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Strengthening Financial Stability Program

Program Development Objective (PDO)

The objective of this technical assistance program is to strengthen the legal and regulatory framework of Rwanda’s financial sector and to contribute to financial stability.

Background

To guide the development of the financial sector over the medium term, the Rwanda Financial Sector Development Plan (FSDP) II, financed by the FIRST Initiative, was finalized in November 2012. FSDP II has informed the development of the Financial Sector Strategy under the Economic Development and Poverty Reduction Strategy II. FSDP II followed from the highly successful FSDP I (equally financed by the FIRST Initiative), which helped establish the major legal, regulatory, and institutional elements of a developed financial sector. Many of the specific policy actions in FSDP II address stability or development weaknesses identified in the 2011 Financial Sector Assessment Program Update undertaken by the International Monetary Fund and the World Bank.

The overall vision of FSDP II and the Financial Sector Strategy is to develop a stable and sound financial sector that is sufficiently deep and broad, capable of efficiently mobilizing and allocating resources to address the development needs of the economy and reduce poverty. FSDP II comprises four main strategies: (a) financial inclusion; (b) development of financial institutions, markets, and the supporting infrastructure; (c) investment and savings to transform the economy; and (d) protection of consumers and maintenance of financial stability.

The National Bank of Rwanda (Banque Nationale du Rwanda, or BNR) has requested follow-up technical assistance from the FIRST Initiative for support in the implementation of those strategies of FSDP II that fall within its responsibility, particularly those related to the legal and regulatory framework of the financial sector and maintenance of financial stability. The support will be focused mainly on Program IV of FSDP II (maintaining financial stability), while the remaining three programs will be supported by other development partners. The request is made on the basis of the positive experience that the BNR has had with previous projects financed by the FIRST Initiative. Rather than involving several catalytic technical assistance projects, the proposal is to design one programmatic support program. This one program can provide targeted support flexibly and over a longer period of time to ensure that the areas identified are addressed with due consideration to quality and timeliness.

Activities

The envisaged support program will comprise four components:

1.  Updating the legal and regulatory framework for the banking sector
           a.  Drafting amendments to the Law on Banking (LOB) and subsequent revisions of regulations
           b.  Drafting revised bank prudential standards in line with the East African Community’s
                agreed convergence
           c.  Drafting revised bank reporting requirements and charts of accounts
           d.  Drafting amendments to the Central Bank Law (BNR) to address Financial Sector
                Assessment Program comments

2.  Updating the legal and regulatory framework for the insurance sector
          a.  Drafting revised insurance regulations
          b.  Drafting revised reporting format and supervisory framework 

3.  Developing crisis preparedness and contingency planning
          a.  Drafting terms of reference and memorandums of understanding for the Financial Sector
               Coordinating Committee (FSCC)
          b.  Drafting a contingency plan  
          c.  Reviewing and revising a resolution framework for financial institutions
          d.  Pre-positioning a new Exceptional Liquidity Facility (ELF) 
          e.  Drafting the alignment of the Deposit Insurance Law with the LOB  and the LMO

4.  Building supervisory capacities
          a.  Developing and implementing training curriculums on financial sector supervision

Expected Outcomes

The main expected outcomes that will support the project development objective are (a) a stronger legal and regulatory framework for banking, contributing to a more resilient and stable banking sector; (b) a stronger legal and regulatory framework for insurance, contributing to improved stability of the insurance sector; (c) a clear crisis preparedness and contingency planning framework, enabling the authorities to respond more effectively to episodes of financial distress; and (d) strengthened supervisory capacity in the areas of banking, insurance, pensions, microfinance, and SACCOs (savings and credit cooperative organizations).

 
The achievement of the development objective and the expected project outcomes will be measured through the following indicators:

1.  Improved compliance with the Basel Core Principles (BCPs) – 2006 methodology – 2 “Permissible
     Activities”, 13 “Market Risks”, and 18 “Abuse of Financial Services”

2.  Minimum Capital Adequacy Ratio (CAR) for banks (%)

3.  Coverage ratio (Provisions/NPLs) (%)

4.  Solvency Ratio for insurance companies (%)

5.  Number of new/ improved laws and regulations enacted in banking and insurance (relative to a
     specified target)

6.  Number of new/improved policies/procedures adopted in banking and insurance (relative to a
     specified target)

7.  Establishment of the Financial Sector Coordinating Committee

8.  Contingency Planning Framework in place

9.  Problem Bank Resolution Framework adopted

10. Emergency Liquidity Facility established

11. Number of supervisors trained using new curriculums