Rwanda Economic Update Mobilizing Domestic Savings to Boost the Private Sector in Rwanda February 2024 © 2024. World Bank Group This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank Group concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. 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TABLE OF CONTENTS Acronyms......................................................................................................................................................................................................................... i Acknowledgments ....................................................................................................................................................................................................... ii Abstract ............................................................................................................................................................................................................................ iii Executive Summary...................................................................................................................................................................................................... iv PART I: RECENT ECONOMIC DEVELOPMENTS ............................................................................................................................................... 1 1.1. Global and regional developments .............................................................................................................................................. 2 1.2. Real economic activity ...................................................................................................................................................................... 2 1.3. Labor market trends............................................................................................................................................................................ 4 1.4. Inflation, monetary policy, and financial sector developments ......................................................................................... 5 1.5. External sector developments........................................................................................................................................................ 6 1.6. Fiscal sector and debt developments........................................................................................................................................... 7 1.7. Economic outlook and risks............................................................................................................................................................. 9 PART II: MOBILIZING DOMESTIC SAVINGS IN RWANDA........................................................................................................................... 11 2.1. The state of domestic savings mobilization............................................................................................................................... 13 2.2. Determinants of savings behavior at household level .......................................................................................................... 15 2.3. Development of financial system and savings ......................................................................................................................... 16 2.5. Policy levers to increase savings..................................................................................................................................................... 23 2.6. Conclusion.............................................................................................................................................................................................. 33 References ....................................................................................................................................................................................................................... 35 Annexes............................................................................................................................................................................................................................ 37 LIST OF FIGURES Figure 1.1: GDP growth, demand components.............................................................................................................................................. 3 Figure 1.2: GDP growth, supply side................................................................................................................................................................... 4 Figure 1.3: Rwanda’s labour market.................................................................................................................................................................... 5 Figure 1.4: Inflation developments...................................................................................................................................................................... 5 Figure 1.5: Decomposition of headline inflation............................................................................................................................................ 6 Figure 1.6: Credit growth remained strong in 2023 ..................................................................................................................................... 6 Figure 1.7: Rwanda’s projected growth in the medium term.................................................................................................................... 9 Figure 2.1: Gross domestic savings and gross national savings as percent of GDP........................................................................... 13 Figure 2.2: Gross domestic savings – Rwanda and peers............................................................................................................................ 