Since 2017, the Rwandan financial sector has undergone significant legal and regulatory reforms in order to create a harmonious framework for the various players in the sector. As such, the National Bank of Rwanda (the Central Bank), adopted in 2020 Regulation No. 33/2020 of 08/06/2020 governing mortgage refinancing companies. This regulation introduces a legal framework for a new form of corporate structure whose purpose is to promote sustainable mortgage refinance business and set regulatory requirements for mortgage refinance companies. The regulation defines a mortgage refinance company (MRC) as a non-depository financial institution authorized to engage in mortgage refinance activities.
The introduction of the MRC is primarily aimed at increasing liquidity in the mortgage sector and accessibility of mortgage credit facilities in Rwanda, reducing mortgage-related costs and guiding the country’s vision for affordable housing. The interest and risks associated with mortgage refinancing activity attract the regulatory and supervisory arm of the Central Bank.
The regulations prohibit the conduct of mortgage refinancing business without a license and prescribe requirements for the RCN’s primary line of business of refinancing mortgage loans to borrowers on the security of mortgage assets and other qualified collateral. It sets the RCM’s capital requirements, including its minimum paid-up capital. The instrument specifies the types of collateral a borrower may pledge for advances from the RCM, and the haircut the RCM must apply in determining the amount it may lend against any qualifying collateral. It also prescribes the procedures for managing the interest rate risk of the RCN and its permitted activities.
Section 4 of the regulations provides for the required capital that a mortgage refinancing company must at least have. It stipulates that a candidate proposing to engage in the mortgage refinancing business must have a minimum paid-up cash capital of at least 15 billion Rwandan francs, unless otherwise provided by the Central Bank. In addition to this, the applicant must demonstrate the ability to maintain equity, sheltered from loss, at the prescribed minimum amount at all times and comply with ongoing capital adequacy.
The regulatory authority that issues the license to a mortgage refinance company is the Central Bank. Once the RCN meets the requirements and obtains the license, it is authorized to carry out the following activities:
1. Refinancing or redemption of qualifying mortgage loans;
2. Investment in debt securities issued by the Government of Rwanda or any guaranteed debt and term deposits;
3. Provide fully secured long-term financing to major mortgage lenders for funding eligible mortgages;
4. To issue bonds, notes and other financial instruments for the purpose of achieving its objectives as well as any other activity that may be approved by the Central Bank.
The authorization thus granted may be revoked by the Central Bank if, inter alia, the RCM:
1. Has not commenced operations within six (6) months of the date the license was granted;
2. Has ceased operations for a period of more than one month;
3. Obtained the license through misrepresentation or fraudulent means;
4. the parent company is in liquidation;
5. It no longer meets the applicable license criteria.
It is important to note, however, that an RCM is prohibited from engaging in wholesale or retail trade, including import or export trade; acquire or hold, directly or indirectly, part of the share capital of, or otherwise have a beneficial interest in, any financial, commercial, agricultural, industrial or other enterprise in which the value of the interest of the mortgage refinance company would exceed the total of 25 percent percent of the capital base of this mortgage refinance company or buy non-performing loans or mortgages.
In order to ensure effective governance and management of an MRC, the by-law requires that the administration of an MRC be entrusted to a board of directors which is constituted in accordance with the prescribed requirements. The minimum number of directors on the Board is seven and two-thirds of them must be independent. To be a member of the board of directors, he must meet pre-established regulatory requirements, including mixed skills and experience, and be approved by the Central Bank. The board should be made up of various committees, including audit, credit and risk management committees.
Like governance and management, shareholding in an MRC is not liberalized. In this regard, the regulation provides that a natural person including its related party or a legal person including its related party owned or controlled by a person other than a reputable financial institution or a reputable public company approved by the Central Bank (with the exception of the Government of Rwanda and its institutions and foreign governments, international governmental institutions, international financial institutions) shall not, directly or indirectly, own or acquire more than 25% of the shares of a mortgage refinancing company.
Despite the by-law’s objective in terms of affordable housing, it is felt that there is a need initially for mortgage finance companies which are subsequently supplemented by mortgage refinancing. If mortgages are still financed by commercial banks at normal commercial rates, the goal of affordable housing may be compromised. Above all, a mortgage bank (a category of bank that can be licensed in Rwanda as provided by Articles 3 and 4 of Regulation No. 2310/2018 – 00013  of 27/12/2018 of the National Bank of Rwanda on the conditions of licensing of banks) would serve better in relation to mortgage refinancing companies that refinance mortgages financed by commercial banks.
Ultimately, financial institutions that currently fund mortgages will benefit from mortgage refinancing schemes by finding liquidity by selling mortgages on their portfolio. There will be, at least in the author’s opinion, no tangible benefit for borrowers, especially in terms of lower interest rates.
Mortgage owners must be considered so that they can benefit from this new legal framework. The idea of a mortgage bank should be operationalized so that they finance mortgages that will be refinanced by the MRC later.
The author is a banking and finance lawyer and senior partner at CM ADVOCATES. The opinions expressed in this article are those of the author.