effective basis, design a modus operandi for their meetings and activities, and prepare terms of reference that assign them responsibility and accountability with respect to contributing to achieving district targets in these areas. Moreover, training will be needed for obtaining and using data necessary for implementing this role. Where appropriate, subcommittees may need to be formed

Policy actions— achieving 80 percent inclusion by 2017  Focus financial inclusion progress measurement broken down by male, female and youth on supply side activity  Define and monitor financial inclusion to include qualified semi-formal VSLAs and their activity  Prepare quarterly district financial inclusion reports and make them available to MINECOFIN and MINALOC district authorities  Utilize financial inclusion reports for discussion in Access to Finance Forums, and performance contracts for Umurenge SACCOs to create incentives for financial institutions to increase focus

3 FinScope data will not match supply side financial inclusion because supply side data will include double counting to the extent that customers have more than one financial institution relationship. 13

on their contributions to broadening financial inclusion  Utilize FinScope 2015 and household surveys to measure demand side financial inclusion and its quality  Utilize technical assistance to provide support for strengthening the district Access to Forum committees and their ability to assist in expanding financial inclusion, etc

2. Action Plan for Financial Education and Literacy

i. Broadening and deepening financial literacy 36. Broadening and deepening levels of financial literacy and promoting financial education is also a high priority. It is of paramount importance as an input for achieving the 80 percent financial inclusion target for 2017 and assisting the newly financially included in understanding how best to use their new status. The 2008 FinScope4 study indicated that at least half the population aged 16 and above had never heard of basic financial concepts such as savings accounts, current accounts, interest, debit cards, or ATMs. Seventy-five percent of the population live in rural areas, where levels of financial illiteracy are higher than in urban areas.

37. A policy and strategy will be developed based on an ongoing national financial capability baseline study and a financial literacy and education study about to begin. These studies will be used to: i) finalize a national financial education literacy policy and strategy; ii) create a plan for implementing the strategy and monitoring implementation at the district and Umurenge level; iii) develop clear objectives, priorities, stakeholder roles, and key messages targeted at different consumer segments; and iv) establish a roadmap to achieve the objectives over the next 5 years.

38. The study, among other approaches developed by the consultants, will examine the following possible elements:

 Establishing a financial literacy unit/function in MINECOFIN and a task force composed of representatives of the most relevant financial institutions5

 Providing institutional task force members with specific tasks and implementation targets

 Coordinating and implementing a national district-focused financial and educational literacy program

 Centralizing preparation of financial literacy substantive content focused on two or more segments defined by level of education and depth of present involvement with financial institutions and ability to learn

 Focusing phase one training on existing clients of financial institutions who are immediately able to utilize new understanding in real world transactions

4 Comparable data from the 2012 FinScope study are not yet available. 5 This same task force should provide parallel support for the closely related implementation of the financial inclusion action strategy. 14

 Utilizing existing VSLA program trainers and content already used to train all new participants in four of the biggest programs

 Utilizing existing AFF district committees and RCA membership training to support delivering literacy strategy programs

 Studying the Vision Umurenge Program (VUP) for lessons to be learned

 Designing a methodology to evaluate the effectiveness of the phase one financial literacy roll out program and to redesign the approach and/or content as needed.

ii. Improving financial education at the nonprofessional level 39. An Institute of Entrepreneurship, Cooperatives and Microfinance will be established under MINICOM auspices. The institute will focus on educating and assisting appropriately qualified individuals with an expressed interest in three areas in which far too few individuals at present have the necessary specific training and skills. Qualified individuals will be trained to effectively perform functions that are critical to managing SACCOs and MFIs and significantly expanding credit for small scale entrepreneurs.6 Consultants will be retained to design the structure, curriculum, modus operandi and financial plan for the institute, which is expected to be launched in phases, using pilot programs where appropriate.

40. Rapid growth in the cooperative and microfinance sectors has created great demand for trained individuals to serve as officers and managers. There is a particular need for qualified individuals living in rural Umurenges to staff SACCOs and other cooperatives. The nation’s cooperatives, of which SACCOs are a relatively small part, have a need to train many potential officers in how to take cooperative principles into account in the management and governance of their organizations. Finally, a number of financial institutions would like to make more small scale enterprise loans than they do but find as the primary constraint the small number of entrepreneurs capable of providing records, plans, and understanding of their business from a management and financial perspective. Usage of existing physical infrastructure in the School of Finance and Banking (SFB) or other institutes will be explored.

Policy actions— strengthening financial literacy and education  Develop a national education policy and strategy based on a soon to be completed financial literacy and education study  Develop clear objectives, priorities, stakeholder roles and targeting associated with this strategy  Create a plan for implementing the strategy and monitoring its impact that inter alia involves MINECOFIN, the relevant financial institutions, utilizing already available training resources and a focus at the district level  Create an Institute of Entrepreneurship, Cooperatives and Microfinance

6 The strategy to address serious financial education needs at the professional level, i.e., banking, insurance, accountants and actuaries utilizing existing institutions such as the School of Finance and Banking is presented in Program 2. 15

3. Promoting Products for Financial Inclusion 41. Over the next five years, policy will focus on encouraging financial and non-financial institutions to provide a broader range of low-cost financial services to households beyond the reach of branch networks. This will include mobile money transfers (MMT), mobile and internet banking, agent banking, and micro insurance.

i. Branchless Banking 42. Using appropriate technological platforms opens up new forms of delivery channels that can be low cost and hence of more relevance to low-income households. To be most effective, improving financial access for low-income households involves not just new delivery channels but designing new financial products and services that are particularly suited to their needs. Much of the innovation in this field is coming from institutions other than traditional banks and insurance companies – from entities such as mobile network operators (MNOs). In promoting branchless banking, it is therefore helpful to focus on the nature of the products and services offered rather than on institutions. This has important implications for the appropriate regulatory approach.

ii. Mobile Money Transfers 43. One of the most important innovations in branchless banking in recent years has been the introduction of mobile money transfers (MMT). There are two MMT services currently operating, MTN Money (launched in 2010) and Tigo Cash (launched in 2011), while the third mobile network operator (MNO), Airtel, is in the process of introducing a MMT product. The core MMT product is money transfer between mobile phone subscribers, based around a network of cash-in/cash-out agents. MMT therefore involves the exchange of cash for electronic money (e-money), the transfer of that e-money, and its exchange for cash. Although the core MMT product is person-to-person (P2P) transfers, this is quickly evolving to include transactions between individuals and businesses. This includes payment of wages and allowing people to make payments at stores for the purchase of goods and services.

44. The use of MMT for transactions between individuals and businesses will be encouraged as it provides a cheap, safe convenient method of making payments. To facilitate this, different categories of MMT subscribers will be introduced, distinguishing between individual and corporate/business customers. These will be distinguished by different due diligence requirements on account opening, and higher transaction and account balance limits for corporate subscribers, effectively adopting a risk-based approach for customer due diligence. MMT service providers will also be encouraged to provide cross-border remittances as well as domestic transfers, subject to the introduction of suitable risk mitigation procedures.

45. MMTs are licensed by the BNR under payments legislation. In order to safeguard the interests of subscribers, the BNR – in common with regulators in other countries - requires that all e-money created by MNOs must be backed by an equivalent balance held in a trust or escrow account at a licensed bank. The two existing licensees are both MNOs. Licensed banks do not need an additional license to offer MMT products. The license imposes a cap on the value of

16 transfers that may be made by individual subscribers, with lower limits for domestic transactions than for international transactions. Experience has shown that the existing limits may inhibit the growth of MMT services and the ability to offer a wider range of products and services. In order to support innovation, the transfer limits will be changed by harmonizing the domestic and international transfer caps (effectively increasing the limit on domestic transactions).

Policy actions — facilitate the extension of MMT product offerings  Harmonise transaction limits for domestic transfers with those in international transfers  Introduce “individual” and “corporate” categories of MMT subscriber accounts, with different due diligence requirements and value caps on transactions and balances

iii. Agent Networks 46. Agents provide cash-in/cash-out services and also register new customers (account opening). Agent networks are an important aspect of MMT – the usefulness of the facility to subscribers depends on having ready access to cash-in and cash-out agents. The number of agents – 2,734 in June 2012 – is growing fast, but needs to be expanded further in order to provide a reliable and functional MMT system with outreach that encompasses the majority of the population.7 BNR regulations prohibit exclusivity arrangements with agents (hence a single agent can represent more than one MMT provider). The regulations also require interoperability. This is not yet in place, i.e. a transfers can only be made to other subscriber accounts on the same network (or to non-subscribers as cash), but cannot be made to subscriber accounts of other MMT providers, or to bank accounts. The technical capability to deliver interoperability will be developed and implemented by providers under BNR oversight.

Policy actions — extending MMT agent networks  Facilitate an increase in the number of agents and super agents  BNR to ensure that service providers develop a programme for the implementation of the interoperability requirements, including introducing the ability to transfer funds to accounts on other service providers’ networks and to bank accounts

iv. Trust/Escrow Accounts 47. BNR regulations require that MMT operators maintain an escrow account at a licensed bank. This is a separate bank account segregated from a payment service provider's own funds, in which the payment service provider is required to deposit all funds collected for clients. In the absence of a Trust Law in Rwanda this segregation is unlikely to be effective in the event of an MMT provider experiencing financial problems.

48. A number of reforms will be introduced to ensure that this segregation is effective. A Trust Law will be introduced that, among other things, will provide a legal basis for such arrangements. The Law on Payments Systems will amended to enable the “ring-fencing” of such

7 For instance, Safaricom in Kenya has 23,000 M-PESA agents – admittedly for a country that is larger than Rwanda both physically and in terms of population, but nevertheless the contrast is sharp. 17 balances so that they are not subject to claims from general creditors of the service provider. A similar provision exists in respect of payments processed through the RIPPS.

49. At present, both MMT providers hold their trust accounts at BCR, which creates an element of concentration risk. MMT providers will be required to split their trust accounts across banks once they a size to be determined, in order to minimise such risks. As at mid-July the total balance in MMT escrow accounts was RWF 2,839 million, equivalent to around 0.5 percent of the local currency deposit base of the banking system, and about 3 percent of BCR’s deposit balances. While this does not at present represent a high concentration risk, it may be necessary in future to require MMT service providers to split escrow accounts across banks once they reach a certain size.

Policy actions — strengthening trust arrangements for MMT escrow accounts  Introduce a Law on Trusts  Amend Law on Payment Systems if necessary to segregate MMT escrow accounts from general bank deposit liabilities.  Require MMT service providers to split escrow accounts across multiple banks once they reach a certain size  Allow banks to pay interest on MMT escrow/trust accounts

v. Data/reporting 50. BNR regulations currently require service providers to provide monthly reports on the value and volume of transactions. A broader range of data is required for effective monitoring and supervision of MMT services. In particular data are required for monitoring the impact of branchless banking services (in terms of growth and outreach), the extent of mobile e-money (in relation to monetary aggregates), the distribution of trust account funds, and quality of service. The reporting framework for MMT service providers will be extended to include all of these variables. In addition, MMT service providers will be required to provide information on the number and value of transactions in different size bands, especially if the transactions cap is lifted and business accounts are introduced.

Policy actions — improve data reporting for MMT services  Extend the reporting framework for MMT service providers to include: o Number of subscribers o Number of agents (direct, sub- and super-agents) o Number of transactions, classified by size bands o Value of transactions, classified by size bands o Total value of e-money in issue o Value of trust account balances at individual banks o User complaint logs and resolution

vi. Formalizing e-money Accounts 51. Although MMT products are based around remittances, evolution into stored value products resembling bank accounts is almost inevitable. For unbanked individuals in particular,

18 this represents a good value proposition, even if no interest is received on these balances, as storing idle balances in the form of e-money is safer than holding cash.

52. E-money deposits will be explicitly provided for through a new licensing category or through extending the MMT licensing category. This will facilitate the entry of non-banks into the provision of e-money deposit services to the public, in recognition that they can provide financial products and services that may be unattractive to conventional banks. This will encourage innovation, improve efficiency, and help extend the “frontier of access” of financial services to the unbanked and financially excluded. The licensing category will be flexible enough to accommodate MNOs as well as other specialized technology or payments companies. Effectively, this new licensing category will be for a limited scope financial institution that takes deposits but is not permitted to lend, and represents a blend of existing banking and payments functions.

53. The new license for entities in the e-money deposit business will have several requirements. These will include i) requiring the financial service provider to be a legally separate entity and permitting that entity to be owned by a non-bank; ii) requiring normal corporate governance and “fit and proper” tests for the directors and senior managers; iii) permitting both money transfer/remittance services and opening e-money deposit accounts for customers (e.g., on a phone or a smartcard); iv) permitting both individual and corporate (registered company) customers; v) requiring that all electronic balances are backed one-for-one by a trust account deposit at a licensed commercial bank (or banks); vi) requiring the entity to have an acceptable service level agreement (SLA) with a partner bank; vii) permitting the outsourcing of functions (e.g. the messaging platform, provided by a parent MNO), subject to an acceptable SLA; viii) permitting the appointment of agents to handle account opening, conduct customer KYC checks, and provide cash-in and cash-out services; ix) providing for regulatory oversight of operational and technological processes and risk management procedures; these would mainly relate to system security and integrity, record-keeping, accreditation of agents, management of the agent network and liquidity, customer service and anti-money laundering requirements; x) prescribing procedures for dealing with dormant accounts; and xi) permitting the payment of interest on e-money/mobile money balances, using the proceeds of interest paid on trust account balances, as this would permit a broader and more attractive range of products to be offered.

54. E-money deposit takers will be permitted to open accounts for both individuals and businesses. For individuals, the account opening process will be straightforward, and the only KYC requirements will be verification of the customer’s identity using the national identity (ID) system. For business e-money deposits, normal bank KYC requirements will apply. There will be a cap on the value of balances that can be held in e-money accounts (a suggested limit is the equivalent of USD10,000), and the individual transactions limits applicable to MMTs will apply.

55. The license will not permit e-money deposit-takers to intermediate funds, i.e. lending (credit) will not be permitted. As with existing MMT providers, the entire electronic value held

19 on the system (in customer accounts) will be fully backed by a trust account deposit in a licensed and prudentially regulated bank (or banks). This approach effectively eliminates the risk that arises from intermediation – so there is no prudential or liquidity risk. Hence regulatory and supervisory concerns can be focused on operational and technology risks.

56. While it is likely that the proposed new licensing category would be mainly of interest to MNOs in the provision of mobile banking products, it should have a broader relevance. For instance, other providers may be interested in providing card-based e-money accounts, where the balances are held on smartcards and accessed through ATMs or POS machines.

Policy actions — extend MMT products to allow for deposit products  Extend licensing to non-banks to cater for e-money deposits  Allow selected non-banks to offer interest-bearing e-money accounts  Allow banks to pay interest on MMT escrow/trust accounts  Require all e-money deposit takers to hold balances in a trust account at a licensed bank, and prohibit them from offering credit products  Allow business e-money deposit accounts to be opened on the basis of normal bank KYC requirements  Impose a cap on the value of balances that can be held in individual e-money deposit accounts

vii. Mobile/Internet Banking 57. Banks will be encouraged to continue extending their mobile and internet banking services, including by developing links with agency banking. Mobile banking and internet banking services are distinct from MMT services and are mainly being introduced by banks as an alternative means for existing customers to access accounts and carry out transactions. Several banks have introduced mobile phone and/or internet banking, or have announced plans to do so. These platforms, especially mobile phones, could be used as a means of extending the reach of banking services to the unbanked, depending on how products are designed.

viii. Agency Banking 58. An important channel for improving access to banking and meeting the needs of the unbanked population will be through agency banking. This involves banks appointing independent entities as agents to conduct a range of banking services on their behalf. Although there has been little roll-out of agency banking to date in Rwanda, several banks are on the brink of rolling out agency networks. By the end of 2012, there are likely to be several hundred banking agents in operation.

59. The BNR approved “Guidelines on Agent Banking” in September 2011. These will be formalized as Regulations in the near future. These permit banks to operate agent banking networks, with the BNR’s permission. Contracts between banks and their agents may not be exclusive (i.e. an agent can act for more than one bank). Individual agents must all be approved by BNR, and must be limited companies, co-operatives or public entities (i.e. individuals are not

20 permitted to become agents) and must have been in operating as a business for at least 18 months. The bank must accept liability for all actions carried out on its behalf by its agents.

60. Agent banking is a new experience and the guidelines/regulations will be revised as necessary to support the rollout of agent banking. The expansion will be closely monitored and data will be collected and published as necessary to facilitate such monitoring. The impact of the prohibition of individuals (sole traders) from becoming agents will be reviewed, as this will restrict the range of potential agents, given that many rural enterprises operate as sole traders.

Policy actions — promoting the development of agent banking  Formalise Agency Banking Guidelines as Regulations  Encourage, but closely monitor roll-out of mobile banking and agent banking networks  Develop an appropriate data reporting template and publish statistics in BNR publications and on BNR and NISR website

ix. Micro insurance 61. Improving access to finance involves not just access to savings, credit and transactions products, but also providing low-income households (including farmers) and small and micro enterprises with the ability to insure against risks. Indeed, vulnerability to uninsured risks can help to keep households poor and enterprises small. Micro-insurance comprises products that are specifically designed to meet the needs of low-income households and small firms, using low- cost distribution methods. The promotion of micro-insurance in Rwanda requires change to the regulatory structure. The minimum capital requirement (RWF 1billion) is too high for any specialised micro-insurance company to enter the market, although it would not stop an existing company from adding micro-insurance products to its range. A regulatory “second tier” will be considered for micro-insurance, that might have lower minimum capital requirements, permitting both short-term and long-term products to be offered by the same insurer, with less onerous corporate governance and reporting requirements, and allowing for a variety of distribution channels. There would be restrictions on the size of risks that micro-insurers will be allowed to insure, in line with the less onerous regulatory requirements. Specifics of the regime will be finalized following consultation with stakeholders.

62. A pilot study on livestock insurance is being carried out by MicroEnsure, and a feasibility study on a crop yield and livestock micro-insurance product is being carried out by Syngenta Foundation (based on a similar product in operation in Kenya), in both cases in collaboration with MINAGRI. These pilot studies will help to determine commercial viability and in refining product design

x. Micro leasing 63. Enactment of the leasing law will, among other things, provide a legal and tax foundation for micro-leasing. Leasing of small equipment is an alternative financing vehicle for farmers and small enterprises.

Policy actions — micro insurance and micro leasing  Consider regulatory reforms to create a “second tier” suitable for micro insurance providers  Review results of the MicroEnsure and Syngenta pilot studies and consider regulatory reforms to improve product viability while retaining sufficient consumer protection.  Enact the leasing law

4. Action Plan for Strengthening the Umurenge SACCO Program 64. The recently established Umurenge SACCOs, as well as other existing MFIs, have already contributed substantially to the objectives of increasing financial inclusion, mobilizing more savings and supporting economic development at the grassroots level. At this early stage, they also seem to be off to a good start financially. Nonetheless, the experience of the older SACCOs and MFIs demonstrates that it is not easy to run institutions of this type in a financially sustainable way. BNR has played a key role in supervising these SACCOs to date, sharply limiting their lending until they have met initial criteria that indicate they are sufficiently prepared to implement a lending program successfully. The BNR has also placed supervisors in every district to closely monitor performance, identify problems quickly, and assist in addressing causes underlying those problems. The individual SACCOs are also being supported with capacity building inputs from several different sources. However, this combined program is a temporary high-cost-to-implement response that cannot be continued beyond a relatively short period of time.

65. The Umurenge SACCOs contributions to national objectives can only be maximized if the primary objective is ensuring overall program and individual SACCO stability and sustainability, with their contribution to economic development objectives as a byproduct. It is essential that the vast majority of individual Umurenge SACCOs achieve sustainability so that the system continues to contribute substantially toward achieving its primary objectives. In phase one, this requires that actions be taken to:

 Strengthen governance by consolidating Umurenge SACCOs at the district level

 Establish an effective interface between District SACCOs and Umurenge branches to achieve stability and control, while preserving cooperative culture elements

 Design strategies to improve sustainability of the District SACCOs and their Umurenge branches

 Establish an overall system and strategy for overseeing and coordinating SACCO/MFI support and capacity building

 Conduct a study to ascertain the most sustainable, effective national entity to unify financially sound District SACCOs and finalize a detailed study to plan its governance and operating modus operandi before its establishment

i. Strengthening governance by consolidating Umurenge SACCOs in districts 66. District SACCOS will be established in each of the 30 districts and will operate as cooperatives with branches by the end of 2013. All Umurenge SACCOs and older SACCOs that meet BNR established sustainability and capacity criteria will be encouraged to merge into the districts and will become branches.

67. A nationwide marketing and public relations campaign will be conducted to promulgate to Umurenge SACCO members the benefits of District SACCO membership. It is essential that the merger process is voluntary and that eligible Umurenge SACCOs take advantage of this opportunity. The benefits include i) significantly reducing risk for the program by eliminating the possibility that one small Umurenge SACCO (some of which have no physical facilities or electricity) could collapse, thus undermining public confidence in the whole program; ii) significantly increasing the ability to make larger loans needed by agricultural and other cooperatives because of larger capital and total deposit positions; iii) providing the Umurenge SACCOs with better access to payment system and interbank services; and iv) increasing safety by allowing BNR to better leverage and focus its supervision and phasing out a conflict of interest between its supervision role and its direct role in providing technical support.

68. For those SACCOs that are amalgamated and become branches, it is anticipated that their members will exchange their shares for shares in the District SACCOs which will become the legal cooperative entity directly supervised by BNR. They will have primary accountability and responsibility for the entire SACCO inclusive of the branches. Other district-based cooperatives will be allowed to become members on a one member one vote basis with a maximum 40 percent of the membership, to increase the capital base and potential credit outreach.

69. Nonetheless, Umurenge SACCO branches will retain a considerable element of the cooperative culture and a grassroots orientation to its customer basis through i) retaining advisory boards at the Umurenge level; ii) conducting “rolling” annual assembly meetings that begin at the Umurenge level before being consummated at the district level; iii) establishing uniform system policies and procedures that allow significant independence in decision-making for branches that perform well; and iv) producing branch level balance sheets and income statements which will be used to monitor branch performance.

70. District SACCOs and their branches will have system-wide uniformity in terms of i) standard policies, procedures manuals, and risk management policies and practices; ii) standard hardware,8 accounting internal controls and reporting; and iii) MIS systems that inter alia, facilitate the capability for all SACCOs and their branches to fully comply with credit

8 Branches that might not have electricity will have a harmonized manual reporting system during a period of transition until they do. 23 information requirements, monitoring needs relating to financial conclusion; and district level monthly reports that include balance sheet and income statement by branch. This will be achieved under the leadership of a technical steering committee.

71. Umurenge and older SACCOs will not be allowed to amalgamate with District SACCOs unless they are financially sustainable and have a demonstrated capacity to perform satisfactorily. It is of paramount importance that District SACCOs, themselves are sustainable and can focus their initial management attention on their own governance, establishing the culture and branch management interface, and emphasizing the growth of good business and soundness rather than the distraction caused by branches that are performing unsatisfactorily. Therefore, SACCOs for which achieving sustainability is doubtful will be converted into “outlets”9 or, where appropriate, merged with older SACCOs that are willing to accept them provided the value of merged assets net of all required provisions is 15 percent higher than merged liabilities.

ii. Establishing an effective interface between District SACCOs and branches 72. Highly qualified consultants will be quickly retained, working under the oversight of the Steering Committee to prepare District SACCO organization charts, the proposed interface between the district and its branches, branch level decision-making policies, initial staffing plans and compensation policies, and finalizing standard operating policies, procedures, IT, MIS and accounting systems, credit administration and risk management. It is desirable, to the extent feasible, that this work be completed before the first District SACCO is established such that they will be “given a running start” when they begin operations.

73. While all aspects of this preparation work are important, particular emphasis will be placed on compensation levels and policies as key staff quality, training and incentives may well play the single most important role in contributing to system-wide performance. Key District SACCO officials and branch managers will be paid at a level that facilitates recruiting and retaining capable staff. Moreover, individual performance should be rewarded through promotion policy and incentives associated with meeting the most important goals, i.e., mobilizing deposits, minimizing NPLs and sustainability-related financial performance.

iii. Designing strategies to improve District SACCO and branch sustainability 74. Umurenge SACCO system success, regardless of how unified at the national level, depends more on the strength of District SACCOs, the quality of their management, their success is growing commercially viable business, and their profitability than on any other factor. A national cooperative system with a significant number of weak District SACCOs is unlikely to, itself, be strong. Therefore, consultants (possibly the same consultants retained for the earlier

9 BPR has implemented a parallel process in which they have established “outlets” in smaller and more remote markets which provide a point for financial services in the form of one person who can collect and distribute cash on behalf of BPR as a convenience to clients, but has no decision-making power and incurs no administration cost other than salary and electronic communications support. 24

District SACCO establishment design) will be retained, again working under the oversight of the Steering Committee.

75. These consultants will, working with District SACCOs to the extent that they are already established and on a pro forma basis where they are not, will prepare a business plan, a one year budget, and three year projections for each district. Initially, this will require a consolidation of budgets for the actual or prospective branches.10 The emphasis will be on achieving financial soundness and profitability in this planning and budgeting exercise. The consultants will be asked as a first step, prior to developing District specific budgets and plans, to propose an initial business strategy most likely to lead to profitability at both the branch and district level. Sub- strategies for improving sustainability that will also be examined.

iv. Establishing an overall coordinating system for capacity building 76. The 416 Umurenge SACCOs, 30 eventual District SACCOs, 70 older SACCOs, and 11 licensed MFIs11 play an extremely important role in national objectives relating to financial inclusion, savings mobilization, broader access to credit, and sectoral financing objectives, especially those related to small scale enterprise and agriculture. . A number of government and donor-financed inputs, as well as commercial bank initiatives, are already available on a somewhat uncoordinated basis, and more are anticipated given the importance and urgency associated with this effort.