14 Figure 2.3: Number of bank accounts and active mobile money accounts ........................................................................................ 14 Figure 2.4: Saving behavior in Rwanda.............................................................................................................................................................. 15 Figure 2.5: Ejo Heza participation, 2018-2022 ................................................................................................................................................ 17 Figure 2.6: Insurance uptake ................................................................................................................................................................................. 18 Figure 2.7: Retail bonds as a percent of government securities............................................................................................................... 20 Figure 2.8: Remittance inflows and FDI, 2010-2028...................................................................................................................................... 21 Figure 2.9: Remittance recipients vs. general population: select characteristics compared.......................................................... 22 Figure 2.10: Cost of sending remittances to African countries.................................................................................................................... 23 Figure 2.11: Value of inbound remittances ........................................................................................................................................................ 32 LIST OF TABLES Table 1.1: Global and regional economic growth....................................................................................................................................... 2 Table 1.2: Employment by selected sectors.................................................................................................................................................. 5 Table 1.3: Balance of payments, 2020–2023............................................................................................................................................... 7 Table 1.4: Government financial operations, FY2020/21-FY2023/24................................................................................................... 7 Table 2.1: Components of national savings ................................................................................................................................................13 Table 2.2: Coverage ratios of pension schemes across selected East African countries.............................................................17 Table 2.3: Key insurance metrics in select African countries.................................................................................................................19 Table 2.4: Operational recommendations to further catalyze Ejo Heza............................................................................................26 Table 2.5: High Level Principles (HLPs) to promote digital savings....................................................................................................29 LIST OF BOXES Box 2.1: Saving-investment identity...........................................................................................................................................................12 Box 2.2: Digital savings groups.....................................................................................................................................................................28 Box 2.3: Promoting savings through remittances and diaspora engagement...........................................................................33 ACRONYMS BNR/NBR Banque Nationale du Rwanda CGAP Consultative Group to Assist the Poor CMA Capital Market Authority DFS Digital Financial Service EAPS East Africa Payment System EMDEs Emerging Market and Developing Economies FDI Foreign Direct Indirect FSP Financial Service Provider GDP Gross Domestic Product GoR Government of Rwanda HHI Herfindahl-Hirschman Index HLP High-Level Principle ICT Information and Communication Technology IMF International Monetary Fund LMIC Lower-Middle Income Country MFI Microfinance Institution MINECOFIN Ministry of Finance and Economic Planning MIS Management Information System MPFSS Monetary Policy and Financial Stability Statement MTOs Money Transfer Operators NPL Non-performing Loan RSE Rwanda Stock Exchange RSSB Rwanda Social Security Board RTB Retail Bond SACCO Saving and Credit Cooperative Society SBIC Small Business Investment Company SDG Sustainable Development Goal SSA Sub-Saharan Africa VAT Value Added Tax Rwanda Economic Update • Edition No. 22 i ACKNOWLEDGMENTS The Rwanda Economic Update (REU) analyzes recent economic developments and prospects, as well as Rwanda’s policy priorities. The REU is intended for a wide audience of policymakers, business leaders, other market participants, analysts of Rwanda’s economy, and civil society. It draws on data reported by the Government of Rwanda and additional information collected by the World Bank Group in its regular economic monitoring and policy dialogue. Published twice a year, each issue has a special feature spotlighting a particular topic. The 22nd edition of REU focuses on the Role of Financial Sector in mobilizing Domestic Savings in Rwanda. The current edition, led by Calvin Zebaze Djiofack and Peace Aimee Niyibizi, is a collective endeavor and involved staff from several parts of the World Bank. The team includes Rosebud Buruku, Brice Gakombe, Helyda Sarun, Erwin R. Tiongson and Migle Petrauskaite. The team is grateful to Philip Schuler (Lead Economist) and Fiona Elizabeth Stewart for invaluable inputs on the structure and messaging of the report. The team also benefited from invaluable support and inputs from Abha Prasad (Practice