Determinants of commercial banks’ efficiency in Rwanda

This study investigates the drivers of cost efficiency of 10 Rwandan commercial banks for the 2012Q1-2021Q3 period,using the true fixed effects model, which makes it possible to integrate unobserved bank-specific heterogeneity in theinefficiency function at the mean level. This study is in line with the central bank’s role of ensuring financial stability.The study builds on Gisanabagabo and Ngalawa (2017), the only study about the subject matter in Rwanda, to makethe necessary adjustments: First, this study uses a larger sample with respect to time and number of commercialbanks; Second, the study also uses a more flexible translog cost function, rather than a linear function and it modelsheterogeneity across banks as part of the inefficiency term rather than using individual dummy variables as this maylead to over-parameterization; Finally, the study deals with correlation among variables in both the inefficiency functionand the cost function by implementing a single-step estimation procedure. Empirical estimations show that creditrisk positively affects inefficiency while intermediation ratio, bank funding structure, and capital ratio negatively affectinefficiency, especially since 2018. The estimated efficiency score stands at 81.3 percent compared to 88.56 percentobtained by Gisanabagabo and Ngalawa (2017), and the differences are due to the employed methodologies and samples.The paper recommends that Rwandan commercial banks should strengthen existing measures to further mitigate creditrisk, and increase intermediation, funding structures, and capitalization so as to deal with macro-financial shocks

Impact of financial systems development on macroeconomic stability in Rwanda

Despite the dominant consensus of the positive influence of financial systems development on macroeconomic stability, this link has come under increasing scrutiny in recent years, particularly following the 2007-09 global financial crisis. This study examines this issue in Rwanda to contribute to policymaking in devising appropriate policies for sustaining macroeconomic stability and promoting financial systems development. While the evidence on the effect of financial systems development on macroeconomic stability is mixed in the literature, the results from this study, to a larger extent, support the view that financial systems development has contributed to macroeconomic stability in Rwanda. Results from local projection methods generally suggest that financial system development has contributed to macroeconomic stability, notably on real GDP growth via investment, while the effect on consumption is quasi absent

Business and financial cycles in Rwanda

The global financial crisis has made it apparent that the financial cycle plays a more prominent role in macroeconomic dynamics. Cross-country studies have revealed significant links between business and financial cycles and have suggested policymakers closely monitor the likely impact of shocks from thefinancial sector on the real economy. Against this background, this paper explores the linkages between Rwanda’s business and financial cycles. The empirical results from Wavelet analysis and Structural Vector Autoregressive (SVAR) model indicate that the financial cycle (proxied by overall credit to GDP gap)is closely related to the business cycle (proxied by the output gap), especially in the medium-term, with credit responding more to output. The results point out the presence of macro-financial linkages in Rwanda and highlight the potential risks of a shock from one sector to another