77. A technical oversight steering committee is being formed to work under the already established Higher Level Steering Committee (HLSC) to directly oversee and coordinate the capacity building and technical assistance support from all existing and future donors for SACCOs and MFIs over the next three to five years. High level officials, e.g., director-level, from MINECOFIN, BNR, AMIR and RCA will be appointed to this committee and it will meet regularly to review, modify as needed, and approve proposals and plans prepared for it by an executive secretariat composed of consultants from a highly qualified firm. The future RCA and AMIR support programs, even when separately funded, will be mapped and become a part of the overall coordinated program and AMIR will change its strategy such that it will facilitate raising donor capacity building support for its members.

78. The consultants in the executive secretariat will assist in designing and, following steering committee approval, implementing an approved overall capacity building strategy establishing priorities and needs, identifying program inputs, and designing a coordinated implementation program. It will prepare an overall one year and three year capacity building strategy and program based on an inventory of need identified by financial entity and individually for key staff. Thereafter, it will monitor implementation, keep a detailed record of

10 District SACCOs will be required to perform this same exercise annually after the first year of operation. 11 Existing SACCOs and MFIs participate in the same business that Umurenge SACCOs do, have a similar and large clientele, and have a parallel need for continued capacity building and technical support. 25 training, other capacity building inputs, and technical support to identify gaps that need to be filled, and reduce costs associated with possible duplication . Commercial bank capacity building initiatives will continue to be welcomed if they are satisfactorily harmonized with uniform standards and systems.

79. Highest priority will be placed on addressing the needs of District SACCOs and, secondarily on those entities (whether SACCOs or MFIs) that are the largest in terms of total assets and the weakest as identified by BNR through its onsite and offsite supervision. Most capacity building and training will focus on those aspects that are most directly relevant to operating on a financially sustainable basis, while RCA will continue to provide training necessary for the district and Umurenge branch level entities related to cooperative principles, regulations and governance. Board and advisory board members will be trained both with respect to achieving financial viability and following cooperative principles. The technical secretariat may also propose and pilot test innovative lending product ideas appropriate for these institutions.

80. The executive secretariat to the technical steering committee will also include a very small highly skilled workout unit, possibly under the same consulting contract. This unit will, when necessary, do the analysis necessary for financially troubled SACCOs, Umurenge branches and MFIs, to i) ascertain the detailed causes of poor performance and what would need to be done to address these causes; ii) the ability and capacity of the entity and its staff to respond satisfactorily; iii) recommend a detailed strategy for resolution, e.g., financial restructuring, replacing management, merger, or winding up; and iv) assist as needed in overseeing implementation of the approved resolution strategy.

81. Government subsidies will be phased out for Umurenge SACCOs and branches as of December 2013 and for District SACCOs by December 2014. The cost of provisions expense to the extent that it is created by NPLs of over 10 percent will be deducted from subsidies to send a clear signal that high NPLs will not be tolerated.

v. Conducting a study to ascertain and design an effective national structure 82. In Phase Two, the District SACCOs will be unified at the national level in line in with the existing concept paper. It is, of course, imperative that it be structured in the best possible way to avoid the problems12 that most national cooperative banks in Africa and other developing countries have experienced, while maintaining significant cooperative culture aspects. Highly qualified consultants will be retained shortly after all 30 District SACCOs have one year of audited financial statements to examine alternatives for how best to unify at the national level with a detailed analysis of advantages, disadvantages and implantation feasibility. A decision will then be made, with the active participation of the key stakeholders (including the 30 District SACCOs) as to what alternative will be pursued.

12 One such problem for example is caused when national level cooperatives engage in the same lending and deposit mobilization business as their SACCO members and, hence, compete with them resulting in conflicts. 26

83. Thereafter, the consultants will prepare a detailed design for the national entity, including i) an organization chart; ii) the legal and operational interface between the District SACCOs and the national entity; iii) its level of required capitalization and how it will be mobilized; iv) policies and procedures; v) an IT, accounting and MIS system fully harmonized with that of the districts; and vi) services, if relevant, that will be provided on behalf of the districts; e.g., management of funds, technical support, audits, etc.

84. The national cooperative structure will be licensed and regulated by BNR under the Banking Act and/or other relevant legislation. It will also be supervised, although a decision as to whether or not BNR will also supervise at the District SACCO level will be deferred until the national cooperative structure has operated for at least one year. Implementation of the MFI/SACCO deposit insurance program will be deferred until all District SACCOs have been licensed, all Umurenge and existing SACCOs that may need to be merged or closed have been resolved; and iii) the decision with respect to the national structure has been taken such that the ongoing legal structure of the District SACCOs will be known.

5. Action Plan to More Effectively Supervise SACCOs/MFIs 85. Consolidating the 416 Umurenge SACCOs into 30 District SACCOs will, after a transition period, reduce the present heavy burden on supervision. Effectively completing the transition will take some time and will still represent a large additional supervisory burden relative to the requirement prior to establishing Umurenge SACCOs. Therefore, BNR intends to reorganize the department responsible for supervising these institutions and make some changes in the regulatory environment, focused in particular on the transition period.

i. Reorganizing and Financing BNR SACCO/MFI Supervision 86. The deployment of two BNR supervisors in Technical Coordination Units (TCUs) in every district, despite its high cost, has played an essential role in supporting the initial successful performance of the Umurenge SACCOs. Therefore, the TCUs will be continued with two inspectors in each district throughout the earlier of when most of the District SACCOs operating are soundly or until the District SACCO subsidy runs out. However, their responsibilities are being broadened, where appropriate, to cover existing SACCOs and district- based MFIs. When phase one has been largely completed, the number of inspectors in the field will be reduced from 30 to about 15 with 3 inspectors based in each provincial capital.

87. The existing small off-site departmental supervision function based in Kigali will be strengthened by adding one staff member and a consultant who will provide training and assist in developing better, more risk-based and peer group-oriented monitoring techniques and reporting.13 This team, using the same report provided to BNR at the district and later provincial

13 Some existing SACCOs and MFIs have not completed computerization to the extent necessary to promptly and accurately submit reports necessary to easily include them in the peer group analyses and to meet requirements associated with participation in the credit reference bureau process. Attention to this issue will be scheduled relatively early in the SACCO/MFI capacity building implementation program. 27 level will provide analytical reports on a monthly basis by individual SACCO and MFI to inspectors in the field and in summarized formats to BNR departmental and higher level officials.

88. The off-site supervision function will, inter-alia, prepare a monthly peer group analysis using the risk-based schedule in BNR’s onsite supervision manual and key CAMEL-related indicators to rate existing and Umurenge SACCOs and, when formed, District SACCOs as well as their branches for placement in performance quintiles. The focus of on-site supervision will be directed most intensively toward those entities identified as the weakest performers and those with the largest total assets. As it may take considerable time for District SACCOs to develop the capacity to effectively oversee and monitor all of the to-be-consolidated Umurenge branches, BNR will continue to monitor and directly supervise the weaker Umurenge branches as it thinks necessary throughout phase one.

89. The cost of supervising SACCOs and MFIs is unusually high as a result of the incremental cost associated with supervising and providing technical support for 416 geographically widely scattered Umurenge SACCOs. Supervision fees to be paid by SACCOs and MFIs will be based on an identical formula to create an equal playing field as they are competitors. Therefore, during phase one Government will provide BNR with a subsidy sufficient to reimburse them for 50 percent of this cost and, until the District SACCOS are fully established on a sound basis, BNR will not charge these entities a fee for supervision. When fully established, District SACCOs, existing SACCOs and MFIs will be charged a supervision fee based on a formula that gives a weight of 75 percent to total assets and 25 percent to the level of NPLs.

ii. Strengthening the SACCO/MFI legal and regulatory environment 90. Umurenge SACCOs, existing SACCOs, MFIs and, subsequently, District SACCOs, will all be subject to the existing laws and regulations, appropriately amended or revised as needed. While relatively few changes are needed, the MFI and Cooperative laws will be reviewed and amended, drawing in particular on the need for harmonization between them relating to SACCOs as well as changes recommended 14in the recent Rwanda SACCO Sustainability Study and the SACCO supervision analysis completed in July by a First Initiative Consultant.

14 Among recommended amendments to the LMO and the Law on Cooperatives are i) revising Article 21 to eliminate reference to prior approval of directors and managers, while leaving the requirement of notification as detailed in Article 11 of the MFI regulations; ii) removing the requirement in Article 37 of the Law to remove the prohibition on directors serving as a director of another enterprise provided the entities do not directly compete; iii) revising Article 97 of the LMO and Article 66 of the Law on Cooperatives to protect board members from liability for actions taken in good faith and limit personal liability to cases where a breach of fiduciary duty has been established; iv) revising Article 10 of the Law on Cooperatives to allow membership in more than one SACCO in the same area to allow for more competition and consumer choice; v) reviewing the MFI/SACCO categories with a view to reducing or eliminating them to move toward greater uniformity; and, revising Chapter VI of the LMO to provide all elements of an effective resolution regime. 28

91. BNR will review its Regulation on the Organization of Microfinance Activity with a view to strengthening the requirements in a few areas including requiring that i) all SACCOs and MFIs report all loans to the credit reference bureau (CRB) as soon as MIS systems make this feasible; ii) all SACCOs and MFIs use credit reports in line with the LMO and CRB requirements; iii) all government funds channeled temporarily through SACCOS and MFIs for onward grants and loans under VUP and similar programs that involve no risk for intermediaries be separately identified and not included in balance sheets for purposes of monitoring compliance with capital and liquidity requirements or calculating total assets, cash and deposits; and iv) all SACCOs and MFIs that are legal entities, with the exception of Umurenge SACCOs destined to become District SACCO branches submit external audits conducted by auditors approved by BNR.

92. Within the Umurenge SACCO program, BNR will focus on the regulation and supervision of District SACCOs in the same way they will regulate and supervise existing SACCOs and MFIs.

93. Umurenge SACCOs are too new to enable conclusions to be drawn regarding the possible migration of credit quality over time. The biggest risk to not achieving sustainability faced by most Umurenge SACCOs is the risk that they will expand lending quickly before they have developed the necessary policies, systems, controls and staff experience to ensure that most lending decisions are sound. Moreover, they may need to deal with some pressures from members generally, influential businessmen at the local level and possibly local political authorities to increase the volume of lending quickly.

94. A technical secretariat, under the auspices of the steering committee for coordinating capacity building will develop uniform policies and procedures as well as MIS systems and controls for District SACCOs and their branches. BNR, as a continuation of its present role, will continue to directly monitor Umurenge branches using rules until these policies are in place and District SACCOs have developed the ability to manage their branches effectively. The rules focus primarily on significantly reducing the risk that Umurenge branches will, over the next year or two, substantially expand high risk lending resulting in high NPLs which can seriously undermine their eventual sustainability.

6. Strengthen other Entities and Programs to Better Support Access to Finance i. Strengthening AMIR capacity and effectiveness 95. AMIR’s mandate includes functions and roles that remain essential to the development of a robust microfinance industry. However, the strategy that it has tried to implement in recent years has been broader and more ambitious than what can be realistically accomplished given the constraints it faces. AMIR has a very small staff and its available funding has dropped significantly with the end of government subsidies and a decrease in donor financial support.

96. AMIR has an existing 2009-2013 strategic plan which effectively focuses on its mandate and key roles needed to fulfill that mandate. It identifies the needs of the microfinance sector

29 associated with those roles but does not adequately address AMIR’s current ability to fulfill them. Therefore, AMIR will revise that strategic plan to narrow the scope of its activities to better fit the staffing and funding it now has.

97. The existing plan calls for AMIR to become a strong and sustainable professional association of MFIs which provides support for its members (and the industry) in the areas of i) advocacy and co-ordination; ii) research and development; and iii) provision of capacity building services. AMIR is uniquely placed to provide advocacy, co-ordination, and research to its members and all the industry, functions that are critical to the long-term development of the industry, so it will focus primarily on these roles. However, in recognition of its constraints and the leading role the technical steering committee and its staff will play in capacity building over the next 3 to 5 years, AMIR intends to focus its capacity building on assisting members, particularly its MFI members who might otherwise be largely ignored, in the search for donor financing, directly and through its role on the steering committee. It will essentially end involving itself in the implementation of capacity building during this time period, an often staff and funds intensive role.

98. If resources are available, AMIR is considering a strategy that focuses on i) acting as a conduit for information on the industry, publishing and lobbying for members’ interests; ii) strengthening AMIR’s capacity in communications and marketing; iii) developing a more highly focused research and development program based on members’ highest priority needs; iv) developing an AMIR MIS system for tracking and benchmarking MFI/SACCO industry data; v) conducting a program for capacity building for AMIR’s own staff; and v) coordinating with the EAC Microfinance Network to further harmonize the enabling environment and improve coordination and consumer protection.

99. AMIR will continue to publish an industry benchmark report on MFIs and SACCOs bi- annually, continue its national award program for best MFI and best SACCO, organize an annual Rwanda Day of Microfinance workshop, and expand its AMIR “Fact Sheet” for members wish to use it in addition to their required BNR reporting.

100. AMIR will seek to build a more formal twinning relationship with another similar association in the EAC or elsewhere in Africa and will expand its member base and membership fee income. When AMIR submits a strategy and financial plan acceptable to MINECOFIN, Government funding will be made available to raise total AMIR funding to levels, if necessary, to implement the strategy.

Program 2: Developing Institutions, Markets and the Supporting Infrastructure

101. Under FSDP I all the major institutional elements were put in place for a developed financial sector. This foundation will be refined and expanded under FSDP II. A particular focus is on building the human capital required by the growing financial sector.

1. Building Capacity in the Financial Sector 102. Recent growth in the financial sector has created demand for qualified graduates to enter the financial services sector as well as for experienced financial services professionals. Future growth is dependent on meeting the current demand for human resources, which in turn will generate additional demand. The SFB, the faculty of statistics and actuarial science of the National University of Rwanda, the Kigali Institute of Management and the Centre for Business Studies will play a key role in meeting this demand. Introduction of licensing and continuing education requirements for financial sector professionals will encourage individuals to further their own qualifications, and for their employers to support these endeavors. In the short term, skills gaps can be filled through recruiting expatriates and from the Diaspora. Foreign-owned firms contribute to local market development by bringing expertise, systems and training opportunities.

i. Rwandan Professional Standards and Training 103. Licensing requirements such as proficiency standards for insurance agents and brokers, capital markets participants and professional accreditation programs adopted by the Rwandan financial sector institutions and associations, will be based on existing regional and international standards and programs. Rwandan standards will take into account the results of the currently ongoing EAC professional qualification harmonization and mutual recognition projects. This avoids the complication and expense of developing specific Rwandan standards and programs, and more importantly will result in programs and accreditations that are recognized elsewhere in the EAC and the world.

104. Efficiencies will be gained through the financial sector associations and institutions partnering with educational institutions for delivery of professional programs. Common elements in financial sector accreditation programs such as introductory accounting and financial management can be more efficiently delivered through a small number of partner educational institutions rather than through sector specific institutes. This also offers the potential to develop these partner institutions into regional players, potentially drawing students from the DRC, Burundi, and elsewhere in the EAC. To facilitate this, industry associations and their educational partners will indentify key areas of comparative advantage relative to other regional providers of professional training and development.

ii. The Role of Industry and Professional Associations 105. It would be costly and inefficient for each part of the financial sector to establish its own training institute. Accordingly, each will be encouraged to play a leading role in setting standards and adopting a curriculum based on existing regional or international programs, and partnering with Rwandan educational institutions for delivery of the required courses. The RBA and ASSAR have been revitalized, and now play an active role in consultation and advocacy. Each is considering how best to support professional development within their sectors. In addition, there has been discussion of establishment of a microfinance institute, and the Institute of Chartered Public Accountants of Rwanda (ICPAR) has its accreditation program.

106. Training for capital markets professionals is currently available through the Securities Industry Training Institute (SITI), based in Uganda and serving the EAC. The CMA, together with the securities exchanges in Kenya, Uganda and Tanzania participated in the development of the curriculum. Currently the 20 modules of the core curriculum and various training programs are delivered by SITI. As demand increases in Rwanda, the option of partnering with local educations institutions for delivery of the program will be explored, with SITI retaining control over the examination process.

Policy actions  Require Certificate of Proficiency for insurance professionals  Provide five years for industry incumbents to obtain certificate  ASSAR to adopt professional program based on UK Chartered Insurance Institute or equivalent  ASSAR to partner with local institution to deliver curriculum  RBA to affiliate with UK Chartered Bankers Institute (or other recognized institute)  RBA partner with local institution to deliver curriculum  Explore possibility of SITI partnering with Rwandan educational institutions for course delivery  Institute of Entrepreneurship, Cooperatives and Microfinance to partner with existing institutions such as SFB, to deliver curriculum

2. Banking 107. The BNR will continue to strike an appropriate balance between protecting consumers and financial stability, and encouraging innovation. The strong prudential standards established and enforced under FSDP I help to protect depositors, while an enabling regulatory approach to innovations such as agent banking has fostered strong growth in both traditional and non- traditional banking products.

i. Increasing Competition 108. The number of competitors and range of products and services in the banking sector has increased dramatically due to the strong economic growth of the country, good and improving conditions for doing business, and an appropriate regulatory environment. The principal benefit to consumers from this competition is from expanded outreach—bringing people previously excluded into the banking market; product enhancements such as accounts with no transactions fees; and product innovation such as the introduction of credit and debit cards.

ii. New Entrants 109. Considering that Rwanda now has a large number of banks relative to the size of the economy, a key consideration in evaluating future applications for de novo licenses or the possible acquisition of an existing bank will be whether the new bank will bring a new business model, strategy or capability to the market. New entrants with innovative business models such as KCB’s agent banking network and Equity Bank’s products targeting the lower-income end of the market have had a particularly dramatic effect on increasing competition.. More banks doing

32 the same thing will not increase competition, but an international bank could bring global scope to the Rwandan market, while an example of a possible innovative business model would be a bank with an SME lending focus.

3. Insurance 110. The performance of the insurance industry has improved since the adoption of new legislation in 2009 and the transfer of responsibility for regulation and supervision to the BNR. Further refinement of the regulatory regime is required to foster the development of the sector while ensuring that it has the financial strength required to safeguard individuals’ savings and to meet the protection promises at the core of insurance policies. Development of the life sector is particularly important for the development of additional pools of domestic capital for long term savings and investment. Updating the regulatory framework for insurance is discussed in Program 4.

i. Mortality (Life) Tables 111. The lack of mortality (life) tables is a significant impediment to the introduction of new products such as annuities and expansion of the provision of life insurance. This means that long- term insurance risks – and hence appropriate premium levels - cannot be correctly calculated. Life companies respond to this uncertainty by loading premiums to cover their risks, which may make life insurance unreasonably expensive. This will be addressed through a project spearheaded by the BNR, and involving the RSSB and insurance industry. Donor funding will be sought, but should this be unsuccessful, a proposal will be developed to share the cost among the interested parties—the BNR, RSSB and industry. Besides benefitting individual entities (such as the private life insurance companies and the RSSB), the life tables will be of general benefit, and there is a “public good” component to their origination.

ii. Annuity Products 112. Rwandans will have a much greater need for annuity products as a consequence of the new pension law, and more generally to meet the need for retirement income. This will become a major new business opportunity for Rwanda’s life insurance companies and will be further expanded to the extent that Rwanda moves over time toward Defined Contribution (DC) pension funds, in line with worldwide trends.

113. Life insurance companies in Rwanda are permitted to provide annuities but do not yet do so, in part because of the limited demand. However, there will be a demand for such products as the pension sector develops. The new Pension Law makes provision for the establishment of private pension schemes, and tax incentives will be introduced to encourage pension provision and participation by employees. Life companies will therefore need to develop the capacity to sell annuity products, or else the public policy objectives will be frustrated and retiring members of private pension funds may be unable to buy pensions.

114. The availability of Rwandan life tables as noted above will address one of the major obstacles to introduction of annuities. Another current impediment, the lack of appropriate assets

33 to match annuity liabilities, will be addressed through other elements of FSDP II. Capital market development, and in particular the program of government debt issues and over the medium term, fostering of the corporate debt market, will provide some of the long-tenor assets required to match long term annuity obligations. Symbiotically, a growing demand for annuities will help to promote the capital market, by increasing demand for bonds and equities. The BNR will need to develop the capacity to regulate and supervise annuity risks, and to supervise the risk management capacity of the life companies themselves.

iii. Taxation 115. A tax regime tailored to the nature of the life insurance business will be introduced, paralleling the special tax rules applied to the life insurance industry in other EAC countries. Under the current Rwandan regime the insurance company is taxed on income (including premium and investment income) less allowable expenses (including benefit payments). However, this is not consistent with the approach in other EAC countries, and gives rise to some undesirable outcomes. First, under many life and pension policies, investment income does not accrue to the company but instead adds to the value of the benefits payable under policies held by policyholders. It is not, therefore, part of profit. Second, applying tax on life insurance company profits as normally defined is in effect taxing the policyholder (who therefore receives the benefits of post-tax investment income not pre-tax), rather than the insurance company. This acts as a deterrent to savings. It may also lead to double taxation, if the benefits of life or savings policies are again taxed in the hands of the recipient. The new tax regime for life insurers will not subject to corporate income tax the portion of profit accruing to policy-holders.

iv. Data compilation and publication 116. Greater information on the insurance industry will be made public by the BNR on its website and through regular publication. Only very limited data on the insurance industry are available, published in the BNR Annual Report. No comprehensive data on insurance are publicly available, and there is no separation between data on short-term and long-term insurance.

117. Such information should be a public good, in the same way that information on the banking sector is published by the BNR. Furthermore, comprehensive information on insurance company balance sheets is an essential input to monitoring of systemic financial sector stability and risks. In future, the BNR will compile consolidated data on each of the two major insurance sub-sectors (short-term and long-term). This will cover key balance sheet information (assets by type, major liabilities) and income/expense data. It will also cover key compliance ratios (solvency etc.). This can be done immediately on the basis of current reporting formats, however, more detailed data will be available once the supervisory and reporting formats are separated and refined for short-term and long-term insurers. The data will be published regularly in the BNR Annual Report and Quarterly Bulletin, and on the BNR website

v. Professional qualification requirements 118. Insurance intermediaries (brokers, agents, loss adjusters) and technical staff employed by the insurers will be required to have a professional qualification, such as the Certificate of Proficiency (CoP) in Insurance, which is available with various specializations. After consultation with the industry, the BNR will specify the acceptable professional qualification— the CoP or other similar internationally recognized standard. The date from which the requirement will be applied will be announced a significant period in advance –five years or such other period as may be determined after consultation with the industry– in order give industry incumbents time to acquire the qualification.

119. In conjunction with ASSUR, efforts will be made to have an educational institution in Rwanda deliver the curriculum of the CoP (or similar) program, in collaboration with a certifying institution outside of the country (it is not necessary to have Rwanda-specific certification). The decision to make professional certification a regulatory requirement would provide an assured market for tuition which should be sufficient to induce an educational institution to invest in the necessary courses and professional development. The SFB is in the process of establishing an Insurance Department, and this may well be a suitable vehicle for professional insurance qualifications.

120. Another important technical skill that is lacking in the industry is actuarial science. This required by life companies and pension funds (including the RSSB), but fully qualified Rwandan actuaries are not available. Some teaching of actuarial science is offered at the National University of Rwanda, but full qualification requires further passing further professional examinations and a period of apprenticeship. Government will work with the RSSB and life insurance companies to prepare a development program to produce qualified Rwandan actuaries.

Policy actions—Insurance  Prepare Rwanda-specific life (mortality) tables  Introduce annuity products to meet the requirements of private pension plans  Introduce a taxation regime for life insurance companies reflecting specific nature of the business  Compile and publish aggregate data on long-term and short-term insurance sectors  Introduce CoP or similar requirement with an appropriate phase-in  Encourage a local institutions to provide CoP courses, in collaboration with foreign instution  Develop a program to train Rwandan actuaries

4. Pensions 121. Developing private pension plans is a key element of FSDP II. Not only do pensions meet social objectives of facilitating retirement savings, the growth of pensions is an important aspect of mobilizing long-term savings and contributing to capital market development. The pension sector currently comprises a government social security pension, and about 40 savings products marketed by financial institutions as retirement products. Enactment of the pension law

35 to provide the legal and fiscal foundation for private pensions is a necessary precondition for the growth of the sector.

i. Rwanda Social Security Board 122. The pension sector in Rwanda is currently dominated by the social security pension scheme managed by the RSSB, which also manages the national medical plan. The RSSB is the largest financial institution in the country, with total assets of about RWF 312 billion at end-June 2012, of which about two-thirds is accounted for by the pension plan. By virtue of its long term pension liabilities, the RSSB should be a major source of institutional long-term capital in Rwanda. However, because of the immature state of the capital market and developmental needs, the RSSB has committed a considerable share of its portfolio to early stage real estate development, including housing, and to unlisted equities.