Manager, EAEM1) who supervised the preparation of different aspects of the report. Sahr Kpundeh (Country Manager, Rwanda) and Keith E. Hansen (Country Director for Kenya, Rwanda, Uganda, and Somalia) provided overall guidance. The team is grateful to Evans Jadotte, Jamie Anderson and Sifa Uwera for their comments and advice on earlier drafts. The team benefited from inputs and support provided by Ana Fiorella Carvajal, James Seward, Aurelien Serge Beko, Alice Umuhoza, Huguette Mwiseneza, Yvette Umutoni, Kaushiki Singh, Lydie Ahodehou A., Karima Laouali Ladjo, Rogers Kayihura, Keziah Muthembwa, Denyse Umuhuza, Juliette Karitanyi and Robert Waiharo. The REU team is grateful to the Ministry of Finance and Economic Planning (MINECOFIN), the National Statistics Institute of Rwanda (NISR), and the National Bank of Rwanda (NBR), for providing the data which made this work possible, and for their insights and comments. Views expressed in the REU are those of the authors and do not necessarily reflect the views of the World Bank Group, its Executive Directors, the countries they represent, or the Government of Rwanda. ii Rwanda Economic Update • Edition No. 22 ABSTRACT The Rwanda Economic Update edition 22 reviews the country’s macroeconomic performance and prospects and includes a special section focusing on Mobilizing Domestic Savings to Boost the Private Sector in Rwanda. In 2023, Rwandan economy demonstrated resilience, achieving a 7.6 percent growth in a challenging global environment. This growth was largely attributed to the services sector and sustained domestic demand despite agricultural setbacks and persistent inflation. However, Rwanda faces a challenge in mobilizing domestic savings—critical for private sector investment and achieving the goals outlined in Rwanda’s Vision 2050. While financial inclusion has risen sharply, with significant transitions from informal to formal savings methods, Rwanda’s savings rates remain low compared to regional peers. The government has undertaken measures to incentivize savings, including tax benefits and the introduction of the Ejo Heza long-term savings scheme. These measures have been complemented by an emphasis on financial education, particularly digital literacy, to align with the expansion of digital financial services (DFS). Despite these efforts, substantial potential exists to enhance savings through strategic regulatory reforms. Policymakers should focus on creating an enabling environment for innovation in the financial sector, supporting the integration of non-banks into the payment system, and fostering customer-centric product development. There is also a need to reduce the high costs of remittances, leveraging the East Africa Payment System and engaging the Rwandan diaspora in capital markets. Furthermore, enhancing gender-focused financial services and collecting sex-disaggregated data are essential to address the unique challenges faced by women, particularly in rural areas, and to harness their economic potential. Rwanda’s policy landscape can thus be enriched by targeted interventions to stimulate savings, leveraging the strengths of its growing digital economy, and addressing the financial needs of its population. These efforts, requiring cross-sectoral collaboration, can lead to an inclusive financial system that supports Rwanda’s broader economic development objectives. Rwanda Economic Update • Edition No. 22 iii EXECUTIVE SUMMARY In 2023, Rwanda’s economy showcased resilience primary deficit remained stable, financed through and adaptability, achieving a robust growth rate external borrowing and concessional loans. of 7.6 percent in the face of global monetary stringency, challenging financial conditions, Looking forward, Rwanda’s GDP growth is and downturns in international trade. Despite expected to regain momentum, with projections of lower global prices for its main exports and an average of 7.2 percent growth in 2024–26. This internal pressures like adverse weather impacting optimism is driven by a recovery in global tourism, agriculture, Rwanda managed notable growth driven new construction projects, and manufacturing by the services sector, particularly contact-related activities. Fiscal consolidation will continue, with a services, and robust domestic demand fueled by focus on reducing subsidies, enhancing oversight of significant investment projects. The services sector, state-owned enterprises, and introducing tax policy especially information and technology, experienced measures to widen the revenue base. However, exponential growth, benefiting from increased challenges persist, including potential geopolitical internet and mobile subscriptions. The industrial tensions and weather-related shocks that may affect sector also rebounded, led by construction and the agricultural sector and overall economic stability. manufacturing tied to the construction boom. The The potential for more rapid private sector labor market saw improvements with a significant rise investment growth in Rwanda is linked to the in employment rates and labor force participation, domestic savings capacity, which is very limited in despite a slight uptick in unemployment rates. Rwanda. Both domestic and national savings rates However, there were disparities in labor trends in Rwanda have fluctuated at a low level while the between genders and urban versus rural areas, with savings rates needed to achieve the development rural employment reflecting the sluggish growth in goals in Rwanda’s Vision 2050 are far from realization. agriculture. Beyond not meeting the targets, Rwanda’s savings rates lag behind those of other East African Rwanda has successfully achieved a balance countries and other comparators including Ghana, between controlling inflation and managing Ethiopia, and South Africa. The main challenges external deficits while ensuring fiscal prudence include the weakness of a small financial