3.3 The monetary policy adopted in Rwanda, before the implementation of the structural adjustment reforms
3.3.2 Control of the supply of credit by the National Bank of Rwanda
Credit offered by commercial banks to their customers was conditioned, on the one hand, by the constraints on resources available to commercial banks. On the other hand, credit offered depended upon the possibility that the NBR would rediscount commercial bank securities.
While influencing both the demand for, and the supply of credit in order to influence the behavior of the banks, and thus moderate their capacities for monetary creation, the NBR, devoted itself to credit control compatible with macroeconomic objectives. Commercial banks were regulated to prevent their hiding any financial intermediation not in accordance with the targets of credit control.
3.3.2.1 Control of the level of commercial banks' free reserves
By modifying the level of commercial banks' free reserves, the central bank influences their ability to satisfy their customers, and thus controlled their capacity for monetary creation. This action was the most essential part of the monetary policy in Rwanda, during the era of direct monetary policy intervention and was realized in the following manner.
a. Reserve requirement ratios
In an attempt to exert control over the money supply progress, the NBR introduced reserve requirements in August 1990. By compelling commercial banks to keep unused a certain fraction of customers' deposits, the central bank sought to sterilize a part of banks' resources usually used in extending credit. Indeed, keeping the required reserves on deposits at the NBR restricted credit expansion and consequently monetary growth rates. This was not part of any structural adjustment programme, but may have been in anticipation of such changes.
b. The rule of required credit allocation
Within the framework of its selective policy as regards credit, the NBR imposed on banks, in October 1987, the requirement that a part of their resources must be used to provide credit to the following operations:
(i) Government projects within the budget funded by the issue of treasury bills;
(ii) Those that require medium and long-term credit;
(iii) Acquisition of shares in companies operating in the financial sector.
This selective method of credit allocation was also intended to limit the commercial banks ability to extend credit.
3.3.2.2 Credit Extension Ceilings
Depending on the current economic situation and taking into account expected variations in banking reserves, the central bank determined, annually, a total amount they were willing to extend. This total amount was then allocated to each of the respective commercial banks. The individual allocation was determined by the commercial bank's main area of economic interest and their future expected lending and finance activities.
At least three quarters of commercial banks' credit extension to the public was devoted to the financing of activities generating appreciable value added or contributing to those activities that reduced balance of payments' pressures. In the 1980's, commercial banks came under pressure to advance loans to their clients. Not having sufficient funds the commercial banks put pressure on the NBR. for additional reserves. As a consequence the NBR had to revise upwards the total amount it was willing to extend to commercial banks.
However, some of the economic activities considered a priority by the government were financed in other ways. Theses activities include those likely: (i) to contribute to the realization of self-sufficiency in food production, (ii) to increase employment, (iii) to support the promotion of exports, (iv) to modernize the primary sector, in particular tea and coffee plantations, and mining production, (v) to support the promotion of international transport, and to stimulate housing construction.
3.3.2.3 Thorough credit control
Motivated by a concern to supervise more closely monetary growth, the central bank made any credit extension by a commercial bank to its customers exceeding a certain amount subject to central bank authorization. Further, this authorization could not be interpreted as a right to increase the NBR's allocation at the discount window. This element of control made it possible to keep money supply growth within the constraints imposed by economic growth and keeping in mind that certain sectors of the economy were to be offered some priority status. In addition, credit control was likely to involve the central bank in the evaluation of the risk incurred by the banks concerned, and thus lead them to change their behavior and take into account the riskiness of their customers before making a loan. However, having said this, some activities, especially in agriculture did receive special support.
3.3.2.4 Judicious control of financial intermediation
Commercial banks had to contribute actively to the development of the economy, according to required standards, and without unfavorable effects on their financial status. Nevertheless, the demand for credit was quite large while financial resources available were relatively limited, and the banking system was hampered by a relative disability to carry out adequate financial analyses indispensable to the well functioning of their activities. It is in this constraining context that the NBR required the banking system, as from October 1987, to follow strict solvency requirements. Banks had to keep capital equal to 7 per cent of deposits if these deposits were greater than three billion Rwandan Francs. If deposits were lower, 10 per cent
of deposits had to be held in capital reserves. One problem that arose is that the NBR did not carry out inspections of commercial banks on a regular basis.
3.3.3 Shortcomings and weaknesses of monetary policy before structural adjustment