123. The most recent actuarial valuation (2008) indicated a significant unfunded liability. Given the low contribution rates, no ceiling on earnings, and a relatively high replacement rate on earnings, the fund will begin to come under financial stress in 5 years. Based on the assumptions in the valuation, the reserve fund will be exhausted by 2040. To deal with these issues, the draft pension law presently before Parliament includes adjustments to benefits and contributions to make the plan more sustainable. In the longer term there will be a need to consider the impact on the RSSB of labour mobility within the EAC.

124. In addition to moving to a sustainable funding base, actions will be taken to i) strengthen the governance, organization and administration of RSSB, ii) to improve investment management and performance; and iii) to strengthen risk and cash management.

a. Strengthening governance, organization, and administration: 125. The RSSB is granted autonomy under its law, but at the same time is subject to the laws governing public institutions. The role of the Board and management will be clarified, giving the Board discretion to restructure the organization. Greater flexibility on compensation for key positions, especially financial and investment management, than provided by public service salary scales, and a streamlined tendering process for professional services will also be established. The RSSB competes with the private sector for investment management professionals and actuarial services. Great flexibility to hire sufficiently skilled and experienced staff, or to obtain specialist skills through contractual arrangements, is required to safeguard the assets of the country’s largest financial institution.

126. Accountability measures will be introduced in conjunction with increased autonomy for the RSSB Board to discharge its mandate. Each function—pension and medical insurance—will be managed as a responsibility centre, with overhead for shared and centralized functions allocated to each. RSSB costs will be benchmarked to evaluate performance. Due to the unique structure and investment portfolio –the costs of managing the RSSB’s large real estate portfolio is higher than for a portfolio of marketable securities—there are few readily available

36 comparators. Initially, expenses will be benchmarked against historical performance. In future, RSSB will commission a peer group benchmarking study.

127. A new actuarial valuation will be undertaken. The planned project to develop mortality (life) tables for Rwanda will make this valuation more robust than previous reviews relying on proxy data. The RSSB will also initiate a program of regular (approximately once every three years) revaluation of its real-estate portfolio to better monitor the returns.

Policy actions—RSSB: Strengthening Governance, Organization, and Administration: Structure  Allow Board of Directors to redefine RSSB’s organizational structure  Formally define roles of the Board and management  Undertake compensation study relative to private sector  Pay market salaries for senior and skilled positions.  Manage RAMA And CSR portfolios separately, allocating overheads  Establish special tendering process for key areas such as professional services  Establish pension and medical insurance plans as separate client accounts of the RSSB.  Establish separate investment policies for pension and medical plans  Define a pension and medical responsibility center and allocate headquarters overhead  Measure and benchmark costs of administration  Perform actuarial studies for the pension and medical plans  Implement regular independent real estate valuations  Prepare analytical financial statements for management

b. Improving investment management and performance 128. The RSSB, using the greater autonomy outlined above, will recruit appropriately skilled investment managers, actuaries and a senior risk-management professions. A staff actuary familiar with the parameters of the plans is required, as are qualified portfolio managers and financial analysts, both to select and manage assets and to provide management information for decision making. Benchmarking the performance (rate of return and risk) of the portfolio and the asset classes is problematic in Rwanda, since there are no historical indexes or peer groups of fund managers. Initially benchmarks will be developed relative to treasury and bank deposit rates and the actuarial discount rate used for the most recent valuation, and over the longer term appropriate benchmarks will be established for each portfolio.

129. A mandate for a diversified foreign securities portfolio will be developed, benchmarked against one of the widely used international indices, and tendered to an external funds manager. Dedicating a portion of the portfolio to foreign securities will improve liquidity and diversity risk. Investment policies will define foreign exposure limits, within the EAC and globally. Limits will also be established for investments in unlisted securities. A reverse repo program (equivalent to collateralized deposits) will be developed as a useful supplement to RSSB’s large bank deposit program. A new requirement for professional feasibility reviews confirming commercial viability prior to acquiring real estate will introduce a more disciplined approach to expanding the real estate portfolio.

Policy actions—RSSB: Improving investment management and performance  Recruit high quality professional investment managers, actuaries, and a risk manager  Define rate of return benchmarks for each portfolio where appropriate indexes exist  Contract out a diversified foreign portfolio to external managers  Establish reverse repo procedures with counterparties  Require a professional study of commercial financial feasibility for large real estate projects before approval

c. Strengthening risk management and cash management: 130. RSSB will institute a separate risk management committee reporting regularly to the Board. Appropriate limits will be established for trading and investment. Risk tolerances and limits will be defined as part of the investment policy, including the balance between risk and return, and foreign exchange limits. In order to improve the quality of cash flow forecasting, short term cash management plans will be designed and implemented, using liquidity gap analysis. This is of particular importance because of the illiquidity of the real estate portfolio and unlisted securities. Loans and overdue positions with government will be regularized. Lastly, since the RRSB has gone through organizational changes and does not have a master custodian, but rather has contracted directly to acquire assets over the years, a review of legal asset ownership and registration will be undertaken.

Policy actions—RSSB: Strengthen Risk and Cash Management  Create risk management committee and staff at headquarters  Establish regular risk reporting to the Board  Create approval limits at trader, manager, CEO, and Board level  Review investment policies for the pension and medical plans to ensure appropriate risk/return exposures  Design and implement cash management plans  Prepare liquidity bucket gap analyses  Settle arrears from government  Review the legal ownership and registration of securities and investments

ii. Private Pension Plans 131. The draft pension law before Parliament, which will establish the legal framework for private pensions, envisages a three pillar structure:

 The RSSB social security fund, with a cap on earnings, higher contributions, and less generous benefits. Neither contributions nor benefits are taxed.  Voluntary occupational pension plans, which will be generously exempted from tax on both contributions and on benefits  Personal retirement accounts, which will be similarly tax advantaged.

132. The private pension sector in Rwanda is very limited in scope at present. There is no current registration framework: “pension plans” offered by insurance companies and employers are after tax savings plans, which the employee usually takes in a lump sum on retirement. No

38 annuities are available. While about 40 employer plans exist, only fragmentary data on the plans exists and has not been collated to provide an overall view of the sector.

133. Plans, managers, and asset custodians will be licensed and plans will be supervised by the BNR. Regulations have been prepared in anticipation of the enactment of the law, but may require revision to align with the law as proclaimed. Over time, private pension plans offer the potential not only to meet retirement savings needs, but also to develop pools of contractual savings that would contribute to capital market development. Bonds and equities are likely to be in demand from the managers of these private pensions. Public sector pensions plans will register under the new law once it and the regulations are proclaimed, providing a demonstration effect to catalyze the private sector.

134. Elements of the draft pension law will be clarified prior enactment. It will be specified that occupational pension plans can be DC or DB. Given that the annuity market is yet to develop in Rwanda, an addition to the draft law will provide that DC plans may be commuted to an annuity upon retirement, or alternatively be subject to a staged withdrawal. There will also be provision for an alternative lump sum arrangement for small amounts. The law will also confirm that the use of the accumulated assets to provide an insured benefit is meant to apply to DC occupational plans and to personal retirement accounts, since the latter are mentioned elsewhere in the law.

Policy actions—Private pensions  Enact pension law following required revisions and clarification  Establish licensing, prudential and supervisory regime for private pensions  Public sector entities provide catalyst by registering pension plans under the new law

5. Capital Market Development 135. A comprehensive legal foundation for the Rwandan capital market is now nearing completion. Work is underway to address the remaining legal and regulatory gaps. The actions planned and currently underway specifically consider the challenges of building a viable capital market in a small economy within a regional context. The main issues going forward are: completion of the necessary supporting infrastructure for regional trading; establishment of guidelines for shelf registrations, medium term notes (MTNs), and private placements; and developing a sustainability plan for the RSE including attracting additional local and cross- listings.

136. To promote interlisting of securities and in anticipation of East African capital markets integration, interconnectivity between Rwanda’s securities depository and other depositories is being developed. Currently, the transfer must take place by paper, which discourages the trading of inter-listed securities and non-resident trading on the Rwandan exchange. When the securities depositories are linked there will be fewer barriers to foreign investors taking advantage of Rwanda’s superior infrastructure, which supports DVP, to trade interlisted securities on the RSE.

137. Commercial paper, MTNs and public corporate issuance will be promoted. Companies often find it easier to issue quickly using a shelf-filed note program than to prepare a public bond issue. Therefore, guidelines for shelf registrations and MTNs will be developed in consultation with the industry for implementation by end-2013. Corporate bond issues will be encouraged by having parastatals, where appropriate, tap the bond market. Local banks are expected to consider debt issues, both for long term funding and to raise Tier 2 capital in the form of subordinated debt.

138. Automation and the development of IT infrastructure is a priority. An electronic trading platform will be acquired by the RSE, and a project manager for this will be hired. The CMA will upgrade communications and its documentation systems.

139. An investor compensation fund will provide more security and comfort for investors, particularly in dealing with new branches of foreign brokerage firms in Rwanda, which may not be well known to the public. The CMA will take an oversight and coordinating role.

140. The compilation of a list of approved credit rating agencies by the CMA, in coordination with other East African regulators, will facilitate corporate bond issuance. Many institutional investors structure fixed income portfolios by credit rating as a risk management technique, and will not purchase (or severely restrict purchase of) unrated bonds. Credit rating reports also provide investors with useful financial information about the borrower in an analytical format.

Policy Actions—Capital Markets  Complete the legal framework and regulation consistent with IOSCO principles  Disseminate guidelines for shelf registration of commercial paper and MTN programs  Draft and issue guidelines for exemption of private placements from public issuance requirements  Proceed with connectivity between the BNR securities depository and other EAC depositories  Support IT automation in capital markets and promote the development of business contingency plans for market intermediaries  Coordinate establishment of an investor compensation fund  Compile list of approved credit rating agencies

i. Rwanda Stock Exchange 141. The RSE is a self-regulatory organization under the supervision of the CMA. The key next step in its development is to transition to a fully sustainable model. A five year plan including an expansion in the number and type of listed securities will be prepared to guide the near-term evolution of the market, taking into account EAC market integration and the particular challenges of sustainability in a small economy. The RSE will build market supervision skills, including through staff interchange with more mature markets.

142. The exchange will also undertake planning, education and information programs regarding the exchange and financial markets, and disseminate price and trade volume data on its website. A long term objective is to bring smaller firms to the market, taking appropriate 40 measures to mitigate the potential reputational risk from listing companies with less developed governance structures and shorter track records. An initial step is to institute an information exchange where entrepreneurs in need of capital and investors can meet and structure a deal, with the assistance of legal and financing advice. This forum should result in a “pipeline” of potential deals that could be supported by one or more venture capital funds established using the new collective investment scheme law. A complementary initiative is the development of a “second tier” listing requirement for the RSE. This is to be completed by March, 2013, with the intention of facilitating capital market access for smaller firms.

Policy Actions—Stock Exchange  Disseminate member licensing criteria for potential new members  Undertake and continue public awareness campaigns on the procedures, rewards, and risks of investment in securities  Build market supervision skills through training and staff interchange with other more mature exchanges  Disseminate RSE price and trade volume data on website  Develop a business information exchange for venture capital, SME's, and investors, with access to financial and legal resources.  When a deal pipeline has been established, engage the business exchange participants above to constitute a venture capital fund as a CIS.  Complete and publish “second tier” listing requirements to attract smaller firms  Develop a 5 year plan for financial sustainability and financial independence for the RSE  Examine alternatives for the future of the RSE in the context of East African capital markets integration

ii. Bond Market Development 143. The major components of the bond market action plan are: (i) to build the government yield curve to serve as a pricing base for the market, (ii) to broaden the investor base, and (iii), to promote private sector issuance. Bond market activity in Rwanda has been sporadic and infrequent (Table 4). In addition to the small number of government bond issues there has been one 10-year issue by BCR in 2008, for RWF 1 billion to finance mortgages. The small size of the bond market is due to only occasional government issuance On the investor side, there is a scarcity of natural long term fixed income investors. Nevertheless, the increasing bid/cover ratio (ratio of bids received to amount offered) for the last 4 issues, indicating good demand.

Table 4: Government Bond Issues Issued Tenor Offered (RWF bn.) Bid/cover ratio Yield (percent) 2008 2 Years 5.00 1.51 8.000 2008 2 Years 5.00 0.85 8.000 2008 3 Years 5.00 1.44 8.250 2010 2 Years 2.50 1.40 9.500 2010 3 Years 2.50 0.60 10.540 2010 2 Years 2.50 3.04 9.458

2010 5 Years 3.50 2.01 11.121 2011 3 Years 2.50 3.28 10.425 2011 5 Years 2.50 3.60 11.150 Source: BNR.

144. Building the government yield curve will be guided by well-established principles and approaches. The first step is the resumption of the Government borrowing program, beginning with regular issuance of three and five year bonds to add depth to the front end of the market, followed by the introduction of seven year tenors. The bond program will benefit the government by reducing its refunding risk. Now, with all of its debt concentrated in short-term T-bills, the government is exposed to the risk that maturing T-bills cannot be refinanced. The three year (rather than two year) date is chosen to facilitate immediate benchmark issues given that withholding tax on issues of three years and longer is subject to five percent withholding tax on interest, while issues under three years pay 15 percent. Over the medium term the tax treatment of different maturities will be revisited to eliminate differences than can distort the market..

145. Regular preannounced issue schedules are important so that brokers and clients can plan their purchases. A modest program of RWR 2 billion per issue will be integrated with the T-bill program and the Treasury’s cash management plan. Over 5 years, taking into account existing bond maturities, such a program will raise about RWF 20 billion in net new cash, which could be offset by reducing the outstanding RWF 90 billion in T-bills. Other uses for the cash could include increasing treasury cash balances to minimize the occasional overdrafts at BNR, to repurchase outstanding non-marketable bonds, and for ongoing general Treasury needs.

146. Bond market intermediaries – the auction participants and dealers who trade with clients –are a key part of the bond market. A Rwanda dealer group, consisting of the more active intermediaries in the government market, will help in its development. As regular auctions proceed, trading will develop and members of the Rwanda dealer group will begin to post prices. The BNR will collect market prices, calculate and publish a yield curve. It will also calculate and publish closing bond prices for use is marking securities to market. The yield curve and bond pricing information constitutes a base on which other issuers can price a bond issue or medium term note.

147. At present, only direct clearing intermediaries have access to the auction platform. Access can be allowed for the best performing brokers. Although they are small relative to banks, they have the potential to be more aggressive traders and market makers, since that is their livelihood, while for banks, trading government debt is not a major profit centre relative to their lending and other businesses.

Policy actions—Bond Market Development: building the yield curve  Develop modest 3, 5 and 7 year regular bond issuance program consistent with fiscal needs  Revisit withholding tax to remove distortions caused by different treatment of maturities

 Introduce longer tenor government bonds as market develops  Publish indicative quarterly bond auction dates for the coming year for the 3, 5 and 7 year auctions  Reopen outstanding bonds where possible to promote liquidity  Prepare proposal to designate a Rwanda Dealer group in government securities (bills and bonds), discuss with the industry  Seek agreement on privileges and obligations for the dealer group: auction performance, market making, market reporting and intelligence  Develop performance indicators for dealer group  Based on market making and trading prices, publish daily government yield curve  Form a bond pricing unit which will calculate and publish closing bond prices, for use in fund and portfolio market valuation  Look for opportunities to refund non-marketable debt in marketable form  Allow the best performing non-bank dealers success to the automated auction platform

148. Broadening the investor base for bonds will promote liquidity in the form of a more active secondary market and more issuance. While the banks are reliable auction participants, it is important to develop markets beyond the banks. Foreign participation will be promoted by conducting joint BNR-MINECOFIN investor presentations in other EAC financial centers. On the technical side, connectivity between Rwanda’s securities depository and that of other East African countries is necessary to promote regional trading. Currently cross border delivery of securities requires cumbersome paper transfer documentation, but an initiative is underway to link the EAC systems. Quotation of government bonds will be promoted on global trading screens like Reuters and Bloomberg.

149. Withholding tax on interest income will be revisited as it inhibits foreign institutional participation in the Rwandan market. It also raises the costs of bond issuance relative to bank loans and under the current regime introduces distortions due to different treatment of debt issues of differing maturities.

150. The options for issuing Diaspora bonds will be explored. One option is that Rwandan citizens abroad might purchase bonds through accounts with local brokerages. A tranche of government bond issues, or of a savings bond issue when introduced, could be reserved for the Diaspora. The reserved tranche would be open to subscription for a set period. While additional resources would be required to manage this program, using tranches of other issues would contribute to the development of the domestic bond market and investor base. An alternative would be to consider foreign currency issues, possibility with an earmarked use for the funds, such as supporting affordable housing. Foreign currency issues may be more attractive to the Diaspora, but come with their own complications in terms of distribution and cost, and do not contribute in the same way to the development of the domestic bond market.

151. On the domestic side, one measure to broaden the investor base will be to make non-bank sales of government securities a performance criterion for dealers. At the auction, a modest overallotment tranche of the bond will be reserved for non-bank and retail participation for a few

43 days at the non-competitive rate. Another option to be assessed is the possible introduction of a retail targeted savings bond for individuals. This will help mobilize savings and provide an attractive alternative to bank deposits for individuals, but has to be evaluated against the costs of running a savings bond program.

152. Over the medium term, institutional investors in Rwanda will benefit though educational efforts on how to use bonds to build pension products (annuities) which will be in demand after the draft pension law is enacted and pension managers and administrators are licensed. Education for issuers as well as investors will also be necessary.15

Policy actions—Bond Market Development: broaden the investor base  Consider elimination of withholding tax on RSE listed bonds  Prepare investor presentation, plan industry visits with MINECOFIN (Kigali, Nairobi, Kampala, Johannesburg, London)  Resolve technical issues to facilitate RWF electronic bond delivery and custody in EAC  Pursue longer term electronic link with global clearing and settlement platform  Promote quotation on Bloomberg, Reuters, and other trading platforms.  Assess market and technical details (sales and settlement) for a Diaspora bond issue  For dealer group, make bill and bond sales to non-banks a performance criterion  Continue informal daily market consultation and formal periodic dealer exchanges with BNR on market conditions and auction recommendations  Explore development of a retail targeted savings bond program  Reserve a modest proportion of auction amount ("overallotment") for primary dealer retail distribution after auction date at non-competitive rate

153. Building the government bond market and development of the yield curve will lay the foundation for the corporate bond market. The role of parastatals and public-private partnerships (PPPs) are two additional ways that government can play a catalytic role. Parastatals requiring long-term financing can be encouraged to consider debt issues, and government can encourage the including of a domestic bond tranche in the financing of PPPs.

a. Public Private Partnerships 154. A three year plan is being prepared for the implementation of PPP projects from an initial list of 15 projects and the first, the airport project, is now being tendered. The PPP policy and procedures, presently available in draft will be finalized and will define the responsibilities of RDB, the MINECOFIN public investment team, and CMA. The policies and procedures will differentiate between very large projects (like the airport project now being tendered) and smaller projects for which Rwandan sources such as the stock exchange and local lenders are potentially relevant. The policy for the smaller PPP projects will inform bidders that some weighting will be placed on the extent to which there is local participation in the form of i) raising capital on the stock exchange; ii) debt participation by local lenders; and iii) advisory

15 This was noted by the City of Kigali as it assessed the prospects for a municipal bond issue several years ago. 44 services contributing to the packaging process. Utilizing BRD project structuring and appraisal skills will be considered, when relevant, for smaller projects in which BRD does not have a conflict of interest.

b. Securitization 155. Securitization of assets is also a way to create marketable bonds. Regulations for asset backed securities (ABS) have been prepared and will be gazetted soon. One key element of the legal framework for these instruments is the enactment of the Trust Law currently pending in Parliament. This is necessary to confirm the legal underpinnings for securitization (conveyance of assets to a special purpose vehicle or a trust, or segregation of assets against which a covered bond can be issued with prior claim). A further required element is review of the tax regime to make securitization tax neutral with respect to the assets conveyed to the trust or special purpose vehicle. Once complete, the foundation will be in place for issuance of a range of asset-backed securities

Policy actions—Bond Market Development: promote private issuance  Educate issuers on bond, equity issues and securitization  Complete the legal requirements for securitization (Trust Law, SPVs) and review tax treatment  Explore potential domestic financing component for medium sized PPP projects  Educate and canvas investors to confirm interest in new issues

iii. Collective Investment Schemes 156. Enactment of the Trust Law is the last remaining element of the legal foundation of collective investment schemes (CIS). The CIS Law introduces the requirements for mutual funds, contractual agreements, and unit trusts. Regulations have been prepared for Real Estate Investment Trusts (REITs). Introduction of products like mutual funds will provide another savings and investment vehicle, and also foster development of a new class of institutional investor—funds managers. Diversification of the investor base in Rwanda will be enhanced to the extent that these funds managers are not affiliated with existing financial institutions, and through development of alternative distribution channels such as independent financial advisors or “open architecture” approaches whereby by banks and insurance companies offer the funds of both related and unrelated managers. The regulator will be the CMA. Foreign funds managers are permitted, but they must have a known place of business in Rwanda, which will help to develop products for the Rwandan market and build capacity in the industry .

6. Supporting Infrastructure i. Payment System 157. Almost all of the previously identified issues with the payment system have been resolved, putting in place the foundation for a payment system to support the needs of a modern economy. Continuing reforms will close the few remaining gaps.

a. Legal and Regulatory Framework 158. The main legal issue outstanding with regard to payment systems is the need to improve the legal protection of the funds of MMT subscribers held in escrow accounts at commercial banks. This requires the introduction of the Trust Law, and other changes in the regulation of MMT services.

159. MMT licensees are required by the BNR to keep the funds received from subscribers, in exchange for e-money, in a trust or escrow account at a commercial bank. These funds are segregated from the general funds of the MNO running the MMT service, in order to protect the interests of MMT subscribers. However the legal foundation for such segregation is weak, and could be over-ridden by the general provisions of insolvency law.

160. This situation is unsatisfactory and means that the intended protection of MMT subscribers through the trust/escrow account mechanism may not work. Enactment of the pending Trust Law is a matter of priority to give legal effect to the intended protection. A related requirement is that the winding up of a bank should not be subject to the general insolvency law but should be governed by relevant portions of the Law on Banking.

b. Retail Payment Systems 161. The retail payments landscape has improved considerably since the time of the FSAP in 2011.

 SIMTEL under new management, re-branded as RSwitch, is operating reliably  Revocation of the SIMTEL monopoly led to market driven solutions, including the entry of VISA  Two MNOs (MTN and Tigo) have introduced mobile money transfer products and a third operator (Airtel) has applied to do so  Banks have begun to roll out mobile and internet banking products

162. The main challenge over the next five years is to consolidate and build upon these improvements, to allow market forces to operate in the retail payments market, and to ensure that consumer interests are served through ensuring interoperable systems with open access. With both RSwitch and VISA present in the Rwanda retail payment market, competition and market forces are now capable of guiding development. Both banks and retail customers have a choice of card types, technologies and costs.

c. Rwanda Integrated Payment Processing System (RIPPS) 163. All three components of the RIPPS (which includes the Automated Clearing House (ACH), the Real Time Gross Settlement (RTGS) system, and the Central Securities Depository (CSD)) are now functioning. The main objectives with respect to RIPPS in the coming years will be to encourage further transition towards electronic payments; to ensure that adequate arrangements are in place to manage the liquidity requirements of participants in the RTGS; to broaden participation in the RIPPS; and to further integrate into the EAC payment system.

164. Further measures will be undertaken to move high-value payments to the RTGS, where settlement is faster and risks are better managed. This will be achieved by introducing a value cap on cheques and EFTs.

165. At present the RTGS only deals with RWF transactions, although there are facilities to operate in multiple currencies. The demand for foreign currency transactions will be monitored, particularly in the context of EAC payment system integration. The BNR will be prepared to introduce facilities for EAC currencies and USD transactions should it be justified.

d. Automated Clearing House 166. The ACH, which deals with payments by cheque and electronic funds transfer (EFT) is an integral part of the payments system. Over the next five years the main challenges will be improving the efficiency of the cheque clearing system while accommodating the move towards electronic payments, and broadening access by different types of financial institutions.

167. The BNR is implementing a cheque automation and modernization plan, involving the introduction of machine-readable cheques. Standards for these cheques (based on magnetic image character recognition), have been agreed between the banks and the BNR. The banks will invest in new (machine readable) cheques and processing machinery for cheque reading, imaging and truncation. Banks will be required to meet the new cheque standards and introduce cheque reading equipment, but the move to full truncation will depend on whether the costs can be justified. The BNR will encourage the public to move away from cheques, while banks pricing strategies may provide an incentive for the public to move away from cheques to electronic payments.

e. Broadening participation in the ACH 168. The rapid growth of Umurenge SACCOs and the continued role of older SACCOs and MFIs has raised questions about which institutions can gain access to the RIPPS and its various components (particularly the RTGS and the ACH). At present this is limited to licensed banks and microfinance banks. Membership entails access to both the RTGS and the ACH. SACCOs and non-bank MFIs can only access the payments system indirectly, through a bank that is a RIPPS member.

169. The BNR will consider alternative means of providing MFIs and SACCOs with access to the ACH. This could be through tiered membership of the RIPPS, which would allow selected MFIs and SACCOs access to the ACH under strict conditions. The conditions for accommodating such tier-2 membership of the RIPPS would need to be developed. Not all SACCOs/MFIs would be eligible – access will be restricted to those that meet minimum volume requirements, are in good regulatory standing, and have access to the necessary technology and communications. If a decision is taken to combine Umurenge SACCOs into a smaller number of district SACCOs, then these district-level organizations would be more suitable as ACH participants. Such tier-2 membership would specifically exclude access to credit facilities at the central bank, which would continue to be available only to licensed banks.

