On June 10, just four days before Parliament was dissolved, Rwanda gazetted a new law governing banks, further cementing its position as a global financial hub. The new law, which replaced its 2017 predecessor, strengthens supervision and accountability, building greater trust among all stakeholders. It is well-timed as Rwanda embraces rapid advancements in financial technology and seizes the opportunity to explicitly integrate Environmental, Social and Governance (ESG) principles.
At the outset, the law extends its scope of application to banking groups and financial holding companies. It further permits foreign banks to establish branches in Rwanda by obtaining a license from the regulator. To enhance transparency and regulatory visibility, the law introduces a requirement for these entities to prominently display their license or authorization at their places of business.
For the revocation of licenses, the law introduces additional grounds, one of which is a bank's involvement in financing the proliferation of weapons of mass destruction. This addition supplements existing prohibitions against engaging in money laundering and financing terrorism, particularly pertinent in these times of global tensions, considering the advanced technology used in weapon-manufacturing and the resulting worldwide apprehension.
Speaking of the current times, amidst rapid digitization with exacerbated vulnerabilities to cybercrimes, as well as the pressing global issue of climate change, the bank's risk management framework now explicitly includes cybersecurity and climate-related financial risks. Ultimately, these risks can no longer be classified under the vague category of "any other risk that a bank considers possible," which might suggest they are of lesser concern. More interestingly, it is now mandatory for the Bank's annual integrated report to include ESG activities.
Touching on issues of capital and liquidity, the Central Bank may now oblige banks to maintain a capital buffer to withstand future periods of distress, which previously would have been the bank's option. In terms of transactions with the related parties, the old law simply instructed banks to apply the arm's length principle. This principle is first extended to interconnected parties, then an exception was drawn for senior managers who, the law said 'may benefit from the overall remuneration package benefits', but left us curious about what that exception entails or how it would apply.
Maintaining restrictions on share transfers, the new law explicitly clarifies that any shareholding in violation of the law is void and does not entitle the holder to voting rights or dividends. It is the same fate for the holding of controlling interest or significant holdings without the regulator's prior authorization. To highlight even further the heightened level of these restrictions, now a proposal for any increase, acquisition, or transfer, may in addition to pre-existing reasons, be rejected if it gives rise to undue influence, results in a monopoly or substantially lessens competition.
This law further mandates banks to maintain comprehensive and chronologically organized transaction records for at least ten years. Then, financial statements, which were usually drawn and submitted only on an annual basis, can now be requested at any time for periods shorter than a year. This change is anticipated to enhance transparency and long-term data availability.
Speaking of transparency, a new layer of protection has been added for whistle-blowers who disclose potential violations of banking laws to the Central Bank. If they have reasonable grounds to believe the information is true, they will not incur any civil or criminal liability, nor face disciplinary action.
On another note, the Central Bank's options for resolving non-viable banks are broadened to include the creation of asset management vehicles, bridge institutions, and liquidation, among others. For liquidation, which can alternatively be voluntary, the new law introduces an important exception to the automatic liquidation of subsidiary banks when their holdings have their licenses revoked. While the default action remains forced liquidation, the Central Bank now has the discretion to decide otherwise based on its assessment. Previously, such liquidation was mandatory, potentially resulting in the dissolution of well-performing subsidiaries.
Now, the liquidator can directly refer bank insolvency matters to judicial organs. Only the Central Bank had this authority, and the liquidator could only request the regulator to initiate court proceedings. Throughout the liquidation processes, this law extends the deadline for submission of claims from 30 days to 180 days, allowing more time for claimants, despite the risk of delaying the process.
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In its final sections, the law tightens penalties, increasing imprisonment and fines for unauthorized management participation, obstruction of Central Bank supervision, and improper use of the term "Bank." In addition, not only will individuals face these penalties, but legal entities will as well.
As I wrap up, this law introduces a flexible approach to address contemporary banking needs. It delegates the authority to the Central Bank for directives and regulations on management appointments, recovery plans, administrative faults, and sanctions instead of delving into these details. To fulfil these overarching responsibilities, the Central Bank is now permitted to deploy independent parties, consultants, for specific tasks. Therefore, 'professionals', keep an eye out for potential tenders, especially for the upcoming digital currency.
The writer is an associate at Certa Law, a law firm based in Kigali