sector that and debt sustainability. Inflationary pressures lacks innovation and has limited outreach to users began to subside, with headline inflation easing of financial services, many of whom have patchy to 6.4 percent by December 2023, as the National financial capabilities. Bank of Rwanda maintained a tight monetary policy. The banking sector remained profitable and Rwanda has achieved notable strides in enhancing stable, with solid capital ratios and an uptick in savings mobilization, evidenced by a marked lending activities. Externally, the current account rise in financial inclusion and the successful deficit widened due to trade deficits and a decline introduction of the innovative long-term savings in secondary income, despite a strong tourism program, Ejo Heza. Recent statistics indicate a surge sector and remittance inflows. The depreciation of in financial inclusion rates to 93 percent as of 2020. the Rwandan franc and the drawdown on foreign Additionally, there has been an encouraging shift reserves were consequences of these imbalances. in savings behavior among Rwandans, with bank Fiscally, Rwanda continued its prudent financial savings usage climbing from 13 percent in 2016 to management by reducing non-essential spending 21 percent in 2020. During the same period, there and prioritizing investments in human capital. The was a significant reduction in the proportion of iv Rwanda Economic Update • Edition No. 22 Executive Summary adults who save money at home (10 percent in 2016 Subsidies and incentives have proven to be vs only 2 percent in 2020) rather than at formal or effective stimulants to improve domestic savings informal financial institutions. rates and insurance enrollment, although not without costs. Rwanda, taking strides in financial Although Rwanda is on a positive path, its sector development, has implemented several domestic savings rates are still comparatively low. incentives, including tax benefits for various In 2021, Rwanda’s gross domestic savings stood at savings instruments, and considering strategies to just 10.5 percent of GDP, one of the lowest among discourage non-productive investments. However, sub-Saharan African (SSA) countries. This limited while these measures are effective, Rwanda pool of domestic savings hampers the availability of must weigh their benefits against the associated financial resources for businesses, particularly small administrative costs and the complexities of and medium-sized enterprises (SMEs), which often legislative processes to ensure sustainable and identify access to finance as a significant obstacle to practical financial sector enhancement. their growth.1 The proportion of the population not saving at all has held steady at 14 percent. Despite Educational programs that highlight the benefits governmental efforts to promote formal banking, of saving can significantly impact the regularity a large number of Rwandans continue to favor and amount of individual savings. In the context of informal savings methods. Rwanda’s expanding digital financial services, there is an urgent need for focused digital financial literacy There is substantial potential to boost savings by programs that cater to the nuances of digital savings focusing on key driving factors. With the evident and the potential risks of FinTech. To achieve this, commitment of national authorities, financial financial education must be practical, personalized, service providers, the Rwandan diaspora, and and easily accessible. Policymakers are encouraged development partners, coupled with Rwanda’s to prioritize such programs, ensuring they are cost- stable macroeconomic conditions, the stage is set effective and supportive of wider financial inclusion for a supportive environment that could greatly and stability objectives. enhance the mobilization of savings. See Rwanda’s most recent Country Economic Memorandum (CEM). 1 Rwanda Economic Update • Edition No. 22 v Executive Summary To propel Rwanda’s financial inclusion and effectiveness, reforms such as permitting partial savings growth, a comprehensive policy fund access, raising the minimum savings required approach that creates an enabling environment for government matching, and expanding reach for innovation is essential. Despite Rwanda’s high through mandates are necessary. Moreover, mobile adoption and a young population favoring capitalizing on retail government bonds, drawing on digital financial services (DFS), challenges like domestic and diaspora savers, could yield positive digital divide, limited infrastructure, and financial results, as evidenced by similar successful strategies literacy gaps persist. Policymakers should enhance in South Africa and the Philippines. regulatory frameworks, improve financial and digital infrastructure, and expand government Increasing engagement with Rwandese diaspora support to foster a DFS-friendly environment. This are also important interventions for savings includes enabling non-banks to participate in the mobilization. Remittances, which have recently payment system and introducing interest-sharing surpassed foreign direct investment flows, should be mechanisms, akin to successful models in Ghana and leveraged more effectively. The high costs associated Tanzania, to incentivize digital savings. Embracing with sending remittances to Rwanda need to be digital transformation across the financial sector is addressed, potentially through systems like the urgent and achievable, necessitating cross-sectoral East Africa Payment System, which offers lower fees collaboration for a digital-first strategy that aligns compared to traditional methods. The influx of fintech with the growing trend of financial digitalization. companies could sustain the growth of remittances, which have been shown to significantly enhance Encouraging customer centricity in savings household well-being and spur entrepreneurship. product development