170. An alternative approach would be to establish a central facility serving all MFIs and SACCOs, which would collect all EFT instructions and submit them to the ACH through a bank (as well as providing other services). This would provide access to the ACH for all MFIs/SACCOs and would be more manageable than multiple MFI/SACCO memberships of the ACH. This solution would be feasible if plans to establish a SACCO/MFI Management Information System come to fruition.

f. Securities Settlement Systems 171. The CSD, operated by the BNR, went live in May 2011. To improve the functioning of the CSD and ensure users are aware of the range of functionality provided, an operational manual will be prepared, laying out rules and regulations for participants and providing guidance with respect to the features of the CSD. Training for CSD users will also provided. Custodial services for international investors will be put in place, by encouraging Rwandan institutions to develop links with international custodial services.

g. Oversight and Co-operation 172. The current National Payment System (NPS) Framework and Strategy was prepared in 2008. The Strategy has been largely implemented. It is now time to update the Framework and Strategy, and this will be done through the oversight body for the payment system, the National Payments Council.

173. The updated NPS Framework and Strategy needs to deal with a number of key issues over the next five years. One is to craft a comprehensive retail payments strategy that takes into account all payment instruments, payment channels, interoperability issues etc. This should extend to remittances, mobile payments, e-money etc., and will therefore also entail close liaison with Banking Supervision in order to identify supervisory and regulatory responsibilities in respect of financial products and services that straddle both payments and deposit-taking functions.

174. There is also a need to improve payment systems oversight, and to ensure that emerging risks are monitored and managed. This will require an expansion of skills and the number of staff at the BNR engaged in oversight activities, so as to ensure that all relevant activities are covered. It will also be important to develop co-operative relationships with other supervisory entities, both within the BNR and in other countries, and to maintain an ongoing consultative relationship with all relevant stakeholders.

h. Regional integration of payment systems 175. The integration of the Rwanda CSD with other depositories in the EAC (Uganda, Tanzania, and most importantly Kenya) will facilitate dematerialisation and inter-register transfers of dual-listed stocks. This will help improve the efficiency of trading of dual listed stocks on the RSE; will encourage further dual listings, and will help to make the RSE more attractive to foreign investors, who require stocks to be held on a CSD. Progress on

48 implementing these linkages will depend not just on actions in Rwanda but also the necessary complementary actions by relevant entities in other EAC member states.

176. An EAC Regional Payments Strategy has been developed by member states with the support of the African Development Bank. This involves the progressive integration of payment systems across the five EAC member states. Key components of the strategy include linking high value payment systems (RTGSs), clearing houses (ACHs) and securities depositories (CSDs) in the region. It also involves facilitating cross-border remittances and payments.

177. The first component is in the process of being implemented, with the RTGSs in Kenya, Uganda and Tanzania already linked. Preparations have been made to link Rwanda; testing has been completed, and the system will go live shortly. The RSE and CSD offer Delivery versus Payment (DVP) for share transactions, which is an attractive feature to offer to foreign investors. This gives the RSE an advantage over other exchanges in the region, and may provide a comparative advantage that will attract inward portfolio investment, especially if the range of regional stocks with a dual listing on the RSE can be increased.

i. Data 178. BNR has started publishing useful information on the RIPPS and the use of different payment instruments, notably in the 2011 Annual Report. In future, more comprehensive data on payment flows will be published in the Annual Report, the Quarterly Bulletin and on the BNR website.

Policy actions—payment systems  Establish interoperability among retail payment systems  Introduce a value cap on cheque and EFT transactions  Encourage migration away from cheques  Encourage MMT providers to develop cross-border payments  Develop operations manual for the CSD  Update the 2008 NPS Framework and Strategy  Complete the integration of the RTGS with other EAC RTGSs  Link the EAC CSDs  Improve the reporting of data on payments in the BNR Annual Report, Quarter Bulletin and NBR website

ii. Credit Information Reporting 179. The credit reporting system is functioning reasonably well. CRB now has approximately 700,000 records on individual borrowers (credits) and 50,000 records on company borrowers. In order to improve the effectiveness of the credit information system, further refinements are required to improve the breadth of coverage and the accuracy and accessibility of the information held. Improving the quality of credit information is an important component of improving access to finance, as financial institutions are more likely to provide credit when they can make a more accurate assessment of the riskiness of lending to particular borrowers.

180. Since 2010, financial institutions have been required to report credit transactions to both the BNR and a private credit bureau, CRB Africa. The information held in the BNR and CRB databases needs to be made more consistent. At present, financial institutions report separately to the two institutions, which have different requirements and reporting templates. As a result the information that is required to be reported to the BNR differs from that required to be reported to the CRB. This leads to a dual reporting burden and inconsistencies between the CRB and BNR data. To resolve this problem, the reporting formats will be unified and a single report will be submitted to the two institutions.

181. Building up a comprehensive credit record takes time. Given that the CRB is relatively new, some of the historical credit information is incomplete, and there has been mixed experience with the uploading of data from banks, especially those that only have manual records on past lending. The BNR will monitor the quality of the credit data submitted by banks and other financial institutions, and ensure that there is full compliance with requirements to submit credit information and to make enquiries before granting new credits.

182. The success rate on credit report enquiries has been poor, but is improving. The main reasons for enquiry failure are ID number discrepancies, and lack of historical information. Data quality has been affected by the changeover from the old national ID system to the new system. This situation should improve as new records are uploaded based on the new ID number system. The old and new ID system databases will be linked to enable cross referencing of records. The national ID database will also be made accessible for online searches, and this will at a minimum enable cross-checking of ID information submitted by prospective borrowers.

183. Compliance and reporting by all non-banks will be closely monitored, and efforts will be made to encourage voluntary participation by other credit-granting entities such as retail stores. Although all financial institutions are required to use the credit information system, among SACCOs and MFIs only a small number are reporting to CRB. This creates a large gap where it is perhaps needed most—smaller rural borrowers who do not have relationships with banks. Many Umurenge SACCOs in particular do not have the capacity to report, although this should be possible once they have a proper MIS in place.

184. While the main use of the CRB credit database is for credit assessment by banks and other financial institutions, the main use of the BNR credit information register is for statistical purposes. Aggregated information is used by the BNR, MINECOFIN and the National Institute of Statistics of Rwanda (NISR). The BNR will consider how the credit data can be used to enhance its supervision of financial institutions.

Policy actions—credit information reporting  Unify formats for reporting credit information to CRB and BNR, and require a single report to be submitted to the two institutions  Monitor submission of credit data by banks and ensure compliance

 Monitor compliance by banks in submitting credit enquiries  Expedite linking of old ID and new ID system databases  Work towards compliance by all SACCOs and MFIs in reporting credit data, once the necessary MIS is in place  Monitor submission of data by insurance companies to ensure compliance  Improve voluntary participation in credit reporting  Consider use of BNR credit registry data for supervisory purposes

iii. Creditors’ Rights and Insolvency 185. Far reaching reforms in the commercial law and insolvency regime have been implemented under FSDP I. The Rwanda Development Board (RDB) has taken a central role in implementing insolvency arrangements; specialized commercial courts have been set up, and registries of security charges are in place. RDB also is developing a registry of insolvency representatives who may act as administrators of commercial estates.

186. A number of issues remain to be addressed in the legal framework and its implementation. The National Land Centre (under a separate Ministry) and the Registry of mortgages at the RDB do not presently share meaningful co-ordination that allow data for land titles and mortgages to be recorded in one place, or accessibility using a single electronic portal. A project is currently underway to synchronize access to the two registries, which will facilitate the registration and verification of charges.

187. Lenders are reluctant to use the movables registry (for vehicles, equipment) because of the risk that assets will be removed, stripped or damaged before creditor possession. Rules will be put in place to prevent asset stripping, and to facilitate use of the registry by approving use of serial numbers and requiring less detailed descriptions.

188. Except for a small number of prime corporate borrowers, most commercial credit is secured by specific assets. The current legal framework gives secured creditors the ability to realize on their security prior to a general insolvency; often the secured claims can be executed outside the court system. It is preferable to allow the court to place a stay on the actions of secured creditors in the case of insolvency, so that an orderly liquidation can be carried out, or a reorganization of the business as a going concern can be carried out. However, such a stay must be balanced and not unduly impair the rights of secured creditors, and the latter will retain their prior claim in the insolvency process.

189. In the case of a debt restructuring, the current application of the tax regime imposes charges and obligations on the restructuring plan. Modifications to the tax regime will aim to facilitate debt restructurings. The law currently does not provide for the transformation of an informal restructuring agreement into a binding insolvency plan. Provisions for the approval and expedited implementation of informal restructuring plans, with the ability to bind dissenting minorities, will be implemented.

190. Creditors’ committees should be composed solely of creditors, to ensure appropriate representation. The current law, which provides for the inclusion on creditors’ committees, for other parties (for example, employees’ groups), will be revised.

191. The registry of charges at the RDB charges a flat fee for registration. This discourages the use of the registry for small secured lending transactions; use of the registry will be encouraged by reducing or waiving the fee for small transactions.

Policy actions—Creditors’ Rights and Insolvency  Synchronize the computerized land and mortgage registries to introduce a unified access portal.  Encourage use of the movables registry through rules that prevent asset stripping  Introduce a stay for secured creditors’ actions that would allow for a more orderly liquidation or for a reorganization of the business as a going concern  Reform tax regime to avoid penalizing debt restructuring  Reform insolvency law so that informal workouts can be formalized into a restructuring plan and expedited.  Restrict the composition of creditors’ committees to include only creditors  Consider a reduction or elimination of fees for registration of small security claims (MFI’s, etc.)

7. Rwanda as a Financial Services Hub 192. Expanding the size of the financial services sector is a key component of the objective of increasing the service sector share of GDP to 55 percent by 2020. Significant progress was made under FSDP I in laying the foundation for a financial sector able to meet Rwandan needs. This foundation work will be completed during FSDP II so that Rwandan financial institutions and markets are positioned to take advantage of regional and international opportunities. Meeting this significant challenge requires continued improvement in the payment system, capital markets, the legal and regulatory environment, the quality of supervision, the human capital of the financial sector, and review of the tax regime.

193. The reforms to financial sector legislation, regulation, and the practice of supervision outlined in FSDP II are central to the future positioning of Rwanda’s financial services sector. Requiring the domestic sector to meet world-class standards in governance, risk-management and capital adequacy is crucial if Rwandan firms are to compete abroad, initially in the EAC and neighboring countries. Similarly, a world-class prudential regime is necessary to attract reputable foreign institutions to Rwanda. There will at a later stage be a need to make significant changes in the tax regime as one of the foundation elements of a regional and internationally competitive financial sector.

194. Rwandan financial services enjoy a comparative advantage in offering neighbouring Burundi, the Democratic Republic of the Congo (DRC) and to a lesser extent, other French speaking African countries a bridge to EAC. Rwanda has a comparative advantage in playing

52 this role given its geographic location, rapidly improving financial sector foundation, multi- lingual culture and familiarity with legal systems in both French and English-speaking Africa. This will present opportunities which must be carefully considered due to the operational risk arising from venturing into jurisdictions with different and less well developed legal and supervisory systems. Equally importantly, there is potential reputational risk if Rwandan institutions suffer losses abroad or become embroiled in legal or other issues in international activities.

195. EAC integration offers additional opportunities for Rwandan institutions and markets. The rapid pace of reform means that Rwandan institutions are able to operate from a legal, regulatory and supervisory regime that has already made substantial progress towards harmonizing on agreed EAC standards, and which in most areas will reach full harmonization well in advance of other EAC countries.

Program 3: Investment and Savings to Transform the Economy 196. The success of the National Savings Mobilization Strategy is evident in the number of new depositors and mobilization of funds in savings and current accounts in the banking and MFI sector, In order to achieve the objective of a national savings rate of 20 percent by 2020 (increased as the original target of 6 percent will be easily surpassed), longer term savings products need to be introduced to complement and supplement the growth in deposits.

1. Long-Term Savings 197. The RSSB is already a major source of long term savings, but has the potential to become much more important. Expansion of participation in the RSSB pension from the current eight percent of the work force will lead to significant increases in contributions and a major growth in the pool of savings managed by the RSSB. A current challenge is the lack of suitable investment opportunities, meaning that the growth of the RSSB also has to serve as a catalyst for capital markets development.

198. Contractual savings are essential for their social role of allowing individuals to provide for their own retirement and the financial security of their family, as well as to accumulate the pools of capital needed for productive investment. Actions outlined elsewhere in FSDP II will provide the legal foundation for pensions, catalyze mobilization of additional pools of long-term funds in the private pensions and provident funds and foster the development of life insurance and annuities. Over time, these products will lead to insurance companies becoming significant institutional investors.

199. The provisions for collective investment schemes, soon to be finalized, will lead to a new range of savings options for Rwandans. Mutual funds, unit trusts and exchange traded funds offer vehicles to pool risks to that individual investors can easily purchase diversified investments that can include venture capital, corporate and government bonds, and equities.

200. Increased RSSB focus on converting a significant portion of shorter-term bank deposits into longer-term bank deposits and the development of a yield curve utilizing government bond issuance will give banks access to more of the long-term funds already available in the pension industry which can, in turn, support longer-term funding.

2. Increasing financing for the private sector 201. Increasing domestic credit to the private sector from its present 13 percent of GDP to 27 percent by 2017 is the most important financial sector target relating to credit as it has the most direct impact on economic growth. The core strategy for increasing financing for the private sector is i) ensuring that formal financial sector institutions are able to mobilize more funds with a reasonably optimal maturity structure; ii) improving the enabling environment to encourage more short and long term lending; and iii) depending primarily on market forces to move the money in the most productive directions. It includes a number of specific actions which indirectly further this objective and enhance the ability of participants to perform this key function more effectively and productively.

i. Reducing obstacles to commercial bank lending in priority areas 202. While the access to finance strategy puts considerable emphasis on SACCOs, MFIs and VSLAs that expand financial inclusion and lending to more marginal borrowers, commercial banks as of December 2011 provided more than 94 percent of formal financial institution loans by value and 67 percent by number. The major opportunities to increase lending in priority areas, e.g., small and medium enterprise (SME), PPPs, agriculture, exports and, perhaps most importantly, housing lie with creating incentives to enhance commercial bank willingness to increase the credit provided to these subsectors. At present, the banking system is quite liquid and is seeking opportunities to increase lending. The rapidly improving availability of credit information, which will be further improved as part of FSDP II reduces what is perhaps the most significant supply side obstacle to expanding bank lending in these priority areas.

203. FSDP II helps to address three other primary remaining obstacles, i.e., i) inadequate collateral available to many borrowers; ii) inadequate access to long-term funds (especially relevant for housing finance, plant and equipment, and coffee and tea production; and iii) inadequate effective demand in areas like small scale enterprise (for which it is the primary constraint to increased lending) because many potential borrowers cannot provide accounts, business plans, or a clearly articulated vision as to why their enterprise has a bright and sound future.

204. Completion of the electronic land registration process contributes significantly to availability of collateral for many borrowers and is particularly relevant for housing and some agricultural finance. Allowing RDB arbitration to be conducted electronically on appropriate loans to avoid the commercial court system,16 e.g., small loans for SMEs, agriculture, and housing, will make such lending more attractive by reducing potential transaction costs.

16 The Law on Intermediation will be amended if necessary to handle these cases. 54

Enactment of a new leasing law which incorporates international tax-advantaged standards for such legislation, e.g., elimination of VAT on lease payments, will enhance lenders’ ability to collateralize longer term credit, in particular, for equipment such as tractors and transport vehicles.

205. Greater use of BDF guarantees for bank lending to small scale enterprise, agriculture and microfinance and an increase in the number of institutions that use them can become an increasingly significant factor in augmenting collateral of loan applicants. BDF has and continues to place considerable emphasis on promoting the use of its guarantees by major lenders. However, the usefulness of these guarantees in their role in augmenting collateral will be enhanced by restructuring the guarantee facility to increase its financial capacity and soundness.

206. BDF is a relatively newly formed limited company 100 percent owned by BRD, which provides advisory services and the guarantees, with BRD presently its biggest single client. If BDF’s structure and financial condition are sufficiently strengthened, the value of its guarantees can be fully taken into account together with other eligible collateral in BNR requirements relating to provisioning on NPLs.

207. BDF, while remaining a BRD subsidiary, will consider spinning off the guarantee function into a separate legal entity, to be managed by BDF for a fee under a contract. The detailed financial ramifications for both BDF and the guarantee facility entity need to be studied before implementation, however, it is envisaged that this entity would be a financially independent structure that can comply with existing prudential standards for consideration of guarantees in determining bank provisioning requirements. Meeting these standards requires assurance that there is little risk that BDF’s considerably expanded guarantee exposure would not be honored. Criteria that would have to be met to achieve this objective may include: increasing net worth to a level in excess of 15 percent of risk adjusted assets by converting a portion of existing grant and/or guarantee funds to equity and seeking other private bank investment such that BRD’s ownership share drops to less than 50 percent. It would also prepare financial statements that transparently show net income by accruing anticipated expense associated with outstanding guarantees,17 and its true liabilities and equity (guarantee funds that do not need to be repaid can be treated as tier 2 capital or as managed funds). A three year financial plan can be used to ascertain whether existing guarantee levels and a possible increase to, say, 75 percent in some guarantee programs, e.g., for SME and housing, can be offered on at least a breakeven basis when interest income on transferred guarantee fund cash and appropriate accrued provisioning for future anticipated losses and actual losses on the existing stock of

17 At present, BDF does not record either actual or accrued expenses associated with guarantee-related losses in its income statements or as deductions from net worth, thus providing inadequate data for ascertaining the extent to which its fees cover the cost of the guarantee program. Large guarantee funds are treated as liabilities and largely as cash on the asset side of the balance sheet and any losses are now written off directly against the liability 55 guarantees are taken into account. .18 As its guarantee program is a potentially relevant financial sector stability factor, the new entity would be directly supervised by BNR.

208. A highly credible financial base for the new entity, i.e., a strong capital position and eliminating a competitor’s (BRD) ownership control will assist in increasing banks’ interest in using the guarantee facility. Moreover, to the extent that any staffing constraints have been addressed and internal feasibility analyses have been completed, the guarantee facility should be encouraged to broaden its product offerings to include guarantees for i) housing finance loans; ii) coffee and tea production loans; and iii) export financing relating to customers for whom banks would not otherwise take full risk exposure on. It will also allow for the possibility of increasing the level of credit guarantees beyond the normal 50 percent for a few areas with the highest priority, perhaps in conjunction with a partial government cross-guarantee.

209. Development of the capital markets is the primary strategy for increasing the availability of long-term funds for lenders as well as the economy more broadly over time. However, this source needs to be supplemented at this juncture. RSSB, which mobilizes relatively large amounts of long term funds (RWF 45 billion in 2011 net inflows, currently places virtually all of its bank deposits in maturities of one year or less, despite the long-term nature of its liability structure for pensions. Prevailing bank practices incorporate relatively little term transformation , i.e., seldom using these relatively short-term deposits to any significant extent to make loans of four years or more, e.g., housing loans, plant and equipment, coffee production, etc.

210. RSSB will, on a pilot basis, request tenders from banks for five year deposits on both a fixed and variable interest rate basis. If the pilot is successful and rewards RSSB with higher interest rates, after its cash projection function has strengthened it will allocate an appropriate portion of its investment portfolio to longer term bank deposits.

Policy actions— increasing financing for the private sector  Increase private sector lending by banks by improving the enabling environment and depend primarily on market forces to move money in the most productive directions  Improve bank access to long-term funds from RSSB deposits and the capital markets and strengthen tools to enhance collateral  Consider converting BDF into a separate legal entity with substantially increased capital, financial ability to credibly cover all guarantee-related risk, to be licensed and supervised by BNR and managed by BDF on a contractual basis  Broaden BDF guarantees to cover export finance, production of coffee and tea production loans needing unusually long grace periods, and housing finance, subject to satisfactory feasibility and staff capacity considerations

18 The guarantee portion of the business can be spun off without reducing the value of BRD’s current equity investment and receivable by transferring the two large funds (85 percent of the liability side of the balance sheet), a significant portion of assets leaving sufficient assets to protect BRD’s existing and receivables position; and iii) converting a sufficient portion of the two large funds from liabilities to equity. 56

ii. Increasing small enterprise financing 211. Increasing the effective use of guarantees, a possible increase in the level of SME guarantees, especially for new enterprises, to 75 percent as well as increased use of credit information (in particular from SACCO/MFI sources) will lead to an increase in small enterprise lending. SME lending will be further supported with a three pronged approach, i.e., i) developing a better understanding of the subsector and its needs and constraints and providing baseline data to evaluate progress over time; ii) addressing a major constraint related to inadequate levels of effective demand, i.e., increasing the number of trained qualified entrepreneur borrowers, assisting them with loan applications coordinated when appropriate by guarantees; and iii) strengthening specific incentives and the support environment for lending in this subsector.

212. A hybrid agricultural/SME finance survey, focusing on the demand side and parallel in many respects to the 2012 FinScope study, will be conducted in 2014. Its inputs will be used to more effectively target other initiatives as well as providing a base-line to measure progress over time.

213. Perhaps the most important program is increasing the number of “bankable” entrepreneurs though training, assistance with preparation of business plans, and, working closely with BDF, supporting applications for trained applicants in coordination with the national financial literacy and education program. The soon-to-be-established Institute for Entrepreneurs, Cooperatives and Microfinance and the existing MINICOM Hanga Umurino program will be heavily relied on to increase the number of small entrepreneurs able to present attractive loan applications to lenders. Emphasis on this approach will increase the likelihood of entrepreneur success as well as their ability to find financing.

214. BDF, in its management capacity in the new guarantee entity, will conduct an internal study to ascertain feasibility and, if appropriate, design and implement an export guarantee facility to support small enterprise and agricultural exporters who do not have banking relationships that include working capital for production and LC financing for exports as well as longer-term loans for small producers of products for export (e.g., coffee and tea). If implemented, this guarantee program could increase national exports at the margin as well as supporting small entrepreneurs and farmers in export-related endeavors. It should also prepare a risk management framework and an approach for presenting an annual guarantee summary and evaluation report for the new entity.

215. Other actions that will be taken to catalyze increased small enterprise lending include waiving the RDB fee for registering collateral for loans of under RWF 10 million, and revising and expanding the BRD small and micro-enterprise development fund. Using monitoring to create opportunities to incentivize increased lending in priority areas by drawing more attention to it can be improved by breaking out commercial bank lending for SMEs and housing finance

57 separately in BNR reports,19 and defining agricultural lending to clearly include loans to participants later in the value chain (such as processors, exporters, etc.) within the composition of subsector lending table as an element in the already initiated BNR review of regulations and reporting.

iii. Increasing agricultural financing 216. Many FSDP II actions supporting access to finance create an enabling environment and incentives that will increase outreach, literacy, strengthened grassroots SACCOs and MFIs, and increased private sector lending, particularly in priority areas. As agriculture represents a very large share of total economy activity (almost 32 percent of GDP and 30 percent of national exports) these broader actions, while not targeted specifically to agriculture, will certainly significantly increase lending to this sector.20 While not surprising given the levels of subsistence and small shareholder farming and possibly understated, bank lending for agriculture21 is undesirably low so efforts will be made to increase agricultural financing. BNR should report outstanding loans and new loans by subsector on a quarterly basis to better capture seasonality and should publish the agricultural lending breakdown by subcategory which is already reported to them by the banks.

217. Several policy actions discussed early in this section relating to augmenting collateral, the hybrid SME/Agricultural financing survey, and making small loans more attractive for bankers by reducing transaction costs will certainly contribute to increasing agricultural financing at the margin. Moreover, Umurenge SACCOs report that at present 19 percent of lending is for agriculture (which exceeds the 2017 18 percent target mentioned in the 7 year government strategy) and anecdotal evidence suggests that agriculture represents a considerably higher percentage of total lending for older SACCOs and MFIs than it does for banks.

218. Other actions more specifically related to agriculture lending include i) enacting a Warehouse Receipts Act and regulations; ii) conducting a rural and agricultural services cost study designed to guide MINIAGRI interventions relating to financing associated with specific crops; and iii) specialized training for bank officers in providing credit to agriculture.

219. Agricultural loan guarantees represent the majority of BDF guarantees at this juncture and the expansion of this program will be aggressively promoted. Understandably, the vast

19 This will require stipulating the definition of SME lending, perhaps to include loans to businesses of under RWF 100,000 as this is relatively easy to measure, and defining housing lending to exclude mortgages on existing buildings or housing that is used to invest in businesses other than housing. 20 Banks report 3.5 percent of their new lending for agriculture as of December 2011, almost none of which is short-term, implying virtually no crop financing at that time of year. Over half of this reported lending was for exports, and some agriculture-related activity e.g., coffee and tea export financing could be classified as commercial, transport or warehousing. 21This percentage, drawn from reporting to BNR, may significantly understate the actual lending to agriculture as activities such as the financing of coffee exports could be classified as commercial, transport or warehousing.

