Local Central African Banks: Burundi, Rwanda & Essay

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local central African banks: Burundi, Rwanda & DRC can learn from the way European banks operate

T a b l e o f c o n t e n t s

Short description of the issue:

Description of how local central African banks operate: In Africa

Description of how European banks operate

How and what can central African banks learn from European banks?

This dissertation (Thesis) is a description, how and what local central African banks can learn from the way European banks operate. This focuses on the banking sector development in central Africa and Europe. This central African region is calling Greats lakes region. As the traditional financial sector is unable to meet the needs of the majority of population in this region, we will try to provide some African central banks examples: Burundi, Rwanda and Congo.

Short description of the issue

Banks have always played a very important role in our day-to-day life. They are the first thing that comes to our mind when we think about money or any financial assistance to support our needs. Not only that they support our financial needs, but also help us with various financial schemes to make sure we have a secure future for our family. The history of banks dates back to early 13th century and from the very first day that they have evolved, they have been instrumental in shaping our society and the way we understand the value of our money. One of the very first banks in the world was founded in Europe, and even the word bank is derived from the Italian root word "banco," which means bench or desk.

The research represents a comparative study of how European banks and African banks especially: Burundi, Rwanda and Congo operate in banking systems, their development in different system; to analyze them, in order to create one restructuring model of the banking system. We will analyze the complex role of the government in banking, the many channels through which governments intervened, and the economic and institutional environment in which the banks operated.

2.1 Description of how in general local central African banks operate: In Africa

In their role as allocators of funds from savers to borrowers, banks have a central role in financial sector development. They bridge the gap between savers and entrepreneurs while also reducing some of the transactional and financial risk for both parties. By making funding available to the market, banks typically facilitate a reduction in barriers to entry for entrepreneurs.

Effective banking systems expand financing opportunities for both large and small companies, while also supporting financial sector development and the expansion of access to funding among low-income retail customers and micro-enterprises. Beyond funding, banks also provide essential financial services to individuals and enterprises including the collection, custodianship, safeguarding of deposits made by savers and the provision of payment services.

All African financial systems are dominated by banks, which remain at the core of financial sector development efforts for the continent.

There are significant differences across the various banking systems in African countries, which range from world-class standards to banking systems that are only beginning to overcome periods of financial repression. Still, a number of general observations can be made about banks and their role within the financial sector across the continent.

Most African banks are small in absolute and relative size. Lack of economies of scale is often linked to inefficiencies. In addition, a lack of sufficient expertise and technology often limits the capacity of banks to deliver adequate financial services to African economies. They often only offer a limited range of services, and outside of urban centers, banking is virtually non-existent.

Banking data clearly shows that African banks have significant development opportunities compared with banks in other developing regions. Indicators such as liquid liabilities to GDP (measuring the monetary resources mobilized by banks) and private credit to GDP (measuring the credit extended by banks) are considerably lower in Africa than anywhere else in the world. In addition, the region's banking system has low intermediation ratios (measuring the deposits intermediated into the private sector), mainly explained by difficulties in assessing creditworthiness and enforcing creditors' rights.

Reflecting the prevalence of poverty in the region, data suggest that not more than 20% of adult Africans have a bank account, compared to between 30% and 50% in other developing regions. This can be attributed in part to high fees, low bank branch penetration and the extensive documentation requirements for opening an account.

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In terms of efficiency, African banks are generally characterized by high spreads, intermediation margins and overhead costs. They are smaller than banks in other developing regions, limiting benefits from economies of scale and risk diversification, while their weak contractual frameworks and regional political volatility increase the costs of doing business. These inefficiencies persist in many cases due to an absence of meaningful competition in the sector. Despite vast improvements during the past decade in the efficiency and accountability of African banking systems, much work remains to be done.

2.2 Description of how in general European banks operate:

Though, hundreds of banks worldwide have come up with new services to lure, to attract more customers, European banks have always remained a step ahead of the market competition. Due to their unmatched reputation for keeping bank transactions secret, European banks have been the favorite banks of people with high profile, or for those who prefer to keep their profile very low and hidden. With growing technological advancement, these European banks continuously update their banking criteria and procedures to provide their customers with high standards of banking security and to avoid any theft or unauthorized transactions.

European banks like European Central Bank and European Investment Bank play vital role in supporting European Union's objectives and oversee the financial situation in Euro zone. Other European banks like banks in Switzerland, Italy, Germany, France, Sweden, Spain, Austria, Belgium, Luxembourg, Malta, Portugal, Ireland and remaining states of EU, together decide about the monetary policies which would affect the other European countries in whole and individually.

2.3 Aims and purpose

This analysis will encompass three perspectives:

Analysis of the banking reforms undertaken by the governments; presenting the role of the central bank, and its action to facilitate the developing environment;

Analysis of the changes in the market behavior in relation to the banking system; Examining the macro-economic reforms that indirectly lead to changes of the banking system;

Analysis of the actions initiated by the banks themselves; Investigating their internal environment and external relations;

The final goal is to create a generalized theoretical representation of the African Banking System, including the main elements of past developments, determining the factors of the future developments, and critically identify deficiencies …etc.

III. Statement of research: Problems and Questions

Developing a restructuring model for a banking system in crisis and trouble period (war); learning from Burundi, Rwanda and Congo experience.

The research aims to address the following questions:

What were the evolutionary stages of the three mentioned above banking systems?

How the governments, the market and the banks themselves did influence the developments in each stage?

What type of developments did Burundi, Rwanda and Congo go through?

Burundi

Brundi banks comprise of a nationalized bank and several other commercial banks. In the beginning the banking systems of Ruanda-Urundi, Burundi and Congo were merged together. Burundi became autonomous in terms of banking in December 1963 after the dissolution of the economic union. Burundi now had its own bank in the form of the Bank of the Kingdom of Burundi which underwent a change of name in 1967 and thereafter was known as the Bank of the Republic of Burundi. Apart from the Bank of the Republic of Burundi there are several other commercial banks in Burundi. These banks deal in short-term credit (Maps of World, 2011, para 1).

Rwanda

Within the banking industry the National Bank of Rwanda (BNR) has ensured that financial institutions operating within the industry are on track as far as ensuring the smooth running of the economy is concerned. In this regard has been restructured the management of banks operating in Rwanda for the purpose of ensuring the sustainability of the industry. The new monetary policy reform which is one of the key components of the macroeconomic reform program falls within the responsibilities of the National Bank of Rwanda. It aims at creating an environment that is conducive to fostering production and investment within the entire economy through ensuring macroeconomic stability.

The National Bank's action is thus geared towards building financial stability within the national economy while deepening the financial system (Kanimba, 2008).

Congo

The bank system has collapsed in most of the country, and the banks that remains are hampered by an unpredictable monetary policy and unrecoverable loans. In such risky conditions, loan credit has entirely ceased except for short-term trade finance. Consequently, most businesses finance their operations from their own revenue or from the informal financial sector. In 2001 for.....

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