among financial service Policymakers should prioritize reducing remittance providers could help foster a savings culture. This fees to unlock additional funds for development could involve integrating frameworks like the CGAP and consider engaging the Rwandan diaspora in 2 Customer-Centric Guide into the product licensing domestic capital markets through diaspora bonds process, ensuring that new savings, pension, and and other initiatives. Encouraging participation insurance products are designed with the needs in these markets, even for those without bank of low-income and marginalized groups in mind. accounts, could further support Rwanda’s financial Drawing inspiration from international practices, sector and broader development goals. such as those of the Monetary Authority of Singapore and Malaysia, Rwanda could require new financial Finally, policymakers in Rwanda should promote products to demonstrate a commitment to financial gender-focused savings products, addressing the inclusion. While shaping the current market may be widespread but informal savings habits among challenging, regulators can influence new entrants women, to tap into their economic potential. to prioritize products that support domestic savings Financial institutions should be incentivized to mobilization. This approach, aligned with the goals welcome small deposits, simplify onboarding of the draft Rwanda Fintech Policy, may require time processes, and provide rewards for saving, thereby and regulatory adjustments to realize its full impact. fostering a culture of formal savings among women. Considering the low uptake of insurance and Additionally, regulatory bodies could mandate the pensions in Rwanda, the government’s long-term collection and analysis of sex-disaggregated data savings scheme Ejo Heza carries substantial potential to identify and address gaps in financial services for savings mobilization in Rwanda. To optimize its for women. CGAP: Consultative Group to Assist the Poorest. 2 vi Rwanda Economic Update • Edition No. 22 Recent Economic Developments PART ONE RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK Rwanda Economic Update • Edition No. 22 1 Recent Economic Developments 1.1. Global and regional developments Economic growth in sub-Saharan Africa also Global growth was weak in 2023 and is set to slow slowed in 2023. Regional economic growth slowed further in 2024 as the global economy continues to 2.9 percent in 2023 and is projected to edge to confront several challenges.1 After a sharp up in 2024 to 3.8 percent. The slowdown reflects slowdown in 2022, the global economy is estimated mainly weak growth in the region’s three largest to have grown at 2.4 percent in 2023–0.6 percentage economies—Nigeria, South Africa, and Angola points below the 2022 growth (Table 1.1). Though and metal exporters. Moreover, post-pandemic global inflation has continued to decline from the recoveries were slowed by weakening external 2022 peak, it remains above target in most advanced demand, domestic policy tightening to address economies and about half of the inflation-targeting persistent inflation as well as limited fiscal space, emerging market and developing economies resulting from high debt levels and increased (EMDEs), leading to tighter monetary policies borrowing costs. Risks to this outlook include a and restrictive financial conditions. Global trade further rise in global or regional instability, such as in goods and services was virtually flat in 2023, the possible escalation of the conflict in the Middle growing by an estimated 0.2 percent—the slowest East, which could drive up global energy and food expansion outside global recessions in the past 50 prices; a sharper-than-expected global economic years. Metal prices fell by 10 percent in 2023, on slowdown; increased frequency and intensity of account of sluggish demand from major economies, adverse weather events; and increased defaults if notably China—which accounts for 60 percent of attempts to reduce elevated public debt burdens global metal consumption—and are set to further were to fail. Materialization of these risks would also decline in 2024. The World Bank’s January 2024 exacerbate poverty and limit the ability of many Global Economic Prospects estimates that global countries to cope with climate change. growth will be at 2.4 percent in 2024. Downside risks include an escalation of the recent conflict in 1.2. Real economic activity the Middle East, financial stress, persistent inflation, Rwanda’s economy continued to grow strongly in trade fragmentation, and climate-related disasters. 2023, amidst a series of challenging external and Global cooperation is needed to provide debt relief, internal factors. The country navigated a complex facilitate trade integration, tackle climate change, global landscape marked by stringent monetary and alleviate food insecurity. Among EMDEs, policies, constrained financial conditions, and a commodity exporters continue to grapple with fiscal downturn in international trade. A key economic policy procyclicality and volatility. Across all EMDEs, pressure for Rwanda arose from its main export proper macroeconomic and structural policies, and commodities fetching lower prices on the global well-functioning institutions, are critical to help market, leading to a reliance on international boost investment and long-term prospects. reserves and resulting in the depreciation of the Table 1.1: Global and regional economic growth 2021 2022 2023e 2024f 2025f World 6.2 3.0 2.6 2.4 2.7 Advanced economies 5.5 2.5 1.5 1.2 1.6 Emerging market and developing economies 7.0 3.7 4.0 3.9 4.0 Sub-Saharan Africa 4.4 3.7 2.9 3.8 4.1 Source: World Bank Global Economic Prospects (January 2024) This section is drawn from the January 2024 Global Economic Prospects 1 (World Bank, 2024). 