58 majority of BDF guarantees cover 50 percent of the eventual loss on financial institution lending losses and, while suggestions of raising that guarantee to 75 percent for lending that is considered of highest priority are regularly made there is not yet an adequate experience base and satisfactory accounting needed to enable BDF to ascertain its ability to maintain sustainability if it offers significant programs to cover losses at this level of guarantee. An extension of 75 percent guarantees, if any, should be carefully limited as a percentage of BDF’s overall guarantee risk exposure, and necessarily reserved for areas identified as of the highest priority for stimulating increased bank lending. MINECOFIN should establish this prioritization from among worthy candidates, including i) export-related SMEs and agriculture; ii) other SME; and iii) housing finance, as discussed below.

Policy actions— increasing financing for small scale enterprise  Conduct a hybrid agricultural/SME finance study, focusing on the demand side in parallel with the 2012 FinScope study  Increase the number of bankable entrepreneurs through linking targeted training, assistance with business plans, the possibility of BDF guarantees, and assisting with loan applications  Utilize export financing guarantees to assist SME and agricultural exporters without banking relationships to finance working capital and LC financing  Waive RDB collateral registration fees for loans of under RWF 10 million  Revise and expand the BRD small and micro-enterprise development fund  Change subsector credit reporting requirements to break out SME and housing finance separately, define the agricultural lending category in more detail, and report quarterly to capture seasonal factors more effectively  Enact a Warehouse Receipts Act and regulations  Provide specialized training for bank officers in providing credit to agriculture

iv. Increasing finance for housing 220. Increasing housing finance, especially finance related to affordable housing, is a very high priority. The actions in FSDP II focus on commercially viable housing finance, which will be complemented by other policy initiatives to more specifically target affordable and subsidized housing. City development in Kigali and elsewhere continues to reduce the stock of affordable housing while the need to increase the stock continues to grow. Although banks report that 30 percent of all lending, and 54 percent of all long-term lending is mortgage related, it is unclear as to how much lending is for housing. As of September 2010, RWF 38.5 billion (61 percent of mortgage value) involving 2000 loans were to individuals.22 Anecdotal evidence suggests that much of the mortgage lending, including some lending to individuals, raises funds for investment in businesses by mortgaging existing buildings and homes.

221. Financial institutions constitute the primary source of housing finance for those that can afford to borrow on commercial terms, an estimated 2 percent of the population. They can also represent a substantial source of financing for commercially viable rental housing and developer

22 As noted in the August 2011 FSAP report. 59 schemes for affordable housing, as well as for incremental financing for renovation and adding rooms. Actions relating to strengthening collateral, e.g., BDF guarantees, and increasing access to long term funds, e.g., from RSSB support increased lending in these areas. This increase in housing finance will indirectly contribute to meeting affordable housing demand by increasing the total stock of housing and removing some of the competition for earmarked affordable housing by servicing some of the demand from middle income borrowers.

222. The strategy for increasing lending for financial sector housing, in addition to broader actions relating to strengthening collateral and increasing bank access to long term funds focuses on i) improving the enabling environment; ii) providing increased access to long-term funds from sources such as RSSB deposits; iii) exploring and taking advantage of opportunities to increase commercial financing for affordable housing; and iv) subsidizing support for affordable housing that is not commercially viable.

223. The role of the already completed electronic land registration system will be strengthened by creating a unique property identifier-based (UPI) system for electronically linking it with the mortgage registration system, recording the value of land transactions and using it to develop an index for land prices. Additional actions that will be taken to strengthen the real estate valuation environment include i) using the new Law on Valuation to set standards based on international practice and improve the monitoring of licensed valuers; and ii) finalize a cell-based real estate value reference system based on transactions and factors like access. Once a reasonable data base on values in place, the mortgage law will be amended so independent valuation is not needed for commercial bank loans of under RWF 10 million when both parties agree.

224. The recent increase in the new building space available, financed to a significant extent by RSSB and commercial banks, and rapidly increasing prices create a volatile real estate environment. BNR will study the extent of real estate exposure for these institutions and RSSB will provide increased understanding of real estate valuation, especially in Kigali, in conjunction with its upcoming audit. In time this date will be used to reconsider the risk-weighting for residential mortgages.

225. Mobilizing longer-term RSSB deposits in the banking system is key to increasing the availability of suitable long-term funds for mortgages. The government decision to allow banks to establish tax-advantaged long-term housing savings schemes will be implemented and efforts will be made to link these deposits to priority listing for affordable housing projected to come on stream in the future.

226. BRD, subsequent to the Housing Bank (BHR) merger, plans to significantly expand its mortgage lending. It is preparing a housing strategy focused on mid-income housing inclusive of a strategy for raising the long-term local currency necessary to implement. Subsequent to passage of the CMA asset-backed security regulation, BRD is also exploring the possibility of exploring a “housing” bond issue based on securitization of its existing housing loan portfolio

60 with BRD retaining the credit risk and responsibility for collection. BRD will also continue in its attempt to find additional nongovernmental investors with similar objectives to reduce the government share to less than 50 percent, which may provide access to additional sources of long term funds.

227. Additional actions will be taken to increase the amount of commercial lending for housing with a focus on affordable housing including i) providing training for financial institution loan officers and treasurers on housing finance lending; ii) creating housing loan products for housing cooperative members based on peer group guarantees as well as traditional collateral; iii) designing a developer scheme for low cost housing; and iv) identifying RSSB opportunities to invest in commercially viable affordable housing; and iv) conducting a housing microfinance study with a view to developing an affordable housing finance project, an incremental financing component, and a supporting fund targeted at commercial lenders.

228. Subsidized lending supported by government and donors will be necessary to more directly contribute to meeting the urgent and growing demand for the bulk of affordable housing. This will be based primarily on a RHA prepared national strategy and policy for financing affordable housing which will focus primarily on noncommercial sources and will build on a EU housing market study, now available in draft. Receipts from a real estate tax to help finance infrastructure, and linking planning permission to inclusion by developers of a proportion of housing meeting affordability criteria will be considered, as will repackaging the former Bye Bye initiative for mobilizing Diaspora support and raising Diaspora bond funding for affordable housing..

Policy actions— increasing finance for housing  Increase commercial lending for middle income borrowers, incremental expansion and improvement of existing housing to increase the stock of housing and reduce competition from this segment of borrowers for affordable housing  Link the completed electronic land registration electronically with mortgage registration and record the value of land transactions to develop an index of prices  Use a new Law on Valuation to set standards based on international practice and improve monitoring of licensed valuers  Amend the Mortgage Law to eliminate the requirement for independent valuation for mortgages of under RWF 10 million when both parties agree  Lower the risk-weighting asset requirement for performing residential mortgages to 35 percent if a study on bank exposure risk to real estate in Kigali demonstrates that it does not pose a stability risk  Mobilize 5 year RSSB deposits, initially on a pilot basis, in the banking system to reduce term transformation challenges  Prepare a BRD lending strategy for mid-income housing and a strategy for mobilizing more long- term local currency resources  Explore the possibility of floating a housing bond issue based on securitization of its existing home mortgage portfolio

 Provide training for financial institution loan officers and treasurers in residential mortgage lending  Create housing loan products for housing cooperative members augmenting traditional collateral with peer group guarantees  Identify RSSB opportunities to invest in commercially viable affordable housing  Conduct a housing microfinance study  Prepare a national strategy and policy for financing affordable housing focused on noncommercial sources which builds on the EU housing market study  Use FinScope 2012 ubudehe segment data to extend the EU Kigali market segment analysis to Rwanda’s urban and semi-urban areas

Program 4: Protecting Consumers and Maintaining Financial Stability 229. There are four elements of the consumer protection regime for the financial services sector. First, prudential requirements are intended to ensure that the financial promises made by institutions—to repay a deposit in accordance with its terms, to pay a claim when an insured event occurs, or to make pension payments upon retirement—are met. Second, oversight by the BNR ensures adherence to these standards. Thus, many the actions outlined in this section to strengthen the regulatory framework and practice of supervision contribute directly to protecting the interests of consumers. The third element is compensation in the event of the failure of an institution. To provide this protection, deposit insurance will be introduced for banks, MFIs and SACCOs, and an investor compensation fund will be introduced for capital markets intermediaries. As part of the review of the regulatory framework for insurance companies, stakeholders will be consulted regarding the best approach to implementing a policy-holder compensation fund.

1. Protecting Consumers 230. The final element in the consumer protection regime is providing a redress mechanism to address the imbalance of power between financial institutions and their customers. A new unit will be established in the Office of the Ombudsman to provide Rwandans with a single portal for resolution of financial sector disputes. The Office of the Ombudsman has a broad range of competencies in dealing with complaints, fraud and corruption. It will need to develop staff with expertise in financial services, and to this end the BNR may initially second staff to assist. The financial sector unit in the Office of the Ombudsman will be operational by end-June, 2103.

2. Updating the Regulatory Framework 231. Experience with the financial sector legislation and inputs provided by stakeholders, as well as the need to continually update to keep pace with evolving international standards, has identified the need for changes to existing legislation and regulation.

i. Amending Legislation—Banking 232. There are three main elements to the project to revise banking legislation. First, the amendments to the LOB will be prepared for consultation by end-2012, with a view to having a final draft for consideration by Parliament by June 2013. Following enactment of the amendments, revised regulations will be required. These are targeted for completion by June, 2014, with the precise timing contingent on the timing of proclamation of the amendments to the legislation. Finally, reporting requirements and formats will need to be reviewed and revised as necessary, with this work targeted for completion by June, 2015. A concurrent project is the necessary updating of banks’ charts of accounts to reflect International Financial Reporting Standards (IFRS) and revised reporting requirements.

Policy actions—amending banking legislation  Prepare drafts of all required amendments to the LOB o Consequential amendments from introduction of deposit insurance o Revise Chapter VI to enhance resolution regime o Technical amendments arising from experience and consultation o Revision of the definition of deposit o Consult with stakeholders and prepare final version for Parliament

233. Article 63 of the LOB provides for the establishment of a deposit guarantee fund, with the specifics to be provided in a separate (deposit insurance) law. The LOB needs revision to provide that the intended guarantee fund would be empowered to facilitate lesser cost minimally disruptive resolutions such as purchase and assumption transactions in addition to indemnifying depositors in the event of liquidation as currently contemplated. Revisions to Section 2 of Chapter VI are related to the introduction of deposit insurance as a full range of powers to seize control and impose a resolution on a failing institution is required to minimize the costs to the deposit insurance fund. In addition, amendments will be required to provide a legal framework fully reflects the 2011 Financial Stability Board guidance “Key Attributes of Effective Resolution Regimes for Financial Institutions.”

234. Consultation with the RBA is an important part of amending the LOB. In addition to seeking feedback on amendments identified in this program, industry suggestions regarding other amendments will be solicited and considered, together with any other specific amendments to the LOB identified as part of the FSDP II consultation process. A final package of all amendments to the LOB, revised as necessary after stakeholder consultation, will be ready for introduction in Parliament in 2014.

235. The FSAP Update proposed revising the LOB to specifically limit deposit taking to licensed institutions. This will be accomplished by revising the LOB definition of deposit from “funds that an entity receives from the public” to “funds that an entity licensed pursuant to this Law, or the Law on Microfinance, receives from the public.”

ii. New and Revised Bank Prudential Standards 236. Most of the areas for improvement in prudential standards noted in the FSAP Update have been addressed through the revised Regulation on Risk Management promulgated in April, 2012. The issue of country and transfer risk remains outstanding, and will be addressed through a guideline or regulation to be put in place by end-2015. At present, country and transfer risk exposure of Rwandan banks is minimal, but as part of the foundation for Rwandan institutions to compete within the region and more broadly, the required standard will be established in the medium term.

iii. Bank Capital Adequacy 237. Rwandan capital adequacy requirements for banks require revision to implement changing international standards. Implementation of the Basel III capital adequacy requirement arises from Rwanda’s commitment to align standards with the EAC harmonization objectives. In response to the findings of the FSAP update, elements of the Basel II framework relevant to Rwanda will be introduced.

Policy actions—new capital adequacy regime  Revise definitions of eligible capital and minimum capital adequacy requirements (CAR) to implement the Basel III standard  Introduce a leverage limit in addition to the risk-weighted capital adequacy requirement  Include collective allowance (general provisions) in the allowable elements of supplementary (Tier 2) capital, consistent with the Basel Capital Accord  Introduce a capital charge for market risk, with exemption provisions to avoid unduly burdening banks with minimal market risk exposure  Adopt the Basel II elements appropriate for Rwandan banks o Capital charge for operational risk (basic indicator or standardized approach) o Require banks to have an Internal Capital Adequacy Assessment Process (ICAAP) o Require banks to publish summary data on their web-sites o Require banks to make audited statements available on their web-sites and in branches

a. Eligible capital and minimum requirements 238. The current conservative approach to capital adequacy means that unlike in many other countries, the practical impact of a Basel III regime for banks in Rwanda will be minimal. The current Rwandan standard requires banks to hold core capital equal to at least 10 percent of RWA and total capital (core plus supplementary capital ) of at least 15 percent of RWA. The minimum Tier 1 (core capital) will be increased when the Basel III compliant regime is implemented in 2013, consistent with the EAC agreement to harmonize on a on a minimum Tier 1 ratio of 12 percent. In accordance with the EAC agreement, Rwandan banks will be subject to the Basel III 2.5 percent capital conservation buffer, to be phased in from 2016 through end- 2018. Rwandan banks on average currently have capital adequacy ratios well in excess of 20 percent, so transitioning to the harmonized EAC standard should not present significant challenges.

239. The Basel III compliant regime for Rwanda will retain the current 15 percent total capital ratio. Although the EAC agreed minimum standard is 14 percent, with a view to maintaining financial stability there will be no reduction in the Rwandan requirement.

240. Regulation No. 11/2009 on Capital Adequacy Requirements requires revision to implement the new capital adequacy regime. The main changes are:

 Introduction of a definition and minimum requirement for CET1 in place of the current core capital requirement,  Specification that deductions of goodwill and intangibles will be from CET1, and  Establish the CET1 requirement at 12 percent

b. Leverage limit 241. The FSAP Update recommended that a revised capital adequacy regulation introduce a leverage limit in addition to the risk-weighted CAR. Reflecting the Basel III standard and the EAC harmonization agreement, the initial limit will be core capital equal to at least three percent of total assets and specified off-balance sheet items. Given the high levels of tier 1 capital already held by Rwandan banks there will be no need for a phase-in period, with introduction expected by end-2013.

c. Including collective allowance in supplementary capital 242. The capital adequacy standard will be revised to include collective allowance (general provisions prior to the introduction of IFRS) as one of the elements of Tier 2 capital. The Basel standard permits inclusion to a maximum of 1.25 percent of total RWA. The capital adequacy requirements in Kenya and Uganda permit inclusion of general provisions as Tier 2 or supplementary capital, so adopting the Basel standard would bring Rwanda in line with practices elsewhere in the EAC.

243. In addition, including collective provisions as supplementary capital will facilitate revision of Regulation No. 2/2011 on Credit Classification and Provisioning to introduce a requirement for minimum provisions on “pass” and “special mention” loans, as required by the EAC harmonization agreements. Local industry opposition will be mitigated by the possibility of including as supplementary capital the additional provisions that will be required, consistent with practices elsewhere in the EAC.

d. Capital Charge for Market Risk 244. All Rwandan banks are currently exposed to relatively small market risks—primarily foreign exchange risk and interest rate risks—and this is likely to remain the case for the foreseeable future. A regime with appropriate exemption criteria will insure that any banks exposed to material market risks hold capital appropriate to those risks, while exempting most banks on the basis of their minimal market risk exposure. This will ensure that banks with minimal market risk exposure are not hindered in their development by undue regulatory burden.

245. The minimum capital requirements for foreign exchange risk, interest rate risk and equity position risk will be determined by applying the Standardised Measurement Method specified in the Basel Committee publication “Amendment to the Capital Accord to Incorporate Market Risks,” or such other methods as the BNR may approve. However, the regulation will also provide that the bank may apply to the BNR to be exempted from the capital adequacy requirements for market risk. The exemption from the market risk capital requirements would be subject to two conditions:

 The bank must demonstrate that on a continuing basis its foreign currency business, defined as the greater of the sum of its gross long positions and gross short positions in all foreign currencies, does not exceed one hundred percent of Tier 1 capital, and the overall net open position does not exceed two percent of core capital, and  The bank must demonstrate that on a continuing basis its total trading book assets do not exceed five percent of total assets.

e. Adopting Basel II Elements Appropriate for Rwandan Banks 246. Basel II comprises three pillars: i) minimum capital requirements; ii) supervisory review; and iii) market discipline. The Basel committee expressly noted that national supervisors need to consider carefully the benefits of Basel II in the context of the domestic banking system when developing an approach to implementation. Rwanda can benefit from the more nuanced approach to credit risk management in a Basel II framework, enhanced supervisory review and the disclosure required for market discipline. However, reflecting the need to ensure that the capital adequacy regime is commensurate with the size, nature and complexity of the banking business, the introduction of Basel II will provide for only the standardized approaches.

247. The standardized approach to credit risk under Basel II is essentially a refinement of the Basel I framework which provides the base for the current Rwandan standard. The key differences are the introduction of risk-weighting based on the external credit rating of the counterparty, which will have minimal effect due to virtual absence of rated counterparties to the Rwandan banking system, and different risk-weights for some asset classes. Current risk-weights for all asset classes will be retained as there is no evidence that loss experience in Rwanda supports adopting the Basel II weightings.

248. The FSAP Update recommended that Regulation No. 11/2009 on Capital Adequacy Requirements incorporate a capital charge for operational risk. This will be implemented pursuant to the Article 17 of the LBO which provides that the BNR may by regulation impose capital charges for any risk. Banks would have the option of either the Basic Indicator or Standardized approach as detailed in the International Convergence of Capital Measurement and Capital Standards (Basel II). It would not be appropriate to offer Rwandan banks the advanced approaches to operational risk as these are not warranted by the current size, nature and complexity of their business, which is likely to hold true for the foreseeable future.

249. The FSAP Update recommended introduction of a requirement for banks to have an Internal Capital Adequacy Assessment Process (ICAAP). This will be implemented as part of the review of the Capital Adequacy Guidelines. Adopting this element of Basel II will contribute to enhanced capital management by banks.

250. The objective of Pillar 2 of Basel II is supervisory review of the risk profile and quality of risk management of individual institutions. The ongoing BNR focus on risk-based supervision (RBS) will contribute to Pillar 2 implementation by enhancing the ability of the BNR to review and assess banks’ adherence to prudential standards and the quality of their risk management. It is not appropriate to adopt the quantitative aspect of Pillar 2—establishing institution-specific CARs—at this time. This highly advanced supervisory approach could be introduced at an appropriate time as the legal foundation is provided by Article 15 of the LOB, however for the foreseeable future it would likely be preferable for the BNR to perfect its current RBS framework.

251. The focus of Pillar 3 implementation is on disclosures by banks to facilitate enhanced market discipline. The FSAP Update recommended that banks be required to publish summary data on their web-sites and make available audited statement on their web-sites and in branches. Some banks already do this, but revised disclosure requirements will be introduced to make this s mandatory, consistent with Pillar 3.

iv. Bank Liquidity Standards 252. Rwandan banks are currently required to maintain liquid assets equivalent to 20 percent of total deposits. Basel III introduces two new liquidity standards, the liquidity coverage ratio which is to come into effect in 2015, and the net stable funding ratio planned for introduction in 2018. In accordance with the EAC harmonization agreement, the liquidity coverage ratio and net stable funding ratio will be introduced as prudential requirements. However, the current liquidity requirements will be retained at least through a transition period to 2020 while experience is gained with the new Basel liquidity standards.

Policy actions—liquidity standards  Liquidity coverage ratio introduced by end-2015  Net stable funding ratio introduced by end- June 2018  Retain current liquidity ratio at least through a transition period with the new Basel ratio

v. Bank Provisioning Requirements 253. Regulation No. 2 of 2011 on Credit Classification and Provisioning be revised to introduce minimum provision requirements for “pass” and “special mention” loan classifications. In addition, the regulation will adopt the five loan classifications as agreed by the EAC supervisors. This will move Rwanda towards full compliance with the Basel Core Principles and bring Rwanda in line with the harmonization agreement within the EAC. These types of general provisions are a key counter-cyclical tool, as they increase with the size of the loan portfolio and provide a cushion against unexpected but inevitable loan losses.

254. Introducing the general provision requirement at the same time as capital definitions are revised to allow inclusion of general provisions up to 1.25 percent of RWA as Tier 2 will help to address the banking industry’s concerns about the introduction of a general provision requirement. In addition, the minimum general provision requirements will be phased-in over four years, so that by end-2017 banks would have accumulated the full amount of the required provisions. The phase-in period would spread the impact on profitability over several years, addressing one of industry’s key concerns.

Policy actions—provisioning requirements  Harmonize on five classifications as agreed by EAC supervisors  Require minimum provisions on pass and special mention loans per EAC agreement  Phase in over four years minimum provision requirement for pass and special mention loans

vi. Bank Accounting and Reporting Standards 255. In consultation with the banking industry the BNR will review and revise the chart of accounts and prudential reporting standards. Rwandan banks have adopted IFRS, but the chart of accounts and reporting formats mandated by the BNR are not yet wholly consistent with IFRS. This project will be linked and sequenced to be informed by planned revisions to the law and regulations so that reporting formats will only be revised once.

Policy actions—accounting and reporting standards  Consult industry on revised chart of accounts and reporting formats  New and revised reports reflect revisions to law and regulations  Revisit the content and frequency of all prudential reports

vii. Amending Legislation—the Central Bank Law 256. The Law Governing the Central Bank of Rwanda (No. 55/2007—BNR law) also requires amendment. The FSAP Update proposed several amendments to increase compliance with the Basel Core Principles. Best practices for independence and accountability require amendment to Article 16 so that the Governor could only be dismissed for specific reasons—by becoming unfit for office—and requiring that the reasons for any dismissal be made public. Article 69 requires amendment to provide that the BNR and its employees are able to refuse any request for confidential information other than pursuant to legal or Parliamentary order. Achieving full compliance with Basel Core Principle 1.3 requires amendment to Article 73 to remove the potential liability of BNR staff for errors. The usual standard is indemnity for actions taken in good faith, so that unless there was malicious intent, staff would not be liable for damages arising from errors in judgment or action.

Policy actions—amending the central bank law  Revise Article 16 of BNR Law regarding dismissal of the Governor  Revise Article 69 of BNR Law to enhance confidentiality  Revise Article 73 of BNR to remove liability for good faith actions

viii. Insurance—Revising and Enforcing the Regulatory Framework 257. One of key requirements of the new statutory structure introduced in 2009 was the separation of short-term and long-term (life and non-life) insurance into different legal structures. As a result the existing “composite” insurers had to separate their life and non-life operations into different companies, which can nevertheless be held under common ownership under a holding company structure. This separation is still in progress, and the BNR will ensure that it is completed by the end of 2012. The BNR will also ensure that all other regulatory requirements are complied with.

258. The two statutory health insurance providers – RAMA (RSSB) and Military Medical Insurance (MMI) – were not required to obtain insurance licenses as they are entitled to undertake insurance business under their own legislation. However, adherence to the prudential framework will help to ensure the stability of these public insurers and also provide a level playing field to the extent that private insurers may offer competing and complementary products. The necessary regulations – relating to capital, solvency, reporting, governance, and investment guidelines—will be amended to apply to the statutory insurers.

259. The single set of regulations applying to all insurance companies will be revised to reflect the differing nature of short-term and long term insurance. Under the 2009 statutory framework, a single set of regulations, a common reporting structure and a single set of investment guidelines applies to all types of insurance companies. However, there are distinct differences in the nature of insurance operations and of the risks to which they are exposed across different types of companies. Hence the regulatory and supervisory framework will be revised to reflect the differences between short-term and long-term insurance businesses, and within short-term, the distinction between general insurance (fire theft, motor etc.) and health insurance. Reporting formats and risk-based supervision will be amended accordingly.

f. Solvency Margins 260. Unlike capital requirements, solvency margins in Rwanda are differentiated between long-term and short-term insurers. The former are required to maintain a solvency margin (“the excess of admitted assets over admitted liabilities”) of RWF500mn, while the latter are required to maintain a solvency margin equivalent to RWF500mn or 20 percent of gross premium income net of reinsurance in the last year, whichever is the greater. While for short-term insurers the solvency margin will rise with the size of the business, this is not the case with long-term insurers. A variable element will be introduced to the solvency margin for long-term insurers, which is related to the size of the business. The fixed element of the solvency margins for both will be reduced, in line with lower minimum capital requirements.

g. Investment Guidelines 261. The investment guidelines will be revised to make them relevant to the different types of types of liabilities that short-term and long-term insurers have. Short-term (non-life) insurance

69 incurs short-term liabilities (e.g. during one year) and charges premiums so as to cover those liabilities, make a profit and build up (relatively small) reserves that are designed to provide a buffer against year-to-year fluctuations in claims experiences. Long-term (life) insurance, by contrast incurs liabilities spread over many years into the future. The assets of short-term insurance companies need to be available at fairly short notice to meet liabilities, and hence liquidity is a prime requirement of the assets in which reserves and surpluses are invested. Therefore it is not prudent to allow short-term insurers to invest significantly in illiquid assets such as real estate. For long-term insurers, the (actuarial) liabilities are long term and, subject to prudent operational cash flow management, liquidity does not need to be a primary investment objective. Instead, investment policies for long-term insurers need to balance maximizing return while keeping risks within acceptable levels.

262. More generally, diversification of investment portfolios is a key requirement for prudential investment management. Given the small size of Rwandan capital markets, a proportion of investments will need to be held outside of Rwanda in order to achieve diversification and optimize risk-adjusted returns. The revised guidelines are summarized in Table 5.

