Effective from 12 April 2019, Rwanda has new regulations (the “Regulation on Banks' Major Investments and Placements” and the “Regulation on Banks' Shareholding and M&A”) governing major investments and placements by banks as well as the shareholding and M&A of banks. The new regulations repeal their predecessors, which have been in force for eight years.
Both the Regulation on Banks' Major Investments and Placements and the Regulation on Banks' Shareholding and M&A introduce various changes embracing the latest core principles of effective banking supervision (also known as Basel Principles III). This article, however, highlights those changes that are salient and beg the attention of the Rwandan banking industry players.
Unlike its predecessor, the Regulation on Banks' Major Investments and Placements imposes a restriction on the ownership of immovable properties by banks by prohibiting them from purchasing or acquiring immovable properties or any right therein except as may be reasonably necessary for the purpose of conducting business (such as offices or providing amenities to its employees) provided that the value of such immovable property does not exceed 50% of the bank’s core capital. In all cases, the bank’s investments in immovable properties is, under the new regulation, subject to the approval of the National Bank of Rwanda (“BNR”). The new regulation, however, gives leeway regarding enforcement of banks’ mortgage rights by carving out immovable properties acquired in that context, but with a strict requirement that such properties be disposed of by the bank within a period not exceeding one year from the date of their acquisition.
Restrictions on banks' investments in real estate under the new regulation appear to embrace the seventh Basel Principle, and can be justified by the fact that real properties are illiquid assets in that they cannot be easily sold or exchanged for cash without a substantial loss in value which would, in some instances, lead to the bank’s failure to meet its obligations towards depositors.
It should be noted that all banks are, under the new regulation, required to comply with the requirements within one year for placements and equity investments, and two years for restrictions relating to investments in immovable properties. This implies that some banks will have to dispose of all or part of their existing interests in immovable properties to the extent they exceed 50% of their core capital.
The Regulation on Banks' Shareholding and M&A introduces two critical changes. The first change relates to major acquisition in a banking group, and seemingly seeks to implement the 12th and 13th Basel Principles. In terms of this regulation, Rwandan banks belonging to banking groups will be required to notify BNR of acquisitions undertaken by any of the group entities or in any of the group entities. It appears, from the relevant provisions of the Regulation on Banks' Shareholding and M&A, that this notification requirement would apply even in circumstances where the entity undertaking the acquisition or being acquired has no other relationship with the Rwandan bank in terms of control, apart from being its sister company (ie, being under the same ultimate control/beneficial ownership). The second change brought about by the Regulation on Banks' Shareholding and M&A has to do with the applicable regulatory process in case of amalgamation – the statutory merger of Rwandan banks. The repealed regulation, Regulation n°05/2011 on Mergers and Acquisition of Banks, provided for a single-stage regulatory process, but the new regulation provides for a two-stage process, namely pre-approval assessment and final approval.
The new regulations come with many other changes, and it is apparent from their reading that BNR is keen to overhaul the banking sector to embrace the latest core principles of effective banking supervision, and as it has always been done, the same regulations are expected to be strictly enforced by BNR.