2 Rwanda Economic Update • Edition No. 22 Recent Economic Developments Rwandan franc. Rwanda’s real GDP growth in the inflation and unemployment, private consumption first three quarters of 2023 reached 7.6 percent increased by 3.9 percent and accounted for about (Figure 1.1). This growth rate is notably higher than 38 percent of the real GDP growth during this the average growth experienced between 2015 period. Net exports added 2.6 percentage points and 2019, underlining the country’s economic to the growth. In the first 3Qs of 2023, exports resilience and adaptability in the face of adversity. grew by 19.8 percent, while imports increased by The agricultural sector, which has been under strain 4.7 percent. Public consumption’s contribution to since 2022 due to adverse weather conditions and growth was modest, as the government focused on reduced usage of essential inputs like fertilizers, reducing current expenditures to maintain long- faced further setbacks with the floods of April–May term fiscal sustainability. 2023. Additionally, persistent double-digit food inflation exerted substantial pressure on household Growth in services continues to be strong. incomes. Despite these multifaceted challenges, Services have been the biggest driver of the post- The services sector continued to lead the expansion COVID growth, in line with pre-crisis trends. In the on the supply side (Figure 1.2). On the demand first 3Qs of 2023, the services sector expanded side, domestic demand remained the main driver by 10.5 percent, contributing significantly of real GDP growth, reflecting investment in the (approximately 5.1 percentage points or about 77 refurbishing activities of the AMAHORO stadium— percent) to the overall GDP growth of 7.6 percent. the biggest football stadium in Rwanda—as well This strong performance was mainly driven by four as spending related to reconstruction of some sub-sectors—information and technology, trade, infrastructures destroyed by the April-May 2023 transport and hospitality—that generated more floods. The GDP growth in 2023 is estimated at a than 55 of the overall services growth and more than robust 7.0 percent. 35 percent of the overall GDP growth. Information and technology surged by an impressive 32.5 In 2023, Rwanda’s real GDP growth was largely percent in the first 3Qs of 2023, which could be fueled by a resurgence in investment, coupled attributable to a substantial increase in internet with steady household consumption. The subscribers, which rose by 13.1 percent year- ongoing reconstruction of the AMAHORO stadium over-year, and active mobile-cellular telephone contributed to 10.4 percent increase in investment subscriptions, which grew by 15.4 percent year-over- in the first three quarters (3Qs) and outweighed year by September 2023. This makes information the dampening effects of rising prices and global and technology the single-largest driver of services uncertainties. Despite being suppressed by growth and overall GDP growth rates. The Output Figure 1.1: GDP growth, demand components (percent y/y; percentage points) 30 20.6 20 10.1 10.0 10.3 7.3 9.2 10 3.5 7.9 7.5 6.3 7.5 0 -10 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2021 2022 2023 Public consumption Private Consumption Investment Net exports GDP growth 2015-2019 average (7.4) Source: WBG staff computation based on National Institute of Statistics of Rwanda (NISR) databases Rwanda Economic Update • Edition No. 22 3 Recent Economic Developments in trade services (wholesale & retail trade), the third period—despite the low international market prices most important driver of services and overall GDP for these commodities—and generating more than growth rates, expanded by 10 percent, year-on- 10 percent of the overall industry growth and 2.3 year, in the first 3Qs of 2023. The output in transport percent of the overall GDP growth. services expanded by 14.1 percent in the first 3Qs of 2023. The hospitality sector, encompassing hotels Following six quarters of decline due to adverse and restaurants, emerged as the fourth single weather, Rwanda’s food production showed driver of second-fastest growing service sub-sector, positive growth in the third quarter of 2023. registering a growth of 17 percent. This growth is However, the overall contribution of agriculture to largely attributed to Rwanda’s continued success in GDP growth remained modest—at 3.6 percent— attracting high levels of tourism. during the first 3Qs of the year. The country’s reliance on rain-fed agriculture, with less than 10 percent of Figure 1.2: GDP growth, supply side (Percent y/y; percentage points) croplands being irrigated in 2022–2023, contributes 30 to the growth rate’s volatility in food production. Notably, there was a 3.1 percent increase in food 20 production in the third quarter of 2023, marking a turnaround after the previous consistent declines. 10 However, growth in the food production remained negative in the first 3Qs of 2023. Moreover, irregular 0 rainfall patterns continued to impact the production -10 of export crops, which grew by 2.1 percent in the Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 first three quarters of 2023. 