Table 5. Proposed new insurance investment guidelines (percent of total assets) Investment asset category Short-term Long-term Real estate or immovable properties 0-10 0-30 (excluding those for the insurer’s own use) Equity shares 0-10 20-60 of which unlisted equities 0 0-10 Marketable debt securities (maturity >1 year) 0-10 20-70 Cash, bank deposits, money market securities (maturity < 1 70-100 10-30 year) Maximum exposure (debt, equities, deposits) to any single 10 10 entity Maximum outside of Rwanda 20 50 EAC 10 25 Rest of world 10 25

Policy actions-insurance  Complete the separation of life and non-life business of insurance companies  Extend regulatory requirements to statutory insurers  Complete revisions of regulations to reflect difference between life and non-life  Revise reporting formats to reflect different life and non-life regulations  Introduce variable solvency element related to the size of the business  Complete separate investment guidelines for life and non-life insurance

3. Financial Stability 263. There is currently no formal approach to contingency planning for the possible failure of an individual bank or other financial institution or a more wide-spread systemic problem in Rwanda. When required, the BNR and MINECOFIN have coordinated on an ad hoc basis. With the establishment of the Capital Markets Authority (CMA), and planned introduction of deposit insurance there is now a third entity and prospectively a fourth entity with mandates to contribute to financial stability. At this point, it is appropriate to plan for more formalized arrangements for crisis management.

i. Contingency Planning 264. Effective contingency planning requires several complementary initiatives to provide the foundation for an action plan for crisis preparedness. The required policy actions are summarized below:

Policy actions—contingency planning  Establish a senior coordinating committee for contingency planning, the FSCC o Prepare terms of reference for the FSCC o Prepare MOU on role, responsibilities of participating organizations  Prepare generic plan to respond to financial instability  Prepare generic plans to resolve problem institutions  Review legal framework for problem institutions  Remove the provisions of Article 101 of Law No.12/2009 making insolvency of financial institutions subject to that law  Revise Section 2 of Chapter IV of the LOB to provide full resolution powers o BNR able to impose a resolution without a report from a special commissioner o Power to impose resolutions without creditor or shareholder consent o Power to establish a bridge bank o Judicial appeal not to stay enforcement and resolution actions  Revise Chapter VI of the Microfinance Act to provide full resolution powers o BNR able to impose a resolution without a report from a special commissioner o Power to impose resolutions without creditor or shareholder consent o Power to establish a bridge institution o Judicial appeal not to stay enforcement and resolution actions  Participate in supervisory colleges of foreign banks in Rwanda  Restrict normal times collateral for BNR facilities to government securities and BNR deposits  Pre-position new Exceptional Liquidity Facility for crisis management  Ensure the Deposit Insurance Law is fully consistent with LOB and LMO

a. Coordination and Planning 265. A high level body—the Financial Sector Coordinating Committee (FSCC)—will be established with a mandate to act as the senior decision-making authority to deal with a financial crisis. The key participants are the authorities with mandates to contribute to financial stability: the BNR; the CMA; MINECOFIN; and once established, the deposit insurance agency. While

71 the supervisory authorities and deposit insurer will provide the necessary technical and operational expertise, the role of the MINECOFIN is crucial because of the public policy and fiscal implications of dealing with a crisis.

266. The permanent members of FSCC will be the Governor of the BNR, Chief Executive of the CMA, and the Minister of Economic Development and Finance. Membership at the most senior level will help ensure that the FSCC is able to quickly take decisions, and to mobilize necessary resources from their respective organizations to support the work of the FSCC. Terms of reference will be prepared for the FSCC outlining its expected role in crisis management and normal times review of macro prudential policies and risks, and financial sector policy coordination. A Memorandum of Understanding among participating institutions will be put in place to confirm the allocation of responsibilities, details of information sharing and an outline of the expected role of the members of the FSCC in normal times and in crisis.

267. One of the first tasks of the FSCC is to oversee the development of a generic contingency plan to deal with financial sector instability. As part of this, the BNR will prepare contingency plans for intervention in weak financial institutions. The FSCC will remain a “living” body, providing a forum for development and discussion of financial sector policy, and will also contribute to macro-prudential oversight by meeting periodically to review the BNR’s financial stability analysis. This will provide a macro-prudential outlook, flagging any concerns about build-up of risks in the financial sector overall, or outside the financial sector with implications for financial stability. Over time, the BNR will build additional capacity in this area particularly the identification and monitoring of macro-prudential indicators. The FSCC will also receive reports on participation in supervisory colleges for the banks active in Rwanda, and updates from the BNR and CMA on developments in the international architecture and standards and their implications for Rwanda.

268. In times of crisis, the FSCC would meet on a regularly scheduled basis to coordinate the official response. Depending on the nature of the crisis and required response, some or all of the BNR head of the financial stability directorate, CMA senior staff, or chair of the deposit insurance fund, would participate in meetings of the FSCC for the duration of the crisis.

b. Resolution Framework for Troubled Financial Institutions 269. The lack of clarity in the legal regime for problem institutions arising from the provisions of the Law Relating to Commercial Recovery and Settling of Issues Arising from Insolvency (No. 12 of 2009) will be addressed. Article 101 will be revised to clarify that the resolution provisions in the financial institutions laws—the LOB, LMO and Insurance Law—take precedence over the general insolvency law.

270. In addition, review of the legal framework for problem bank resolution in the context of the recent developments in international best practices and the planned introduction of deposit insurance suggests the need for revisions to Section 2 of Chapter VI of the LOB to introduce all the elements of an effective resolution regime for problem banks.23 A similar review will be

23 International standards have evolving since the recent global financial crisis. Revisions to the Rwandan framework with be guided by Financial Stability Board, 2011, “Key Attributes of Effective Resolution Regimes for Financial Institutions” (Basel, Bank for International Settlements). 72 conducted of the relevant sections of the Insurance Law. The major concerns about the current regime are whether resolution options could be implemented sufficiently quickly, and whether it would be possible to impose a resolution without shareholder or creditor consent in the interests of protecting depositors and maintaining stability.

271. The planned introduction of deposit insurance makes it especially important to have a robust resolution regime in place. A legal regime that permits prompt intervention in a failing institution and imposition of a resolution without shareholder or creditor consent is crucial to being able to minimize the exposure of the deposit insurance fund and pursue lower cost resolutions. It is equally crucial to ensure there are no conflicts between the provisions of the LOB and deposit insurance law as these could lead to delays while courts resolve challenges, or in the worst case to the overturning of actions taken to resolve a problem bank.

272. As part of the broader review of the LOB, specific amendments to the resolution powers of the BNR will be introduced:

 Clarify that the BNR may impose a resolution without first requiring a report from a special commissioner

 Explicit power for the BNR to impose a resolution on a failing banks without the approval of creditors or shareholders

 Explicit power for the establishment of a bridge bank

273. In addition, as recommended in the FSAP update, the legal framework requires amendment to provide that appeal of enforcement and resolution actions taken by the BNR should not stay those actions. The courts should be limited to a review of whether the BNR, and after its establishment the deposit insurance agency, has acted in accordance with the law, with no provision for the courts to substitute their judgment for the professional judgment of the BNR with respect to solvency, viability and the cost of resolution options. In the event the BNR is found in violation of the law, the appropriate remedy is an award of monetary damages. These provisions are required to facilitate speedy resolutions in the interests of depositors and financial stability, and to provide certainty when resolutions have been implemented.

274. The resolution powers under the Microfinance Act (Chapter VI) parallel those in the LOB, and thus require similar revision.

275. Cross-border resolution issues are of particular importance because of the prominence of subsidiaries of foreign banks in the Rwandan banking sector. The recent work of the Financial Stability Board and Basel Committee on resolution regimes has emphasized the importance of effective domestic resolution frameworks as a precondition for effective cross-border resolution. Thus, it is important that the Rwandan regime contain all the elements recommended by the Financial Stability Board, and that the BNR liaise with home country supervisors to ensure appropriate arrangements are in place for coordination and information sharing in a crisis as a

73 supplement to the exchange of information required for ongoing consolidated supervision . The BNR will also advocate within the EAC that the other members countries review their own resolution regimes to ensure they fully meet the Financial Stability Board criteria.

c. Safety Net—Liquidity Facilities 276. As part of crisis preparedness the BNR will pre-position a new Exceptional Liquidity Facility (ELF). This facility will not be available to banks in the normal course, but could be made available to a solvent bank as part of the response to a crisis. Since the ELF would be used when a solvent bank had exhausted its eligible collateral for the NBR’s normal facilities, the security for the ELF would be the bank’s loan portfolio, subject to a significant haircut to ensure adequate protection for the BNR. The ELF will bear a penal interest rate reflecting that it would only be used in extraordinary circumstances.

277. Prerequisites for an ELF advance will be a loan agreement specifying terms and conditions, security agreement assigning the loan portfolio to the BNR, and a legal opinion satisfactory to the BNR that the security agreement would be enforceable. The BNR will “pre- position” itself and the banks for a crisis by preparing the documentation in advance, and having “shelf” agreements with each bank ready for execution should they be required. The Financial Stability Directorate as the supervisory authority would play a key role in the authorization process by providing an opinion on the solvency of the institution, as the ELF, like other BNR facilities, would only be available to solvent banks.

d. Safety Net—Deposit Insurance 278. Chapter V of the LOB provides for the establishment of a Depositors’ Guarantee Fund. Draft legislation has been prepared which would establish the deposit protection fund within the BNR. LMO (Chapter III) provides for the establishment of a stabilization fund mandated to provide financial assistance to protect the interests of depositors, and government does intend to extend deposit insurance to microfinance institutions. Deposit insurance for microfinance institutions will be introduced concurrently with the introduction for banks. The deposit insurance regime will support minimally disruptive least cost resolutions through the express legal power to participate in purchase and assumption type transactions in addition to making payments to depositors of banks in liquidation.

ii. Building Supervisory Capacity 279. The BNR has an ongoing need for several types of training. First, introductory supervision courses are required for bank and non-bank supervisors. The BNR has in the past made use of regional courses offered through the East African Regional Technical Assistance Centre (East AFRITAC) and generic bank supervision courses offered by a number of providers. These are useful, but especially when progressing towards intermediate skill levels would be more useful if specifically tailored to the Rwanda legal and regulatory framework and supervisory processes.

280. The BNR will develop a core training curriculum. This will be supplemented by self- study modules using the FSI-Connect program offered by the Financial Stability Institute. There is also a need for intermediate level training on specific supervisory skills such as financial analysis, credit analysis and risk management, liquidity risk concepts and management, and various aspects of market risk including interest rate risk and foreign exchange risk. There is a similar need for intermediate and advanced training in insurance and pension supervision topics.

281. The is also a need for targeted specialized training. One specific area identified by the BNR relates to anti-money laundering and countering the financing of terrorism (AML/CFT), where it will be necessary to train inspectors in the use of the on-site inspection procedures to be developed. Other specialized training will be linked to revisions to the Risk Management Guidelines. Financial Stability Directorate staff will require training to ensure they are fully aware of the revised legal framework, which could take the form of one to two day workshops for supervisors on each of the key elements of the Risk Management Guidelines. These programs linked specifically to the Rwandan prudential framework will be supplemented by self-study course on the related technical issues through FSI-Connect..

Policy actions—building supervisory capacity  Develop core training curriculum for BNR supervision staff o Introductory supervision course o FSI Connect self-study modules o Intermediate and advanced courses tailored to the RBS framework o Intermediate and advanced course in insurance and pension supervision o Intermediate and advanced courses in MFI and SACCO supervision  Seek funding for continuing presence of one or more resident advisors  Targeted specialized training o AML/CFT o Training workshops on the revised risk-management guidelines  Use risk-based rather than size-based approach to supervisory planning  Examine higher risk banks on a 12 month cycle, lower risk less frequently  Implement a one-month internal schedule for on-site reports after completion of field work  Revise on-site manual to reflect planned changes in guidelines and regulations  Prepare new on-site module to guide AML/CFT review  Prepare new on-site module to guide review of operational risk, including IT  Review Off-site Surveillance Manual, RBS Framework and Draft On-Site Inspection Procedures o Ensure consistency among manuals and alignment with actual practices o Sequence so that revised manual reflect expected changes to law and regulations

e. Implementing the Risk-Based Supervision Framework 282. The RBS Framework is well suited to use in allocating supervisory resources by determining the appropriate supervisory cycle and most relevant tools of supervision. By 2013/14, the BNR will move towards full implementation of its framework by replacing the current size-based approach to determining the supervisory cycle with a risk-based approach.

Tools of supervision will routinely include targeted examinations and meeting with banks’ internal auditors as useful supplements to full-scope inspections. Effective from 2013/14, each higher risk bank will be examined at least once each year in accordance with the RBS Framework, with lower risk banks examined less frequently.

283. The BNR’s internal processes for completion and approval of on-site examination reports will be enhanced. The BNR will implement a one-month internal schedule from the date of completion of the field work for an examination for review and completion of the on-site report to ensure than banks receive it on a timely basis.

284. The BNR will undertake a thorough review project to ensure that supervision policies and procedures are fully documented, and reflect all of the expected revisions to the law, regulations and guidelines. For efficiency, the revision of the manuals will be undertaken once the revisions to the law, regulations and guidelines are well advanced so that the manuals would fully reflect the new framework.

285. BNR supervisory activities are currently guided by the 2006 Off-Site Surveillance Manual, the 2007 RBS Framework, and the 2010 Draft On-Site Inspection Procedures. These documents are not wholly consistent and do not align in all cases with the BNR’s actual practice of supervision.

286. On-site inspection procedures require review and revision. This requires incorporating into a revised On-Site Manual the planned changes to capital adequacy requirements, provisioning standards and risk management guidelines as well as introducing specific modules with the on-site procedures for review of AML/CFT implementation, and operational risk including information technology.

III. IMPLEMENTING, MONITORING AND EVALUATING FSDP II 287. FSDP II will be implemented using the same approach that helped catalyze completion of over 90 percent of the actions in FSDP I. The FSDS in MINECOFIN will monitor progress against the actions and timelines provided in the appendix, providing quarterly updates to the stakeholders with responsibility for implementation. Quarterly meetings to review progress will be chaired by MINECOFIN at least through end-June 2014.

288. Given the front-end loading of many of the policy actions for FSDP II—many are high priority and sequenced for completion by 2014—end-June 2014 marks a logical point for a mid- program stock-take of implementation. At that time, the need to adjust timing or otherwise revise the actions will be reviewed, and a decision made at that time on the modalities for monitoring through end-2017. As with FSDP I, evaluation will be based on the successful completion of the action plans.

289. The matrix of actions included in the appendix contains both time frames and responsible entities. The balance of this chapter is a summary of the programs and sub-programs, including identification of those requiring external resources for effective implementation, responsible entities and timing. This chapter focuses on the observable outputs expected from the completion of the matrix of actions. It may be possible to achieve the outputs through different actions than contemplated in the matrix of policy actions. As part of the monitoring process, the responsible stakeholder and FSDS will consider whether new or revised actions need to be introduced to achieve the desired outcome.

290. The expected outputs will contribute to the reaching the financial sector targets established in Vision 2020 and the 7YGP, and in turn contributed to achieving the boarder set of goals and objectives for the country. The summary in this chapter provides a foundation for the preparation of the results chain, log framework and determination of budget implications which will be needed for EDPRS II, but are beyond the scope of FSDP II.

Program 1: Action Plan for Financial Inclusion Sub-program Outputs Completion Date External Resources Responsible agencies Define and monitor 1. Umurenge mapping includes all semi-formal VSLA 1. June 2013 Not required BNR financial inclusion programs that report VSAL MLS data to MINALOC 2. Financial inclusion monitored with data by male, 2. June 2014 Not required MINECOFIN female, youth to extent possible, including active depositors and borrowers, participants in registered semi-formal, cell phone participants, insurance participants National financial 1. Baseline financial capability study complete 1. June 2013 Technical assistance AFR education and literacy 2. National financial education policy and strategy 2. June 2014 Technical assistance MINECOFIN strategy completed 3. Roadmap in place to achieve specific objectives over 5 3. June 2014 Technical assistance years. 4. Institute of Entrepreneurship, Cooperatives and 4. June 2015 Technical assistance Microfinance established Mobile money transfers 1. Harmonized domestic and international transfer limits 1. June 2014 Not required BNR, MNOs 2. Individual and corporate subscriber accounts introduced 2. June 2014 3. Increasing number of agents and super-agents 3. Ongoing 4. Reporting by MMT service providers includes 4. June 2013 classification of transactions by size MMT Consumer 1. MMT services in legally separate entity 1. June 2013 Not required BNR protection 2. Segregation of trust/escrow accounts from other MNO 2. June 2014 assets 3. Remove prohibition on interest payments on escrow 3. June 2013 accounts

Sub-program Outputs Completion Date External Resources Responsible agencies Licensing 1. New or extended licensing category for e-money 1. June 2014 Not required BNR deposits 2. E-money deposit takers hold balances in trust accounts 2. June 2014 at licensed banks, prohibited from offering credit products 3. MMT service providers split large escrow account 3. June 2014 across banks 4. KYC requirements for individual e-money accounts are 4. June 2014 national ID and photo 5. KYC requirements for business e-money accounts are 5. June 2014 normal banking requirements 6. Cap imposed on value of balances held in individual e- 6. June 2014 money accounts Mobile and agent 1. Agency Banking Regulations issued 1. June 2013 Not required BNR banking 2. Mobile and agent banking statistics published 2. June 2013 3. Agency banking and mobile e-money regulations 3. June 2013 harmonized Micro-insurance 1. Micro-insurance diagnostic completed 1. June 2014 Technical assistance BNR, AFR for diagnostic study Strengthen the 1. Technical steering committee established. 1. December 2012 Donor support for MINECOFIN,/BNR Umurenge SACCO 2. Substantial technical secretariat in place to support 2. June 2013 technical committee MINECOFIN/BNR program—phase 1 technical steering committee, coordinating and secretariat implementing technical assistance for SACCOs and MFIs 3. Financially sustainable District SACCOs established in 3. December 2014 Technical assistance BNR/RCA every district 4. Standardized hardware, accounting, reporting, IT and 4. June 2015 Technical assistance Steering Committee MIS in use in all District SACCOs and their branches 5. RCA cooperative policies and procedures issued to 5. June 2013 Possible technical RCA SACCOs on non-financial issues assistance 6. Work-out unit established to deal with weak SACCOs 6. December 2013 Technical assistance MNECOFIN/BNR and MFIs 7. CGAP management tool in use in all District SACCOs 7. December 2014 Technical assistance Steering Committee and their Umurenge branches

Sub-program Outputs Completion Date External Resources Responsible agencies Umurenge SACCOs— 1. National structure and implementation plan developed 1. June 2016 Technical assistance MINECOFIN/BNR phase 2 after study overseen by technical committee and required RCA stakeholder input. 2. National structure operational, providing services to 2. June 2017 Technical assistance MINECOFIN/BNR District SACCOs required RCA Strengthen Supervisory 1. SACCO/MFI supervision units established at the 1. June 2015 Not required BNR and Regulatory provincial level, district supervisors phased out. Environment for 2. External audits of all District SACCOs, older SACCOs 2. June 2014 External auditors BNR SACCOs and MFIs and MFIs completed by BNR approved auditors 3. SACCOs and MFIs reporting to the CRB, and using 3. June 2015 Assistance with MIS BNR CRB reports in credit adjudication system Strengthen other entities 1. AMIR strategic plan revised to recognize staffing and 1. June 2013 Not required AMIR and programs to support funding constraints and implemented. access to finance

Program 2: Developing Institutions, Markets and the Supporting Infrastructure Sub-program Outputs Completion Date External Resources Responsible agencies Insurance 1. Rwanda specific mortality (life) tables prepared 1. December 2015 Actuarial consulting BNR, RSSB, ASSAR, services, FIRST or MINECOFIN other donor funding if possible 2. Annuity products introduced in Rwanda 2. December 2014 Not required Insurance companies, 3. BNR capable of supervising annuity risks 3. December 2014 Technical assistance ASSAR 4. Corporate income tax not applied to life insurance 4. June 2015 Not required BNR profit attributable to policy-holders BNR, RRA 5. Publish insurance industry data 5. June 2013 Not required 6. CoP or equivalent requirement for insurance 6. June 2017 Not required BNR intermediaries and company staff BNR 7. Local educational institution delivering professional 7. December 2014 Collaboration with courses for CoP or equivalent foreign institute, BNR, SFB possible technical and/or funding assistance for delivery

Sub-program Outputs Completion Date External Resources Responsible agencies Pensions—RSSB 1. RSSB has operational independence and 1. June 2103 Not required MINECOFIN, RSSB accountability, evidenced by ability to retain suitably skilled staff and consulting expertise and benchmarking administrative cost performance 2. Virtual holding company concept implemented with 2. June 2013 Possible need for RSSB separate accounts for pensions, medical, and allocation technical assistance of overhead 3. Risk management committee and staff in place, with 3. June 2103 Not required RSSB regular risk reporting to the Board 4. Approval limits in place at trader, manager, CEO and 4. June 2013 Not required RSSB Board level 5. Separate investment policies established for pension 5. June 2013 Technical assistance RSSB and medical funds 6. Foreign securities exposure limits, foreign currency 6. June 2013 Not required exposure limits and limits on unlisted securities in RSSB place 7. Actuarial studies for pension and medical plans 7. June 2103 Actuarial technical RSSB complete assistance 8. Management regularly receiving analytical MIS reports 8. June 2103 Technical assistance RSSB 9. Rolling cash management plans in place 9. June 2013 Technical assistance RSSB 10. Liquidity bucket gap analysis completed on regular 10. June 2013 Technical assistance RSSB basis Pensions—Private 1. Pension law provides appropriate legal foundation for 1. June 2013 Possible need for re- BNR, MINECOFIN private pensions drafting assistance 2. Licensing, prudential and supervisory regime for 2. June 2013 Technical assistance BNR private pensions in place after legislation enacted 3. Public sector pension plans registered under the new 3. June 2013 Not required Ministries, parastatals law Payment System--Retail 1. Interoperability among ATMs, POS and MMT systems 1. June 2013 Not required BNR, banks, MMOs 2. Value cap in place on cheque and EFT transactions 2. June 2013 Not required BNR

Sub-program Outputs Completion Date External Resources Responsible agencies Capital Markets 1. Guidelines in place for shelf registration of commercial 1. June 2013 Not required CMA paper and MTNs, and exemption of private placements from public issuance requirements 2. BNR securities depository and other EAC depositories 2. December 2014 Possible need for BNR, RSE connected 3. technical assistance 3. Investor compensation fund established 4. June 2013 Possible need for CMA, industry technical assistance Stock Exchange 1. Member licensing criteria disseminated 1. June 2013 Not required RSE 2. Public awareness campaign on investing in securities 2. June 2014 Possible need for RSE complete technical assistance 3. Business information exchange for venture capital, 3. June 2014 Possible need for RSE, CMA, MINICOM SMEs and investors established technical assistance 4. “Second tier” listing requirements published to attract 4. June 2013 Not required CMA, RSE smaller firms 5. Five year plan for RSE financial sustainability 5. June 2014 Possible need for RSE completed technical assistance Bond Market 1. 3, 5 and 7 year government bonds issued on a regular 1. June 2013 Not required BNR, MINECOFIN Development—building and ongoing schedule the yield curve Bond Market 1. Ongoing “road show” presentations to promote 1. June 2014 Possible technical MINECOFIN, BNR Development— Rwandan market assistance required developing the investor 2. Electronic bond delivery and custody within the EAC 2. June 2014 Technical BNR base assistance, EAC coordination Bond Market 1. Legal underpinnings for securitization in place—Trust 1. June 2013 Possible technical CMA, BNR Development—Private Law and provisions for SPVs assistance Issuance Payment System— 1. Operational manual for CSD completed 1. December 2013 Possible technical BNR RIPPS assistance Payment System— 1. National Payment System Framework and Strategy 1. June 2104 Possible technical BNR Vision and Strategy updated assistance

Sub-program Outputs Completion Date External Resources Responsible agencies Credit Reporting 1. Single format implemented for reporting to CRB and 1. June 2013 Not required BNR, CRB BNR 2. Banks, MFIs including SACCOs and insurance 2. Ongoing Not required Financial institutions, companies complying with requirements to submit MFIs, BNR, CRB credit data and credit enquiries 3. Old ID and new ID system databases linked 3. June 2013 Not required BNR Creditor Rights and 1. Land and mortgage registries synchronized 1. June 2013 Not required BRD, Land Registry Insolvency 2. Tax regime does not penalize debt restructuring 2. June 2014 Possible technical assistance BRD, RRA 3. Law permits informal workouts to be formalized into a 3. June 2014 Possible technical BRD restructuring plan and expedited assistance 4. Composition of creditors’ committees restriction to 4. June 2014 Possible technical BRD only creditors assistance

