As Rwanda positions itself as an international financial centre, the government has tabled a bill seeking to amend the 2017 law governing banking. The proposed amendments aim to "provide a smooth environment for foreign investors," and include regulations for branches of foreign banks, as well as allowing private banking to serve high-net-worth individuals.
Following a 2020 assessment by the International Monetary Fund (IMF) on Rwanda's implementation of the Basel Core Principles for effective banking supervision (BCPs), the government has identified areas of improvement in the 2017 law.
The BCPs are global standards for the regulation and supervision of banks.
"The review of the current law has been a great opportunity to consider our financial market trend," Minister of Finance said.
"Some new market developments were deemed necessary to be embedded in the present draft law governing the organisation of banking, specifically regulation and supervision of banking groups and financial holding companies."
What's in the bill?
The bill proposes eight new provisions as follows;
1. Allowing branches of foreign banks
One of the proposed changes in the bill is allowing foreign banks to open branches in Rwanda in order to attract international financial institutions, which is one of the goals of Kigali International Financial Centre (KIFC).
Under the current law, foreign companies applying for a banking licence in Rwanda have no option opening a branch. They are required to register it with a separate legal personality, even though the two entities are connected.
"Most international financial centres attract international banks by allowing them to establish branches instead of fully owned subsidiaries," the government said in the bill's explanatory note.
If the bill is passed it will allow "greater flexibility for companies to apply for a banking license instead of limiting it to public companies limited by shares and investors to have different options of the banking legal status."
2. Central bank licences branches of foreign banks
According to the draft law, the central bank may grant a licence to a subsidiary or a branch of a foreign bank applying for carrying out banking activities in Rwanda.
Most international financial centres now allow international banks to establish branches in their jurisdictions, which is the case in Mauritius, Jersey, Luxembourg, South Africa.
3. Law applies to banking groups
The draft law clarifies that it also applies to banking groups and financial holding companies where applicable to ensure the banking group is covered under this law as required by the Basel Core principles for effective banking supervision.
4. Private banking services
Private banking has been included among the transactions to be carried out by banks as they mainly serve high-net-worth individuals and KIFC's strategy is to attract these individuals to domicile their funds in Rwanda, the explanatory note reads.
5. Higher capital adequacy ratio
The law provides that the central bank may require a bank to maintain a capital buffer to enable a bank to withstand future periods of stress.
"This gives the Central Bank the power to require a bank to maintain a higher capital adequacy ratio than the prescribed minimum where the circumstances so require as recommended by IMF," according to the government.
6. Powers to modify prudential requirements
The law provides that the central bank has the power to modify any prudential requirements for individual banks and banking groups based on their risk profile and systemic importance in order to comply with BCPs and mainly give the Central Bank the power to increase or modify any prudential requirement for an individual bank once the situation so requires.
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7. Central bank's supervisory function
The law extends the central bank's supervisory function to banking groups and financial holding companies as recommended by BCPs but also to take into account the current market development in Rwanda with holding companies that need to be regulated.
8. Central bank's use of independent party
The law provides in article 58 that the Central Bank may use a third party to carry out a specific assignment related to its prudential responsibilities in order to comply with the BCPs and also allows the central bank to rely on the expertise of an external person for any complex assessment.
However, according to the bill, the use of a third party cannot be taken as outsourcing the central bank's prudential responsibilities.
The Parliament approved the relevance of the bill on Monday, and referred it to the relevant house committee for further scrutiny.