2021 2022 2023 Agriculture Industry Services Net taxes GDP growth 2015-2019 average (7.4) 1.3. Labor market trends Source: WBG staff computation based on NISR In 2023, the improvement in labor market Industry rebounded in 2023, driven largely by a continued in Q3-2023, with some shifts in the labor resurgence in construction activities. Industrial market towards urban jobs. The employment-to- output grew by 9.4 percent year-over-year during population ratio increased by 2.7 percentage points, the first 3Qs of 2023. Coming from a negative growth year-on-year, to by September 2023. Labor force in 2022, construction grew by 8.6 percent in the 3Qs participation rates also increased by 3.2 percentage of 2023, reflecting the refurbishing activities of the points (Figure 1.3). In absolute terms since the third AMAHORO stadium and reconstruction of some quarter of 2022, nearly 316,000 joined the labor infrastructures destroyed by the April-May 2023 force, about 261,000 of whom found employment. floods. Generating more than 30 percent of the The improvement in employment was more in the overall industry growth and 7 percent of the overall urban area with a 1.4 percentage points—versus GDP growth, the bulk of the construction growth— 1.3 percentage points in rural areas—and in male more than 80 percent—occurred in the third quarter workers with a 3.7 percentage points—versus 1.8 with a 23.5 percent year-on-year growth rate. The percentage points in female workers. However, food manufacture, the second most important driver because more 55,000 workers were unemployed, the of the industrial growth, expanded by 15.1 percent, unemployment rate was at 18 percent, comparable year-on-year, and contributed more 25 percent to to the previous year. The unemployment rate for the industrial growth in the first 3Qs of 2023. The youth aged 16-30 remained high, at 21.0 percent in mining and quarrying sectors also showed robust the third quarter of 2023, 2.9 percentage points than performance, growing by 11.6 percent in the same the national unemployment rate. 4 Rwanda Economic Update • Edition No. 22 Recent Economic Developments Figure 1.3: Rwanda’s labour market A. Employment rates B. Share of jobs: urban area vs rural area (Employment-to-population ratio (percent) (Percent) 70 100 60 80 50 40 60 30 40 20 20 10 0 0 Q3 Q3 Q3 Q3 2020 2021 2022 2023 2020 -Q3 2021 -Q3 2022 -Q3 2023 -Q3 All Male Female Urban Rural Urban Rural Source: Rwanda Labor Force Surveys, various issues Recent trends in Rwanda’s labour market reflect months—and further slowing to 6.4 percent in developments in the real economic activities. The December 2023—aligning with the NBR’s inflation bulk of employment expansion was driven by trade, target for the first time in 20 months (Figure 1.4). construction, transport and hospitality sub-sectors, This reduction can be attributed to base effects, in line with their contribution to the real GDP improvements in domestic food production, lower Agriculture employment contracted by over 200,000 commodity prices, and the maintenance of a tight jobs, with the loss of agricultural employment monetary policy stance (Figure 1.5). Core inflation, affecting male and female workers alike. which excludes fresh food and energy prices, also began to decline, falling within the NBR’s target range Table 1.2: Employment by selected sectors (percent changes) of 5±3 percent since October 2023, and standing 2023 Q3 vs 2022 Q3 at 5.7 percent in December 2023. Despite these Employed population 7.0 easing inflationary pressures, the NBR has opted to Agriculture, forestry and fishing -12.2 keep its monetary policy stringent, maintaining the Mining and quarrying 3.4 bank policy rate at 7.5 percent since August 2023. Manufacturing 2.7 This rate has seen a cumulative increase of 300 basis Construction 19.2 points since February 2022, rising from 4.5 percent Trade services 49.6 in January 2022 to 7.5 percent in August 2023. Transport services 32.2 Information and communication 11.0 Figure 1.4: Inflation developments (percent) Hospitality 65.0 25 Others 12.2 Source: Rwanda Labor Force Surveys, various issues 20 15 1.4. Inflation, monetary policy, and financial sector developments 10 Headline inflation in Rwanda began to ease as 200 5 the National Bank of Rwanda (NBR) continued 0 its tighter monetary policy. After reaching a peak Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec of 22.7 percent year-over-year in November 2022, 2022 2023 Low band Headline in ation Core in ation inflation gradually fell to 9.2 percent by November Source: WBG staff computation based on NISR Consumer Prices Index December 2023. 2023—the first time it hit single-digit levels in 18 Rwanda Economic Update • Edition No. 22 5 Recent Economic Developments Figure 1.5: Decomposition of headline inflation ((Percentage points) 25 20 15 10 5 0 Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov 2022 2023 Fresh products Energy Core in ation Headline in ation Source: WBG staff computation based on NISR Consumer Prices Index December 2023 Banks’ lending activities remained strong in 2023, 1.5. External sector developments despite monetary tightening. In nominal terms, Rwanda experienced a widening of external credit growth averaged 14.2 percent in the first nine imbalances in the first three quarters of 2023. The months of 2023, two percentage points that the current account deficit rose to 11.9 percent of GDP annual average in 2022. This growth momentum in the first three quarters of 2023 from 9.3 percent was largely linked to the growth of new lending. in the corresponding period of the previous year The September 2023 Monetary Policy and Financial (Table 1.3). Although tourism and remittance inflows Stability Statement (MPFSS) reports that new remained strong, growth in Rwanda’s traditional loans approved by banks increased by more than exports (including coffee, tea, cassiterite, coltan, and 40.4 percent during the first half of 2023 (2023 wolfram) slowed to 3.5 percent during this period, H1), compared to the decline of 7.2 registered in largely due to lower global metal prices. Additionally, the corresponding period of 2022. Within activity reexports saw a downturn, decreasing by 1.3 sectors, the same MPFSS shows that credit growth percent, influenced by reduced trade activities with was boosted by increased retail and consumer loans. the DRC. However, this negative trend in traditional The real credit growth has returned into positive exports and reexports was significantly offset by the zones since July 2023, after being negative for 12 growth of nontraditional and non-monetary gold consecutive months (Figure 1.6). exports, which expanded by 14.8 and 61.6 percent, Figure 1.6: Credit growth remained strong in 2023 respectively. As a