When outlining his plans to transform the Rwanda capital market, Mr. Thapelo Tsheole, the new CEO for Rwanda Capital Market Authority (CMA) noted that there is need for aggressive awareness creation about capital markets in Rwanda. He also noted the need for capacity building for various stakeholders in the Rwanda capital market including the regulators, stock exchange, stock brokers, assets managers among others. Being a nascent and relatively smaller economy compared to its peers across East Africa, these two interventions are critical as a precursor for accelerated capital market growth in Rwanda.
Like any other market place, capital markets provide a platform for buyers and sellers to interact and transact. Specifically, capital markets provide a medium through which companies and governments who are the sellers of financial assets meet and transact with investors who are the buyers for those financial assets.
The Anatomy of a Custodian
Financial assets traded in capital markets vary depending on the level of sophistication of a given economy. However, they generally include debt securities, equity securities, derivatives, collective investment schemes such as mutual & exchange traded funds (ETFs), hybrid securities such as convertible bonds and Real Estate Investment Trusts (REITs). To facilitate the trading of these financial assets, custodians play a central role to ensure synchronized interactions and transactions between the sellers and buyers in a capital market.
The Rwanda Capital Markets Regulation No. 12 on institutions providing custodial services defines a custodian as “a person acting for or by arrangement with a customer who performs stewardship and related custodial services on the customers’ behalf which, include safekeeping of assets and is licensed to do so under this regulation.”
The regulation further elaborates what permitted custodial services include safekeeping of assets (including portfolio securities, cash, and other property), book‐entry transactions, income collection, trade settlement, corporate action monitoring, tax withholding, transfer agency support, auditing, financial reporting, cash management, securities lending and foreign currency exchange services.
With such a wide mandate, it is simply not possible to build a robust capital market without having strong custodians in the market. Suffice to say, custodians are the cogs that keep the wheels of capital markets running smoothly.
Evolution of the Rwanda Capital Market
Rwanda has experienced tremendous economic growth over the past three decades that has led to its current high growth stage in its capital market. In the late 1990s, the government of Rwanda prioritized economic reconstruction; with the establishment of the Rwanda Revenue Authority and the centralization of the tax collection being among the initial steps taken to stabilize the economy.
In the early 2000s, the government of Rwanda started to implement financial sector reforms to create a conducive environment for investment and spur economic growth. Aligned with this objective, in 2002, the National Bank of Rwanda (BNR) began spearheading the process of developing the Rwanda capital market. Later on, in 2005 the Capital Market Advisory Council (CMAC) was established and given the mandate to oversee the development of the capital market.
By 2007, the Capital Markets Law was enacted, hence providing a legal framework for the operationalization of the Rwanda capital market. This was closely followed with the issuance of the first treasury bond by the Rwandan government in 2008; which set the stage for the debt market development.
On January 31st 2011, the Rwanda capital market achieved a major milestone with the official launch of the Rwanda Stock Exchange (RSE). This provided a formal platform for trading securities. Within the same year, Brasseries et Limonaderies du Rwanda (BRALIRWA) became the first listing on the exchange through an Initial Public Offering (IPO); followed closely by Bank of Kigali IPO. This opened the era of publicly traded equity securities in the Rwanda capital market.
In the subsequent years, more companies listed at the RSE, and the government continued to issue bonds, which contributed to the growth of the local bond market. By 2017 corporate bonds started to gain traction with companies like I&M Bank issuing bonds to raise capital in the local market. In 2018, CMAC transitioned to the Capital Markets Authority (CMA), with a more robust mandate to oversee and regulate the Rwanda capital market effectively.
From 2020, the Rwanda capital market started to embrace digital transformation through online trading platforms in order to increase market accessibility and efficiency. In 2021, RSE joined the Africa Securities Exchange in order to enhance regional integration and cooperation. Currently, the integration process for the East Africa Community (EAC) stock exchanges is in progress in order to create a unified and efficient regional market; and align with the EAC Common Market Protocol.
Today, the government of Rwanda and CMA are continuously working on developing new financial instruments which include derivatives and Real Estate Investment Trusts (REITs). The goal is to diversify products in the Rwanda capital market and attract more investors both locally and internationally. In line with the transformational plans by the new CMA CEO, Rwanda is also aggressively engaged in creating financial literacy among its citizens, improving its market infrastructure as well as enhancing its regulatory frameworks in order to support sustainable growth in its capital market.
Strong Custodial Services are Critical for the Next Growth Phase
As the new CEO for the Rwanda CMA embarks on steering the next growth phase for the Rwanda capital market, the role of custodians should be amplified and their capacity built to match international standards.
Capital markets grow when the volume and size of transactions in the capital market increase over time. On the other hand, transactions increase in volume and size when there are more and bigger investors and businesses participating in the capital market. By extrapolation, growth in the capital market will therefore require more custodians in the market to provide quality custodial services to new investors with big ticket sizes who would like to invest through Rwanda.
For strategic growth, Rwanda capital market should and is already targeting international investors into the country through initiatives led by Kigali International Finance Centre under Rwanda Finance Ltd. However, efforts put in marketing Rwanda as an investment destination locally, and roadshows done abroad; will take longer to reap significant returns if the local capital markets infrastructure is not leapfrogged to international standards.
International investors rely on custodians to carry out their custodial services including safe keeping of their assets and all the other administrative tasks involved in settling their investment transactions, records keeping and reporting. Having a strong network of local custodians in Rwanda who are equipped with custody best practices and internationally recognized custody systems; will boost investor confidence and attract the target investors to the country.
No investor will comfortably invest in a market where they do not have access to all the auxiliary services that they need; to easily get their assets into the market, transact and repatriate their returns. Custodians are at the centre of providing these custodial services, hence why they should be at the core of the short-term to medium term plans to develop and strengthen Rwanda capital market by the CMA.
Currently, of the three licensed custodians in Rwanda, only two (Bank of Kigali & BPR Bank Plc) are active; while I&M Bank custody services are not activated yet. For the active custodians, continuous improvement of their services is required in order to match global standards and attractive more international investors. The inactive custodian needs to get the right support to activate their custodial services. Other qualified institutions like NCBA Rwanda and Equity Bank Rwanda should be encouraged to get licensed in order to create a strong custodian network in Rwanda.
Ultimately, Rwanda capital market will win over international investors when it is seen to have a strong and diversified custodial services infrastructure to serve an array of different investors.
Author: Jeremy Riro