Program 3: Investment and Savings to Transform the Economy Sub-program Outputs Completion Date External Resources Responsible agencies SME and Agricultural 1. BDF Guarantee scheme restructured to be regulated as 1. June 2014 Possible need for BDF Finance a financial institution. technical assistance 2. Export guarantee facility available to small borrowers. 2. June 2014 Technical assistance BDF 3. Guarantee facility established for coffee/tea production 3. June 2105 Technical assistance BDF with extended grace periods. 4. Agricultural/SME finance study focusing on the 4. June 2015 Technical assistance MINECOM/RDB demand side completed. 5. RDB collateral registration fees waived for loans under 5. June 2013 Not required RDB RWF 10 million. 6. Warehouse Receipts Act and regulations enacted 6. June 2017 Technical assistance MINAGRI/MOJ 7. Index-based crop yield insurance tracking system in 7. June 2016 Technical assistance MINAGRI place. 8. Training programs delivered for bank officers in 8. June 2105 Technical assistance RBA providing agricultural credit. Housing Finance 1. Electronic land registration process complete. 1. June2013 Not required RDB 2. Cell based real estate value reference system 2. June 2017 Technical assistance RDB operational. 3. Mortgage law amended to remove requirement for 3. June 2015 Not required RDB/MOJ independent valuation for loans under RWF 10 million 4. Pilot RSSB tender for 5 deposits completed. 4. June 2014 Not required RSSB 5. Tax advantaged housing savings scheme deposits 5. June 2013 Not required RRA rolled out. 6. BRD housing finance strategy focusing on mid-income 6. June 2013 Technical assistance BRD housing complete. 7. Training programs delivered for bank officers in 7. June 2015 Technical assistance RBA providing housing financing. 8. National strategy for affordable housing completed. 8. June 2014 Technical assistance RHA

Program 4: Protecting Consumers and Maintaining Financial Stability Sub-program Outputs Completion Date External Resources Responsible agencies Consumer protection 1. Financial sector unit established in the Office of the 1. June 2013 Possible secondment Ombudsman Ombudsman. of BNR staff Updating the regulatory 2. LOB amendments reflecting all specific FSDP II 2. June 2013 Drafting and BNR, MINECOFIN framework—banking actions ready for submission to parliament technical assistance 3. New and revised regulations ready for gazetting 3. June 2014 Drafting and BNR following enacting of LOB amendments technical assistance 4. Bank prudential standards aligned with EAC agreed 4. June 2014 Drafting and BNR convergence technical assistance 5. New and revised bank reports and formats in place 5. June 2015 Technical assistance BNR 6. Revised bank chart of accounts reflect IFRS and new 6. June 2105 Technical assistance BNR reporting formats 7. National Bank of Rwanda law revised to implement 7. December 2014 Possible technical BNR FSAP recommendations. assistance Updating the regulatory 1. Life and non-life business separated 1. June 2013 Not required BNR framework—insurance 2. Public insurers subject to prudential regime with the 2. December 2014 Not required BNR exception of requirement for a license 3. Appropriately different regulations for life and non-life 3. June 2014 Technical assistance BNR insurers in place, including capital, solvency and investment guidelines

Sub-program Outputs Completion Date External Resources Responsible agencies Contingency planning 1. High level coordinating committee established and 1. June 2014 Possible technical BNR, MINECOFIN, operating pursuant to TOR and MOUs with assistance CMA participating institutions 2. Generic contingency plan in place to address financial 2. June 2015 Technical assistance BNR, MINECOFIN, instability CMA 3. Generic contingency plan in place to deal with a failing 3. June 2015 Technical assistance BNR financial institution 4. Resolution framework in place clarifying that the 4. June 2014 Technical assistance BNR, MINECOFIN, financial institution laws take precedence over the MINECOM general insolvency law, and providing full powers to quickly impose resolutions to protect depositors and financial stability 5. New deposit insurance law is fully consistent with 5. June 2014 Technical assistance BNR provisions of the LOB and LMO Building Supervisory 1. Core training curriculum developed and being 1. June 2013 Not required BNR Capacity delivered to BNR supervision staff 2. RBS Framework and all supervision manuals and 2. June 2014 Technical assistance BNR procedures revised for consistency and full alignment with laws, regulations and BNR policies 3. June 2015 Technical assistance BNR

APPENDIX: PRIORITY POLICY ACTIONS MATRIX

Program 1: Action Plan for Financial Inclusion

Priority No. Description of policy action 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 Responsibility (L, M, H) Define and Monitor Financial Inclusion Objective 1. H Refine definition of financial inclusion to separately identify a X BNR semi-formal VSLA supply-side category 2. H Provide BNR with copy of quarterly data provided to districts by X MINALOC/ VSLA programs VSLAs 3. H Broaden Umurenge financial mapping to include all semi- X BNR formal VSLA programs that report VSALMIS data to district MINALOC 4. H Require all BNR licensed financial institutions to submit data X BNR needed to monitor financial inclusion as part of their regular reporting 5. H Monitor financial inclusion roughly by district by collecting and X MINECOFIN recording number of active depositors and borrowers at BNR licensed and VSLA qualified institutions, divided into male, female and youth, as well as value of combined financial institution deposits,, loans, small enterprise and agricultural loans, and number of financial deposit transactions 6. H Utilize future household surveys to examine quality of financial X AFR inclusion and guide 2015 FinScope on deeper inclusion quality aspects and demand side program evaluaton 7. H Encourage establishing a donor-funded small central unit to X MINECOFIN provide support for and monitor at least the 4 big programs when AFR donors leave 8. H Utilize technical assistance to provide support for strengthening X MINICOM district Access to Finance Committees MINECOFIN 9. M Utilize financial inclusion reports, their discussion in Access to X MINECOFIN Finance Forums, and Umurenge SACCO performance contracts MINICOM to create incentives for broadening financial inclusion

A- 1

Create and Implement a National Financial Education and Literacy Strategy 10. M Finalize national financial capability baseline survey and use its X AFR segmentation findings to identify key priority targets and needs 11. H Develop a national financial education policy and strategy based MINECOFIN on the financial literacy and education study 12. H Create a plan for implementing the strategy and monitor X MINECOFIN implementation for improving financial literacy at the district and Umurenge level 13. H Develop clear objectives, priorities and stakeholder roles and X MINECOFIN key messages targeted at different consumer segments 14. M Establish a roadmap to achieve specific objectives over the next X MINECOFIN 5 years in relation to identified national needs, gaps and priorities 15. H Consider the following, modified appropriately when the X MINECOFIN baseline study is completed. 16. H Establish a financial literacy unit/function in MINECOFIN X MINECOFIN and create a task force of most involved institutions to work with it 17. H Provide institutional task force members with specific tasks X MINECOFIN and targets to implement 18. H Coordinate and implement a national district-focused X MINECOFIN financial and educational literacy program 19. H Centralize preparation of financial literacy substantive X MINECOFIN/AF content focused on at least two levels of assumed knowledge R 20. H Focus phase one training on existing financial institution X MINECOFIN clients who are immediately able to utilize new understanding for actual transactions 21. H Utilize existing VSLA program trainers/content that have X MINICOFIN/ already trained about 330,000 to continue to train all new VSL participants in these programs 22. M Utilize existing Access to Finance Forum district committees X MINECOFIN/ and RCA membership training to deliver literacy strategy MINICOM programs 23. L Study Vision Umurenge Program (VUP) program for X STEERCOM lessons to be learned 24. H Ensure that effectiveness of financial education programs is X MINECOFIN evaluated and redesign as necessary 25. H Create an Institute of Entrepreneurship, Cooperatives and X MINICOM Microfinance

A- 2

26. H Utilize donor-financed consultants to design a structure, X MINICOM curriculum, modus operandi and financial plan for this institute

No. Priority Description of policy action 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 Responsibility (L, M, H) Mobile money transfers (MMT) 27. M Harmonise transaction limits for domestic transfers with those X BNR for international transfers 28. H Introduce “individual” and “corporate” categories of MMT X BNR subscriber accounts, with different due diligence requirements and value caps on transactions and balances 29. M Increase the number of MMT agents and super-agents X X X X X X MNOs 30. M BNR to ensure that operators implement interoperability X BNR, MNOs requirements, including introducing the ability to transfer funds to accounts on other service providers’ networks and to bank accounts 31. M Extend the reporting framework for MMT service providers to X BNR include: number of subscribers, agents (direct, sub- and super-); number of transactions classified by size bands, value of transactions classified by size bands, total value of e-money in issues, value of trust balances at individual banks, user complaint logs and resolution. Consumer Protection 32. H Introduce a Law on Trusts to enable proper segregation of X BNR trust/escrow accounts from other Mobile Network Operator (MNO) assets 33. M Amend Law on Payment Systems if necessary to segregate MMT X BNR escrow accounts from general bank deposit liabilities (as with RIPPS balances). 34. M Require MMT service providers to split escrow accounts across X BNR banks once they reach a certain size 35. M Remove the prohibition on interest payments on escrow accounts X BNR for MMT services Licensing 36. H Introduce new licensing category or extend MMT license to X BNR specifically enable e-money deposit taking for transactions and savings purposes

A- 3

No. Priority Description of policy action 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 Responsibility (L, M, H) 37. H Make the e-money deposit license available to MNOs and certain X BNR other non-banks 38. H Require all e-money deposit takers to hold balances in a trust X BNR account at a licensed bank, and prohibit them from offering credit products 39. H Permit the payment of interest on e-money deposits X BNR 40. H Allow individual e-money deposit accounts to be opened on the X BNR basis of minimal KYC requirements (national ID card and photo), by agents 41. H Allow business e-money deposit accounts to be opened on the X BNR basis of normal bank KYC requirements 42. H Impose a cap on the value of balances that can be held in X BNR individual e-money deposit accounts Mobile and agent banking 43. H Formalise Agency Banking Guidelines as Regulations X BNR 44. H Encourage banks to roll out mobile and agent banking networks, X BNR and monitor closely 45. M Develop appropriate data reporting template, and publish X BNR statistics in BNR publications and on website

No. Priority Description of policy action 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 Responsibility (L, M, H) Micro-insurance 46. M Consider regulatory reforms to create a “second tier” X BNR, AFR suitable for micro-insurance providers. 47. M Review the results of the MicroEnsure and Syngenta X BNR pilot studies for livestock and crop insurance, and MINAGRI consider regulatory reforms that could improve AFR product viability while retaining sufficient consumer protection. Strengthening the Umurenge SACCO Program—Phase One Consolidate and strengthen governance of district SACCOs 48. H Establish district level SACCOs in every district by X BNR/RCA end 2013

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No. Priority Description of policy action 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 Responsibility (L, M, H) 49. H Convert those Umurenge SACCO members who X RCA/BNR meet requirements and wish to do so into District SACCO members 50. H Conduct a nation-wide public relations and X RCA/BNR/ marketing campaign to promulgate the benefits of MINECOFIN District SACCO share membership 51. H Establish method for exchanging Umurenge SACCO X RCA/BNR shares for district shares consistent with amalgamation 52. H Convert Umurenge SACCOs amalgamated with the X BNR/RCA District SACCOs into branches 53. H Make District SACCO a legal entity with X MINECOFIN/BNR/RCA accountability and control over Umurenge branches that have some local-level decision making power 54. H Eliminate separate legal status of Umurenge X RCA/BNR branches but retain Umurenge boards as "advisory boards") 55. M Allow reasonably healthy older SACCOs and X BNR/RCA licensed unions choice if they wish to become district SACCO members on same basis as Umurenge SACCOs 56. H Rate all Umurenge SACCOs to determine those that X BNR are sufficiently sound and only allow them to qualify for consolidation at district level 57. H Convert unsustainable Umurenge SACCOs into X BNR point of service agencies or "outlets" if there are other financial institutions in the Umurenge 58. M Require de facto bankrupt older SACCOs to be X BNR wound up or, if carefully structured and agreed, merged with a nearby sound SACCO or MFI if one exists 59. M Ensure that net asset value of weak merged SACCOs X BNR equals 15 percent of assets (with subsidies if needed) to avoid de-capitalizing the combined SACCO 60. L Consider allowing other cooperatives to invest in X RCA/BNR District SACCOs to increase capital but ensure that Umurenge SACCO members own at least 60 percent

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No. Priority Description of policy action 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 Responsibility (L, M, H) 61. H Allow only district members to make deposits and X RCA borrow and make first loan to any one borrower small 62. H Allow free entry and exit of district cooperative X RCA members 63. H Manage Umurenge branches as profit centers on a X BNR relatively decentralized basis to retain cooperative/grassroots culture and sustainability incentives 64. H Maintain some local Umurenge decision-making X STEERCOM subject to capability , NPLs, sustainability and performance-based limits 65. H Require standard procedure manuals, rules, and X BNR credit and risk management policies for all SACCOs and Umurenge branches 66. H Establish standardized hardware, accounting and X STEERCOM reporting systems and fully harmonized IT and MIS at District SACCOs and Umurenge branches 67. M Use simple computerized "accounting system" at STEERCOM branch level that requires computer but not much accounting skill 68. M Use same MIS system and harmonized manual X STEERCOM accounting in branches that do not have electricity or internet communications access 69. M Ensure that MIS systems include capability to X STEERCOM participate fully in the credit information system and provide usage data to monitor financial inclusion 70. M Require all districts to prepare an annual budget X X STEERCOM which becomes the first year of a 3 year business plan 71. H Prepare district SACCO "legal" financial statements X STEERCOM monthly and include individual branch level financial statements in harmonized formats 72. M Issue standard RCA cooperative policies and X RCA regulations for all SACCOS which do not cover financial issues or conflict with BNR regulations 73. H Establish district level SACCOs in every district by BNR/RCA end 2013

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No. Priority Description of policy action 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 Responsibility (L, M, H) Establish an effective interface between district SACCOs and Umurenge branches to maintain control and preserve cooperative culture 74. H Recruit highly qualified consultants to prepare X MINECOFIN/BNR district organization, staffing, standard policies & procedures, & interface with Umurenges 75. H Work within an overall interface which gives X STEERCOM district primary accountability and responsibility but allows scope for limited branch decision- making 76. H Prepare custom-tailored business strategies and X STEERCOM plans for District SACCOs using similarly formatted Umurenge branch business plans as input 77. H Prepare standard policies and procedures manual X STEERCOM and internal controls at district level which include those that Umurenge branches must follow 78. H Require Umurenge level branches to provide X STEERCOM monthly reports directly to the district for analyzing and onward submission 79. H Produce pro forma balance sheets and income X STEERCOM statements at branch level that focus in particular on deposits, profit, sustainability and NPLs 80. L Account for interbranch interest income at X STEERCOM branches for money transferred to district to reduce incentives to maximize branch lending 81. H Create/redo management contracts between X STEERCOM District and Umurenge managers and emphasize number of depositors, sustainability and NPLs 82. H Design compensation policy that pays managers X STEERCOM sufficiently well to recruit and retain capable staff 83. H Reward District and Umurenge branch managers X STEERCOM for improvements in number of depositors, low NPLs and meeting financial performance targets Create District SACCO Headquarters and Umurenge Branch Strategies to improve sustainability 84. H Same consultants should, inter alia, consider the X STEERCOM following ideas:

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No. Priority Description of policy action 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 Responsibility (L, M, H) 85. H Assist Umurenge branches to prepare X STEERCOM standardized format business plans 86. M Design strategies to create noninterest income at X STEERCOM both District and Umurenge level 87. H Maximize interest income associated with X STEERCOM liquidity ratio requirements at both District and Umurenge with savings accounts and short-term deposits 88. H Pay deposit rates that allow investing in X STEERCOM commercial bank savings or term deposits at an adequate positive spread 89. H Require market-based interest rate minimums for X STEERCOM all loans on which SACCO takes credit risk 90. M Utilize district collection committee and ensure X STEERCOM NPL reports are run daily and collection efforts begin on loans one day overdue 91. M Enforce a policy of not lending again to a X RCA defaulter deemed as willing for at least 5 years 92. M Distribute Ubudehe credit and other gov't X MINECOFIN program loans without credit risk to the SACCO for a fee based on collection performance 93. H Charge market-based interest on VUP/other X BNR gov't programs loan portions to avoid market distortions and eroding branch commercial image and culture 94. H Measure management performance primarily on X STEERCOM the basis of profit, NPLs, and increase in number of depositors 95. L Consider replacing managers who perform in X STEERCOM lowest quintile of Umurenge branch performance for more than 12 months 96. L Provide promotion opportunity incentives for X STEERCOM branch managers who remain in top performing quintile for considerable periods of time 97. M Consider adopting CGAP credit and/or BPR X STEERCOM credit scoring tool for credit decision-making 98. M Create custom-tailored loan products and try X STEERCOM them out on a pilot basis

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No. Priority Description of policy action 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 Responsibility (L, M, H) 99. H Adopt some bank lending product ideas targeted X STEERCOM at similar clientele where appropriate 100. L Assist members with credit needs larger than X STEERCOM District SACCO credit exposure limits to graduate to the banking system 101. H Design low administrative cost structures and X STEERCOM MIS system that actively compares actual against annual budget 102. H Act as non-bank agencies, in POS roles, and as X STEERCOM Western Union and cash transfer sub-agents when opportunities are available 103. M Act as platforms for cellphone banking and X STEERCOM develop mobile banking products where feasible 104. L Consider using commercial bank wireless X STEERCOM network and services where useful Establish an Overall System and Strategy for Overseeing and Coordinating SACCO Support and Capacity Building 105. H Create a technical steering committee under the X MINECOFIN HLSC to coordinate capacity building support for SACCOs and MFIs for 3 to 5 years 106. H Appoint fairly high level MINECOFIN, BNR, X MINECOFIN AMIR, and RCA officials to the committee 107. H Retain a firm (UNCDF financed?) for at least 3 years X MINECOFIN/BNR to act as secretariat to the committee and assist in designing and implementing approved programs 108. M Add a small highly qualified firm-supported small X MINECOFIN/BNR person work-out unit for troubled saccos and MFIs also reporting to steering committee 109. H Prepare an overall capacity building strategy X STEERCOM establishing priorities, identifying programs, and designing a coordinated implementation program 110. H Create a one year and a three year overall capacity X STEERCOM building strategy and plan and seek donor support for it 111. M Monitor and maintain record of support delivered by X STEERCOM entity and officer level individuals within entities 112. H Train SACCO boards and staff in the areas identified X STEERCOM in the training needs assessment

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No. Priority Description of policy action 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 Responsibility (L, M, H) 113. L Interface with commercial bank linkage programs to X STEERCOM ensure they are fully harmonized, and incorporate in the capacity building tracking analysis 114. H Implement agreement between BNR and RCA X BNR/RCA defining their respective scopes for supervision and support 115. M Review RCA Umurenge SACCO strategy and its X MINICOM/RCA implementation in coordination with steering committee program 116. M Resolve conflicts, if any, between BNR and RCA X HSLC cooperative policies and regulations at the technical steering committee 117. L Utilize AMIR's 24 trainer/coaches in support of X STEERCOM steering committee program 118. L Catalyze district and local government coordination, X MINALOC/STEERCOM but cautiously, with and support for, SACCOs and MFIs 119. M Resolve conflicts, if any, between BNR and RCA X HSLC cooperative policies and regulations at the technical steering committee 120. H Cease all Umurenge SACCO branch level subsidies X MINECOFIN as of December 2013 121. M Cease all District SACCO subsidies as of December X MINECOFIN 2014 122. M Do not subsidize portions of losses caused by X MINECOFIN provisions associated with NPLs of over 10 percent 123. H Continue to provide grant money for capacity X X X X MINECOFIN building, technical assistance, computers, supervision, etc. Implement the Overall SACCO/MFI Capacity Building Support Strategy Effectively 124. H Place highest priority on capacity building for District X STEERCOM SACCOs and customize some training addressing their somewhat unique roles 125. H Give priority in support services to SACCOs and X STEERCOM MFIs which are the largest and those with greatest risk

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No. Priority Description of policy action 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 Responsibility (L, M, H) 126. H Continue capacity building for TCU district-based X STEERCOM/BNR SACCO inspectors especially in risk management and financial analysis during first phase 127. H Provide capacity building for RCA inspectors who X STEERCOM/RCA work with financial SACCOs on issues for which they are responsible 128. H Put a primary initial focus on establishing uniform X STEERCOM computers, accounting systems and reporting at Umurenge level 129. M Adopt CGAP management tool for all SACCOs and X STEERCOM Umurenge branches and assist in training and implementing 130. H Create and train congruent with standard credit X STEERCOM policies and a credit decision-making tool 131. M Use pilot concept extensively to test new ideas, X STEERCOM products and tools before system-wide adoption Phase Two-Umurenge SACCOs Link all Financially Sound district SACCOs at National Level as Phase Two 132. H Conduct study of best structure, ownership and X MINECOFIN/ interface option for national cooperative entity inter BNR/RCA alia including commercial bank, federation, etc. 133. H In phase 2, establish a national cooperative structure X MINECOFIN/ in most appropriate form to link district SACCOs BNR/RCA 134. H License and supervise the national structure in a X BNR manner appropriate to the type of structure established 135. M Begin study, conducted with stakeholder X MINECOFIN/ participation, after all District SACCOs have been BNR/RCA established and have audited financial statements for one year 136. M Finish study roughly one year before planned X MINECOFIN/ implementation to allow active stakeholder BNR/RCA participation in discussions and their training 137. H Implement phase 2 when most District SACCOs X MINECOFIN/ have proved to be reasonably sound BNR/RCA 138. L Allow other cooperatives to invest but ensure that X credit cooperatives (SACCOs) maintain at least 60 percent control

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No. Priority Description of policy action 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 Responsibility (L, M, H) 139. L Explore an option under which national cooperative X BNR structure conducts only wholesale lending and does not compete with district SACCOs 140. M Defer MFI/SACCO deposit insurance until national X BNR unifying structure has been implemented Strengthen Supervisory and Regulatory Environment for SACCOs and MFIs Reorganize BNR Supervision Department to Effectively Supervise SACCOs/MFIs at all Levels 141. H Retain 2 BNR supervisors at each district throughout X BNR phase one or until subsidy runs out, then change to 3 supervisors at each province 142. H Organize SACCO/MFI supervision units at the X BNR provincial level when District SACCO formation has been completed 143. M Directly monitor Umurenge branches in the bottom X BNR two quintiles in coordination with District SACCOs on a management by exception basis until subsidy stops 144. H Strengthen small off-site supervision team In Kigali X BNR to utilize District SACCO and MFI reports as guide to substantive supervision 145. M Supervise the largest independent unions, SACCOs X BNR and MFIs from Kigali or the district (during phase one) as most practical 146. H Supervise all District SACCOs intensively with X BNR particular focus on monitoring those with largest value of assets and those that are weakest 147. M Place a consultant in the MFI/SACCO Supervision X BNR Department to help establishing the off-site supervision and training staff to use it 148. M Prepare monthly peer group analysis using a few key X BNR indicators and rate District and Umurenge SACCOs in quintiles 149. M Define the weakest per the risk-based schedule in X BNR BNR's onsite supervision manual and two lowest quintiles identified by off-site analysis 150. M During phase one, provide a government subsidy to X MINECOFIN BNR to cover 50 percent of BNR incremental supervision cost

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No. Priority Description of policy action 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 Responsibility (L, M, H) 151. M Inspection fees, will not be levied during phase one, X BNR should be the same for SACCOs and MFIs, based 75 percent on assets and 25 percent on NPLs Strengthen Regulatory and Supervisory Requirements for SACCOs and MFIs 152. M Review legal and regulatory requirements and X BNR modify, in line with recommendations in July 2012 and other studies 153. M Continue to impose existing SACCO and MFI X BNR regulations for all SACCOs and MFIs but modified for transitional situations, e.g., absence of District SACCOs 154. M Move toward harmonizing MFI and SACCO X BNR/AMIR reporting formats so BNR off-site unit can consolidate, compare, and analyze data more consistently 155. M Review the MFI/SACCO categorization system as to X BNR feasibility of amending the law to reduce the number or eliminate the categories 156. H Require that only SACCOs which are legal entities X RCA send an appropriately designed quarterly report to RCA on those issues it supervises 157. H Require external audits of District and older X BNR SACCOs/MFIs by auditors approved by BNR 158. H Require all SACCOs and MFIs to report all loans to X BNR credit bureau as soon as MIS systems make this feasible 159. M Require all SACCOs and MFIs to use credit reports X BNR for loans in line with LMO or CRB requirements 160. M Ensure that all gov't funds channeled through X BNR SACCOs and on-lent be separately identified and not included for capital and liquidity compliance review 161. H Impose specific rules on Umurenge SACCOs & X BNR branches until District SACCOs are formed and uniform policies and procedures are determined: Strengthen Other Entities and Programs to Better Support Access to Finance Strengthen AMIR, Its Capacity and Programs

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No. Priority Description of policy action 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 Responsibility (L, M, H) 162. H Revise the existing 2009 AMIR Strategic Plan to X AMIR/MINECOFIN define a more narrowly focused strategy recognizing staffing and funding constraints 163. H Continue to emphasize AMIR's role in advocacy and X AMIR co-ordination and research and development while deemphasizing direct capacity building 164. M Provide some government funding for AMIR, if X MINECOFIN needed, after new strategy and financial plan are agreed and approved 165. L Look to EAC or other associations for twinning X AMIR support 166. H Consider the following in the AMIR review of the X MINECOFIN strategy study 167. M Focus AMIR more on being a conduit for X AMIR information on the industry, publishing, and lobbying for members' interests 168. M Strengthen AMIR capacity in communications X DONORS and marketing 169. M Design a more highly focused research and X AMIR development program based on members' highest priority needs 170. M Develop AMIR MIS system for tracking and X AMIR benchmarking MFI/SACCO industry data 171. L Conduct a program for capacity building for X AMIR AMIR's own staff 172. L Coordinate with EAC Microfinance Network to X AMIR further harmonize enabling environment and improve coordination 173. M Reduce or eliminate AMIR role direct role in X AMIR/DONORS implementing capacity building but facilitate members in raising funds for such purposes 174. M Facilitate MFI capacity building and financing X DONORS (challenge fund) for individual MFIs with donor financing through steering committee 175. M Continue to publish AMIR industry benchmark X X X AMIR report on MFIs and SACCOs at least once every two years

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No. Priority Description of policy action 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 Responsibility (L, M, H) 176. L Explore expanding AMIR "Fact Sheet" for all MFI X AMIR reporting without changing BNR reporting requirement 177. L Continue national award program for best MFI and X X X X X X AMIR best SACCO and organize an annual Rwanda Day of Microfinance workshop

Program 2: Developing Institutions, Markets and the Supporting Infrastructure

No. Priority Description of policy action 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 Responsibility (L, M, H) Capacity Building 178. M Require certificate of proficiency for insurance professionals X BNR 179. M Provide five years for industry incumbents to obtain certificate X BNR 180. M ASSAR to adopt professional program based on UK CII X ASSAR, BNR 181. M ASSAR to partner with local institutions to deliver curriculum X ASSAR 182. M RBA to affiliate with UK CBI or other recognized institute X RBA, BNR 183. M RBA to partner with local institutions to deliver curriculum X RBA 184. M Explore possibility of SITI partnering with Rwandan educational X CMA, SITI institutions for course delivery Insurance 185. H Approach FIRST Initiative to funding the preparation of X BNR, MINECOFIN Rwanda-specific life (mortality) tables 186. H Alternatively, agree to split the cost three ways, between the X BNR, RSSB, ASSAR BNR, the RSSB and the insurance industry (through the Insurance Association). 187. H Commission actuarial consultants to prepare Rwanda-specific X X X BNR, RSSB, ASSAR life (mortality) tables. 188. H Introduce annuity products to meet the requirements of private X X X X X Insurance co’s, pension plans ASSAR 189. H Government to undertake bond issuance programme for capital X X X X X X MINECOFIN market development purposes.

