By Jonathan Gatera Sebagabo
2011
Domestic Financial Markets are one of the major pillars of market based economy. Well-functioning financial markets lead to economic growth; they check on macroeconomic volatility and hence ensure financial stability. They perform the essential economic function of channelling funds from households, firms and governments that have saved surplus funds to those that have a shortage of funds. Thus, financial markets are critical for producing an efficient allocation of capital, which contributes to higher production and efficiency for the overall economy.
This paper reviewed the current situation of the financial market in Rwanda and highlighted the role of financial market in the mobilisation of domestic resources for investment in developing countries in general, and Rwanda in particular. It also discussed the challenges and constraints that impede the development of an effective domestic financial market in Rwanda. Lastly, the paper details the strategies that could be employed to meet the goals set to make Rwanda the Financial Hub for the EAC Region. Based on the experience from other developing countries in general and from regional markets in particular, the paper recommends both medium and long term strategies to pave way for an effective domestic financial market.
The Treasury Bills market has been very active especially from the second quarter of this year 2009. Commercial Banks have been bidding in the weekly auctions, sometimes aggressively, for all the maturities offered. A typical problem has been that banks and all other investors buy and hold the securities. That is, they purchase the instruments are keep them till maturity. This is due mainly to lack of liquidity in the secondary market. The investors (both institutional and individuals) have few opportunities to place their savings. As it currently stands, other than the issues of BNR, the only alternative is commercial bank deposits.
It is evident also that commercial banks have excess liquidity which results from the contraction of their loan portfolios (chapter 3). Banks have been, of recent, reluctant to issues new loans. It appears that this problem of loans will take long to correct as the banks will need to either, restructure the loans for the entities which can repay the outstanding loans or write off loans which will not be repaid. In the meantime, banks have to improve on the profitability of other sectors of their businesses. In this regard, new loans will not be negotiated if the price of the loan is not reflective of the economic conditions. The banking system will need to adopt the market derived yield curve for this purpose.
The paper recommended therefore (chapter five) a regular issuance of Government instruments, both Treasury Bills and Treasury Bonds to provide the foundation of the capital markets. By establishing benchmarks from which the yield curve will be derived, the market will have the basis for expanding, allowing other instruments (for example: debt, equity and mortgage securities) to be priced based on their economic value and riskiness vis-à-vis the government yield curve. The government will have a basis for privatisations; private companies will be able to issue equities to capitalise on their investments or raise funds by issuing bonds to leverage the return on equity. Diversified investment opportunities will present alternatives for the investors and will aid in the creation of wealth over time.

Whereas the medium term strategies proposed are supposed to be undertaken by the concerned domestic institutions, the long term initiatives proposed will have to take into consideration the whole of EAC region.