Abstract
The objective of this paper was to analyze the topology of interbank network in Rwanda for policy formulation. Our main result is that interbank market network in Rwanda is described by a core- periphery model with some level of completeness of interbank market in Rwanda. As policy implication, any risk from a bank is more easily shared within the interbank market network provided that there is nearly a complete network. This is an indication that the risk of instability of the financial system in Rwanda originating from interbank market is limited.
Highlights
The National Bank of Rwanda (NBR) moved to a price based monetary policy in January 2019, using the interbank rate as operating target from monetary targeting framework used since 1997
The bank will focus on aligning the interbank rates to the central bank rate (CBR) through its interventions on money market to anchor short-term interest rates
Interbank market can be a source of risk contagion among banks and the magnitude of impact from a shock to single or few banks depends on the structure of the interbank network
Summary
The National Bank of Rwanda (NBR) moved to a price based monetary policy in January 2019, using the interbank rate as operating target from monetary targeting framework used since 1997. The interbank market will play a crucial role in transmitting monetary policy impulses from central bank rate to interbank rate and to other money market rates; and to deposit and lending rates. To achieve this objective, the focus of NBR when intervening on money market will be to align interbank rates to the central bank rate (CBR) to anchor short-term interest rates. Interbank market in Rwanda has facilitated the financing of short and medium term positions and the mitigation of liquidity risk by commercial banks. It has contributed to smoothening financial intermediation and boosting the lending to the economy by helping banks not to hold more liquidity for precautionary purpose as the market facilitates payment processing, and help banks meeting legal reserve requirements
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