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No. Priority Description of policy action 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 Responsibility (L, M, H) 190. H BNR to develop capacity to supervise annuity risks (or annuity X BNR risk management by the life companies). 191. M Introduce a special taxation regime for life insurance companies X BNR, RRA that reflects the specific nature of the business, to avoid an inappropriate calculation of profit and unintended additional taxation of savers. 192. M Compile consolidated data on each of the two major insurance X BNR sub-sectors (short-term and long-term). This should cover key balance sheet information, income/expense data and key compliance ratios (solvency etc.). 193. M Publish insurance industry data in the BNR Annual Report and X BNR Quarterly Bulletin, and on the BNR website 194. M Announce the intention to introduce the CoP (or similar) X BNR requirement for insurance intermediaries and insurance company staff 195. M Introduce the CoP (or similar) requirement X BNR 196. M Encourage a local institution to provide relevant courses leading X X BNR, SFB to CoP qualification, in collaboration with a foreign certifying institution 197. M Develop a programme to train Rwandan actuaries X X X X X X MINEDUC, ASSAR, Insurance co’s

No. Priority Description of policy action 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 Responsibility (L, M, H) Pensions RSSB 198. H Allow Board of Directors to redefine RSSB’s organizational X MINECOFIN, BNR structure 199. H Formally define roles of the Board and management X RSSB, MINECOFIN 200. H Undertake compensation study relative to private sector X RSSB 201. H Pay market salaries for senior and skilled positions. X RSSB 202. H Establish special tendering process for key areas such as X RSSB professional services 203. M Create virtual holding company with consolidated statements X RSSB

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No. Priority Description of policy action 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 Responsibility (L, M, H) 204. M Establish pension and medical insurance plans as separate client X RSSB accounts of the RSSB. 205. H Establish separate investment policies for pension and medical X RSSB plans 206. M Define a pension and medical responsibility center and allocate X RSSB headquarters overhead 207. M Measure and benchmark costs of administration X X X RSSB 208. H Perform actuarial studies for the pension and medical plans X RSSB 209. H Implement regular independent real estate valuations X RSSB 210. M Prepare analytical financial statements for management X RSSB 211. H Recruit high quality professional investment managers, actuaries, X RSSB and a risk manager 212. H Define rate of return benchmarks for each portfolio where X RSSB appropriate indexes exist 213. M Contract out a diversified foreign portfolio to external managers X RSSB 214. Define foreign securities exposure limits within the EAC and X RSSB globally 215. M Define limits for investment in unlisted securities X RSSB 216. M Establish reverse repo procedures with counterparties X X RSSB 217. M Require a professional study of commercial financial feasibility X X X X X X RSSB for large real estate projects before approval 218. H Create risk management committee and staff at headquarters X RSSB 219. M Establish regular risk reporting to the Board X RSSB 220. H Create approval limits at trader, manager, CEO, and Board level X RSSB 221. M Review investment policies for the pension and medical plans to X RSSB ensure appropriate risk/return exposures 222. M Define foreign exchange risk limits X RSSB 223. H Design and implement cash management plans X RSSB 224. M Prepare liquidity bucket gap analyses X RSSB 225. H Settle arrears from government X RSSB 226. M Review the legal ownership and registration of securities and X RSSB investments Private Pensions 227. H Enact pension law following required revisions and clarification X BNR, MINECOFIN 228. Establish licensing, prudential and supervisory regime for private X BNR pensions 229. Public sector entities provide catalyst by registering pension X Ministries, Parastatals plans under the new law

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No. Priority Description of policy action 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 Responsibility (L, M, H) Capital Markets 230. H Complete the legal framework and regulation consistent with X CMA IOSCO principles 231. M Disseminate guidelines for shelf registration of commercial X CMA paper and medium term note programs 232. M Draft and issue guidelines for exemption of private placements X CMA from public issuance requirements 233. H Proceed with connectivity between the BNR securities X X BNR, RSE depository and other EAC depositories 234. H Support IT automation in capital markets and promote the X X X X X X CMA, RSE development of business contingency plans for market intermediaries 235. H Coordinate establishment of an investor compensation fund X CMA, industry 236. M Compile list of approved credit rating agencies X CMA Stock Exchange 237. M Disseminate member licensing criteria for potential new X RSE members 238. H X MINECOFIN, CMA, Proceed to list new initial public offerings of Rwandan firms RDB, RSE 239. H Undertake and continue public awareness campaigns on the X CMA, RSE procedures, rewards, and risks of investment in securities 240. H Build market supervision skills through training and staff X X RSE interchange with other more mature exchanges 241. M Disseminate RSE price and trade volume data on website X X X X X X RSE 242. M Develop a business information exchange for venture capital, X X RSE, CMA, SME's, and investors, with access to financial and legal MINICOM resources. 243. M When a deal pipeline has been established, engage the business X X RSE, MINICOM exchange participants above to constitute a venture capital fund as a CIS. 244. H Complete and publish “second tier” listing requirements to X CMA, RSE attract smaller firms 245. H Develop a 5 year plan for financial sustainability and financial X X RSE independence for the RSE

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No. Priority Description of policy action 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 Responsibility (L, M, H) 246. M Examine alternatives for the future of the RSE in the context of X X X X X X CMA, RSE East African capital markets integration Bond Market Development—Building the Yield Curve 247. H Develop modest 3, 5 and 7 year regular bond issuance program X X X X X X BNR, MINECOFIN with MINECOFIN, consistent with fiscal needs 248. Introduce longer tenor government bonds as market develops X X X MINECOFIN 249. H List bonds on RSE X X X X X X MINECOFIN 250. H Publish indicative quarterly bond auction dates for the coming X X X X X X BNR, MINECOFIN year, for the 3 and 5 year auctions 251. M Reopen outstanding bonds where possible to promote liquidity X X X BNR 252. H Prepare proposal to designate a Rwanda Dealer group in X BNR government securities (bills and bonds), discuss with the industry 253. H Seek agreement on privileges and obligations for the dealer X X BNR group: auction performance, market making, market reporting and intelligence 254. M Develop performance indicators for dealer group X X BNR 255. M Based on market making and trading prices, publish daily X X X X X BNR government yield curve 256. M Form a bond pricing unit which will calculate and publish X X X X X BNR closing bond prices, for use in fund and portfolio market valuation 257. M Look for opportunities to transform non-marketable debt into X MINECOFIN marketable debt (RSSB non marketable bonds, BNR assets, development bonds) 258. H Allow automated auction platform access to the best performing X non-bank dealers Developing the Bond Market--Broadening Investor Base 259. H Consider elimination of withholding tax on RSE listed bonds X MINECOFIN, RRA 260. M Prepare investor presentation, plan industry visits with X X X X X MINECOFIN. BNR MINECOFIN (Kigali, Nairobi, Kampala, other centres) 261. H Resolve technical issues to facilitate RWF electronic bond X X BNR delivery and custody in EAC (and eventually wider) 262. M Promote quotation on Bloomberg, Reuters, and other trading X BNR platforms. 263. M Assess market and technical details (sales and settlement) for a X X BNR diaspora bond issue 264. H For dealer group, make bill and bond sales to non-banks a X BNR performance criterion 265. H Continue informal daily market consultation and formal periodic X X X X X X BNR dealer exchanges with BNR on market conditions and auction

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No. Priority Description of policy action 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 Responsibility (L, M, H) recommendations 266. M Explore development of a retail targeted savings bond program X X MINECOFIN, BNR with MINECOFIN 267. M Reserve a modest proportion of auction amount ("over- X BNR allotment") for primary dealer retail distribution after auction date at non-competitive rate Bond Market Development—Promote Private Issuance 268. M Educate issuers on bond, equity issues and securitization X CMA, BNR, RSE 269. M Complete legal framework for securitization in Rwanda (trust X CMA, BNR law, SPV) and review tax treatment 270. M Explore potential domestic financing component for medium X RDB, CMA sized PPP projects 271. M Educate and canvas investors to confirm interest in new issues X BNR, RSE

No. Priority Description of policy action 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 Responsibility (L, M, H) Payment System Retail payments 272. H Ensure that interoperability is established between retail payment X BNR, banks, MMOs channels, especially ATMs, POS machines and mobile money transfers 273. H Introduce a value cap on cheque and EFT transactions X BNR 274. L Encourage the public to move away from cheques in favour of X X X X X X BNR, banks electronic payments 275. L Allow the banks to price in a way that discourages cheque use – X X X X X X BNR, banks as long as pricing is transparent 276. M Encourage MMT service providers to develop cross-border BNR payments, subject to proper identification of risk and risk mitigation procedures. RIPPS 277. H Monitor intraday RTGS liquidity and participant behaviour X X X X X X BNR 278. M Segregate settlement and reserve accounts or introduce a daily X BNR minimum 279. L Monitor demand for non-RWF facilities in the RTGS and be X BNR prepared to introduce if justified

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No. Priority Description of policy action 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 Responsibility (L, M, H) 280. L Consider appropriate means of providing SACCOs/MFIs with X BNR access to the electronic payment platform, including appropriate settlement arrangements CSD 281. M Develop an operations manual for the CSD laying out rules and X CSD (BNR) regulations for participants 282. M Encourage the provision of custodial services for international X CMA investors Payments Vision and Strategy 283. M Update the 2008 NPS Framework and Strategy X NPC, BNR Regional Integration 284. M Complete the integration of the RTGS with other EAC RTGSs X BNR 285. L Link the EAC CSDs X BNR Data/reporting 286. M Improve the reporting of data on payments in the Annual Report, X BNR Quarterly Bulletin and BNR website

No. Priority Description of policy action 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 Responsibility (L, M, H) Credit Reporting 287. M Unify formats for reporting credit information to CRB and BNR, X BNR, CRB and require a single report to be submitted to the two institutions 288. M Monitor submission of credit data by banks and ensure X X X BNR, CRB, banks compliance 289. M Monitor compliance by banks in submitting credit enquiries X X X BNR, CRB, banks 290. M Expedite linking of old ID and new ID system databases X ??? 291. M Work towards compliance by all SACCOs and MFIs in reporting X X BNR, CRB, ?? credit data, once the necessary MIS is in place 292. M Monitor submission of data by insurance companies to ensure X X BNR, CRB, ASSAR compliance 293. L Improve voluntary participation in credit reporting X X BNR, CRB, MNOs, utility companies, major stores

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No. Priority Description of policy action 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 Responsibility (L, M, H) 294. L Consider use of BNR credit registry data for supervisory X X BNR purposes

Priority No. Description of policy action 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 Responsibility (L, M, H) Creditors’ Rights and Insolvency 295. H Synchronize the computerized land and mortgage registries X RDB, Land Registry 296. M Encourage use of the movables registry through rules that X RDB prevent asset stripping 297. H Introduce a stay for secured creditors’ actions that would allow X X RDB for a more orderly liquidation or for a reorganization of the business as a going concern 298. H Reform tax regime to avoid penalizing debt restructuring X X RDB, RRA 299. H Reform insolvency law so that informal workouts can be X X RDB formalized into a restructuring plan and expedited. 300. M Restrict the composition of creditors’ committees to include X RDB only creditors 301. M Consider a reduction or elimination of fees for registration of X RDB small security claims (MFI’s, etc.)

Program 3: Investment and Savings to Transform the Economy

Priority No. Description of policy action 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 Responsibility (L, M, H) Commercial Bank Lending in Priority Areas 302. L Allow RDB arbitration conducted electronically on appropriate X MONECOM small loans 303. M Enact new Leasing Law X MINECOFIN

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Priority No. Description of policy action 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 Responsibility (L, M, H) 304. L Consider adding loan category reporting for SMEs and housing to X already established BNR review of its regulatory and reporting requirements 305. H Strengthen BDF guarantee scheme by restructuring it in the form X BDF of a separate corporation, increasing capital, modifying ownership and changing accounting: 306. H Broaden and strengthen BDF guarantee program as follows: X BDF 307. H Spin off a separate legal entity from BDF to handle X BRD guarantees to be managed by BDF for a fee under contract BDF 308. H Create sound capital structure, reduce BRD ownership to a X BRD minority position and subject new guarantee entity to BNR BDF supervision 309. H Accrue provisions expense on outstanding guarantees, write X BDF off losses, and prepare a 3 year financial plan 310. H Broaden guarantees to cover housing finance, export finance X BDF and term loans for coffee and tea production 311. M Increase BDF guarantees to 75 percent for the highest X BDF priority facilities, if feasible 312. M Clarify BNR treatment of guarantees in enforcement of its X BNR provisioning requirements SME and Agricultural Finance 313. H Conduct a hybrid agricultural/SME finance survey parallel to the X AFR FinScope study 314. M Link guarantee scheme with potential borrowers trained under X MINICOM/BDF MINICOM sponsored training and technical assistance programs including Hanga Umurino 315. M Design and implement an export guarantee facility to support X MINICOM/BDF small borrowers who do not have access to bank LCs and financing 316. M Waive registration fee for collateral on low value loans under X RDB RWF 10 million 317. L Revise and expand the BRD small and micro-enterprise X BRD development fund 318. M Stipulate the definition of SME lending and define housing X BNR lending to exclude housing lending to exclude mortgages used to invest in business 319. H Allow RDB arbitration conducted electronically on appropriate X RDB/MOJ loans to avoid commercial court system

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Priority No. Description of policy action 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 Responsibility (L, M, H) 320. H Amend Law on Intermediation if necessary to enable RDB to X MINICOM/RDB handle these cases 321. M Build on established MINICOM Hanga Umurino program and X MINICOM other technical assistance to improve SME management and creditworthiness 322. L Facilitate commercial bank lending programs for financing new X MINICOM coffee production including BDF guarantees 323. L Enact Warehouse Receipts Act and regulations to facilitate X MINAGRI/MOJ implementation if financially feasible 324. L Develop index-based crop yield insurance tracking system to X MINAGRI facilitate eventual rural crop insurance 325. L Provide specialized training for bank officers in providing credit X MINAGRI to agriculture 326. M Conduct Rural and Agricultural Services Cost Study X AFR 327. L Consider adding loan category reporting for SMEs and housing to X BNR already established BNR review of its regulatory and reporting requirements Housing Finance 328. H Improve the enabling environment in support of housing finance: X 329. M Create electronic UPI based system to connect land and X RDB mortgage registration systems 330. M Use this connected system to record the value of land X NLC transactions and an index of land prices 331. M Using a new Law on Valuation to set standards based on X RDB international practice and improve the monitoring of licensed valuers 332. L Finalize a cell based real estate value reference system based X RDB on transactions and factors like access 333. M Amend Mortgage Law so independent valuation not needed X RDB/MOJ for commercial bank loans of under RWF 10 million if parties agree 334. H Establish a BDF guarantee scheme for affordable housing X BDF loans 335. L Study commercial banking system and RSSB commercial X BNR real estate risk exposure 336. H Mobilize more long-term funding suitable for mortgages X COM Banks/RSSB

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Priority No. Description of policy action 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 Responsibility (L, M, H) 337. H Conduct a pilot RSSB tender for a modestly sized 5 year X RSSB/COM Banks deposit to inter alia ascertain suitable market-based interest, terms and conditions 338. H Incentivize RSSB to seek three to five year term deposits in X COM Banks/RSSB banking system at higher interest rates (or variable) 339. M Implement gov't decision to allow banks to establish tax- X REV AUTH advantaged long term housing savings schemes 340. L Link tax-advantaged housing savings scheme deposits X RHA/COM Banks directly to planned affordable housing projects coming on- stream 341. M Prepare a BRD housing finance strategy which inter alia X BRD focuses on mid-income housing 342. L Securitize BRD housing loan portfolio for private placement X BRD with recourse (BRD keeps credit risk & collection responsibility) 343. L Attempt to bring in an international investor with X BRD developmental objectives to reduce government share in BRD to 40 percent 344. H Increase the amount of commercial lending for housing with X BRD a focus on affordable housing 345. L Provide training for financial institution loan officers and X BA treasurers on housing finance lending 346. L Create loan products relevant for loans to housing X RHA/COM Banks cooperative members utilizing peer group guarantees 347. L Consider a developer financing scheme for affordable housing X RHA 348. M Focus future RSSB real estate investment, subject to good X RSSB standards and satisfactory ROI, on affordable housing projects 349. M Conduct housing microfinance study with a view to developing X AFR an affordable housing finance project and a supporting fund 350. H Create a national strategy for affordable housing which builds on X RHA the EU housing market study focusing primarily on noncommercial sources 351. M Use FinScope 2012 ubudehe segment data to extend EU Kigali X RHA market segment analysis to Rwanda’s urban and semi-urban areas 352. L Consider Imposing a permit fee on high cost housing and Kigali X RHA/RDB commercial real estate development to support affordable housing 353. L Consider repackaging the former Bye Bye initiative for X RHA mobilizing Diaspora support MINECOFIN

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Program 4: Protecting Consumers and Maintaining Financial Stability

No. Priority Description of policy action 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 Responsibility (L, M, H) 354. H Establish financial sector unit in Office of the Ombudsman X Ombudsman Updating the Regulatory Framework Banking 355. H Prepare drafts of all required amendments to the LOB X BNR, MINECOFIN 356. H Consequential amendments from introduction of deposit X BNR, MINECOFIN insurance 357. H Revise Chapter VI to enhance resolution regime X BNR, MINECOFIN 358. H Technical amendments arising from experience and consultation X BNR, MINECOFIN 359. L Revision of the definition of deposit X BNR, MINECOFIN 360. H Consult with stakeholders and prepare final version for X BNR, MINECOFIN Parliament 361. H Review and revise regulations and guidelines when LOB X BNR enacted 362. H Revise Regulation 9 of 2009 on Capital Adequacy X BNR 363. H Align definitions of capital and requirements with Basel III X BNR 364. H Introduce a leverage limit X BNR 365. H Including collective allowance in supplementary (Tier 2) capital X BNR 366. H Capital charge for market risk, with suitable exemptions X BNR 367. H Adopting Basel II elements appropriate for Rwanda banks X BNR 368. H Capital charge for operational risk X BNR 369. H Banks required to have ICAAP X BNR 370. H Banks’ summary financial data available on their websites X BNR 371. L Introduce regulation on country and transfer risk X BNR 372. M Align bank prudential standards with EAC recommended X BNR convergence 373. M Limit on large exposures revised to 800 percent core capital X BNR 374. M Increase minimum Tier 1 capital adequacy ratio from 10 to 12 X BNR percent 375. L Adopt Liquidity Coverage Ratio and Net Stable Funding Ratio X BNR 376. L Retain current liquidity ratio for transition period X X X BNR

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No. Priority Description of policy action 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 Responsibility (L, M, H) 377. M Require banks to publish in newspapers financial statements X BNR quarterly 378. M Banks’ audited financial statements displayed in branches X BNR 379. M Banks’ audited statements submitted within 3 months of year- X BNR end 380. M Revise regulation No. 2 of 2011 to harmonize five loan X BNR classifications 381. H Require minimum 1 percent provision on “Pass” loans X BNR 382. H Require minimum 3 percent provision on “Special Mention” X BNR loans 383. M Phase in new provisioning requirement over four years from X X X X BNR 2014 384. H Consult industry on revised reporting formats and requirements X X BNR 385. H Revise formats and requirements due to changes in LOB and X regulations, identify other new reports required 386. H Capital adequacy report X BNR 387. H Provisioning report X BNR 388. H Large exposures report X BNR 389. H Update bank chart of accounts to reflect IFRS, new reporting X X BNR formats 390. M Revise Article 16 of BNR Law regarding dismissal of the X BNR, MINECOFIN Governor 391. M Revise Article 69 of BNR Law to enhance confidentiality X BNR, MINECOFIN 392. M Revise Article 73 of BNR to remove liability for good faith X BNR, MINECOFIN actions Insurance 393. H Complete the separation of life and non-life business of X BNR insurance companies 394. M Bring the public insurers within the statutory requirements of X BNR, MINECOFIN regulation and supervision, other than the need to obtain a license from the BNR 395. H Refine the regulatory and supervisory framework for insurance X BNR companies to draw up different sets of regulations for different types of insurance (Short-term, long-term). 396. H Amend reporting formats and risk-based supervision X BNR accordingly.

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No. Priority Description of policy action 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 Responsibility (L, M, H) 397. M Introduce a variable element to solvency requirements for long- X BNR term insurers that would relate the required solvency margin to the size of the business. 398. H Prepare separate investment guidelines for short-term and long- X BNR term insurers and for different categories of products offered by each, each which take their respective liquidity requirements and the tenor of their liabilities, as well as exposure to risk into account. 399. M Agree on the proportion of their investment portfolios that X BNR, MINECOFIN insurance companies are permitted to invest outside of Rwanda

No. Priority Description of policy action 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 Responsibility (L, M, H) Contingency Planning 400. H Establish a senior Financial Sector Coordinating Committee X BNR, MINECOFIN, (FSCC) CMA 401. H Prepare terms of reference for FSCC X BNR, MINECOFIN, CMA 402. H Prepare MOU on role, responsibilities of participating X BNR, MINECOFIN, organizations CMA 403. M Prepare generic contingency plan to address financial instability X FSCC 404. M Prepare generic contingency plans to take control of a weak X BNR institution 405. H Review the resolution framework for financial institutions X BNR 406. H Remove the provisions of Article 101 of Law Nº12/2009 X BNR, MINECOFIN, making insolvency of financial institutions subject to that law MINICOM 407. H As part of LOB amendment project, revise section 2 of chapter X BNR V 408. H Clarify that BNR may impose a resolution without a report from X BNR a special commissioner 409. H Power for BNR able to impose resolution without shareholder X BNR or creditor consent 410. H Explicit power to establish a bridge bank X BNR

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No. Priority Description of policy action 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 Responsibility (L, M, H) 411. H Judicial appeal of enforcement and resolution actions not to stay X BNR those actions 412. M Revise Chapter VI of the Microfinance Act X BNR 413. M Clarify that BNR may impose a resolution without a report from X BNR a special commissioner 414. M Power for BNR able to impose resolution without creditor or X BNR shareholder consent 415. M Explicit power to establish a bridge bank X BNR 416. M Judicial appeal of enforcement and resolution actions not to stay X BNR those actions 417. H BNR to participate in supervisory colleges convened by the X X X X X X BNR CBK 418. M BNR to advocate that all EAC countries review resolution X X X BNR regimes 419. M Pre-position new Exceptional Liquidity Facility (ELF) X BNR 420. H Ensure consistency among revised LOB, LMO and new deposit X X BNR insurance law

Priority Description of policy action 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 Responsibility (L, M, H) Building supervisory capacity 421. M Develop core training curriculum for BNR supervision staff X BNR 422. M Introductory supervision course X BNR 423. M FSI Connect self-study modules X BNR 424. M Intermediate and advanced courses tailored to the RBS X BNR framework 425. M Intermediate and advanced courses in insurance, pension X BNR supervision 426. M Intermediate and advanced courses in MFI and SACCO X BNR supervision 427. H Targeted specialized training X BNR 428. H AML/CFT X BNR 429. H Training workshops on the revised risk-management regulations X BNR 430. H Use risk-based rather than size-based approach to supervisory X BNR planning 431. M Examine high risk banks on a 12 month cycle, lower risk less X BNR frequently

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Priority Description of policy action 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 Responsibility (L, M, H) 432. M Implement one-month internal schedule for completion of on- X BNR site reports after completion of field work 433. H Review Off-site Surveillance Manual, RBS Framework and X BNR Draft On-Site Inspection Procedures 434. H Ensure consistency among manuals and alignment with X BNR practices 435. H Revised manuals to reflect changes in law and regulations X BNR 436. H Prepare new on-site module to guide AML/CFT review X BNR 437. H Prepare new on-site module for operational risk, including IT X BNR

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