result, overall exports grew by (percentage points) 19.4 percent, contributing 24.4 percent to the GDP 20 15 in the first three quarters of 2023. Import spending 18 10 surged by 20.2 percent, driven mainly by imports of food product—especially cereals and construction 16 5 materials linked to food shortages experienced in 14 0 early 2023—and transport materials. To develop 12 -5 public transportation in Kigali—in response to the pressing shortage of public transport vehicles, the 10 -10 government has facilitated the acquisition of 200 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep 2022 2023 electrical buses. As of September 2023, imports Nominal credit growth Real credit growth (RSH) accounted for 41.1 percent of GDP. Rwanda’s Source: WBG staff computation based on NBR monetary survey November 2023 current account has persistently been negative, reflecting a low level of national savings relative to investment needs. 6 Rwanda Economic Update • Edition No. 22 Recent Economic Developments Table 1.3: Balance of payments, 2020–2023 (percent of GDP, unless otherwise indicated) 2021 2022 2023 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Current account balance -9.1 -11.6 -12.8 -10.0 -8.1 -6.0 -13.3 -10.1 -11.7 -10.1 -13.9 Trade balance (goods and services) -14.0 -17.5 -17.5 -15.5 -13.5 -15.7 -16.2 -14.2 -14.4 -18.3 -17.3 Exports 16.0 18.5 19.7 21.8 20.8 23.2 23.6 22.2 22.7 25.4 25.1 o/w coffee and tea 1.4 1.1 1.6 2.1 1.2 1.1 1.4 2.5 1.3 1.1 1.4 o/w tin, coltan, wolfram 1.0 1.3 1.5 1.6 1.7 1.8 1.5 1.2 1.4 1.6 1.4 o/w tourism 0.9 1.1 1.6 1.8 1.9 3.2 3.9 3.0 3.2 3.4 4.7 Imports 30.0 36.0 37.1 37.4 34.3 39.0 39.9 36.4 37.1 43.8 42.4 Primary income, net -1.9 -1.5 -1.7 -1.4 -2.5 -1.5 -2.2 -1.6 -1.7 -2.0 -2.3 Secondary income, net 6.8 7.3 6.4 6.9 7.9 11.2 5.2 5.7 4.4 10.2 5.7 o/w external grants to government 3.8 3.9 3.0 3.3 4.3 7.8 1.9 2.1 0.9 6.6 1.9 o/w remittances inflows 3.1 3.6 3.4 3.7 3.6 3.4 3.4 3.5 3.4 3.5 3.8 Capital account balance 3.0 3.7 4.0 4.5 2.5 2.3 2.5 2.4 2.8 2.8 2.7 Financial account balance (inflows) 4.5 3.7 22.8 8.3 -0.7 10.5 2.4 7.0 12.5 3.4 1.2 Direct investment, net 1.5 2.3 2.4 2.3 2.2 2.0 2.4 2.5 2.4 2.2 2.6 Portfolio investment, net 0.0 0.0 10.1 -0.2 -0.1 -0.3 -0.3 -1.0 0.0 -1.7 0.0 Loans and other inflows, net 3.0 1.4 10.3 6.3 -2.7 8.8 0.3 5.5 10.1 2.9 -1.4 o/w government borrowing 6.8 5.3 2.7 19.7 4.2 4.1 2.3 1.0 12.0 3.3 1.9 Net errors and omissions -2.7 1.4 -4.4 -0.2 -0.2 -1.4 0.9 5.0 -7.1 7.6 0.9 Increase in reserves -4.3 -2.9 9.6 2.7 -6.5 5.4 -7.5 4.2 -3.5 3.7 -9.1 Source: WBG staff calculations based on NBR and NISR data. Foreign direct investment (FDI) and government collection through a medium-term strategy, despite borrowing only partially financed the current facing inflation-related challenges. Government account deficit, leading to a drawdown on foreign made efforts to reduce non-essential and ineffective reserves. FDI inflows expanded by 21.4 percent spending, with an emphasis on selecting efficient in the first three quarters of 2023, reflecting projects and discontinuing non-viable ones, while continued improvement in economic activities. The prioritizing health, education, and social protection. other important source for financing the current The government reduced spending to 28.6 percent account deficit is government borrowing, much of of GDP from 32.2 percent in the previous year, with in concessional terms from development partners. infrastructure spending falling to 9.9 percent of GDP However, it was not enough to finance the current from 11.6 percent, and other recurrent expenditures account deficit, leading to a drawdown on foreign declining to 18.7 percent from 20.6 percent. The reserves in the first three quarters of 2023. The low overall and primary deficits remained almost similar level of reserves, together with the high demand to the previous year at 6.2 percent and 4.3 percent for imports led to a 17.4 percent depreciation of the of GDP, compared to the forecasted 7.6 percent and franc against the U.S. dollar in 2023. 5.8 percent. This government financed the deficit mainly through external concessional loans, with 1.6. Fiscal sector and debt developments external borrowing constituting 5.3 percent of GDP. In the fiscal year 2022/23, Rwanda continued Domestic borrowing accounted for 0.8 percent to strengthen its financial management. The of GDP (Table 1.4). Issuing domestic debt the government focused on enhancing revenue governments taps into private savings that would Rwanda Economic Update • Edition No. 22 7 Recent Economic Developments otherwise be available to finance private investment. Despite this, the government remains committed Normally, government securities—treasury bills to the medium-term fiscal policy geared towards and bond—are nearly risk-free, so that commercial maintaining fiscal and external sustainability, such banks would prefer to lend to government instead as (i) the implementation of domestic revenue of to the private sector. However, the government of mobilization (DRM) measures under the Medium- Rwanda has been caution in borrowing domestically Term Revenue Strategy (MTRS), (ii) spending to avoid crowding out the private sector. rationalization measures and (iii) improving the transparency and the efficiency of public In the FY2023/24 budget, the government financial management and investment practices envisages a temporary fiscal relaxation to cushion and enhancing the management of fiscal risks. the effects of the recent floods. Total reconstruction In FY2023/24, Total spending is projected at 28.0 spending is anticipated to be around 3 percent of percent of GDP—0.4 percentage points lower than GDP over the next five years, of which two thirds in FY2022/23. The overall fiscal deficit is projected at will be executed in FY2023/24 and FY2024/25. 6.1 percent of GDP. Table 1.4: Government financial operations, FY2020/21-FY2023/24 (percent of GDP) FY2020/21 FY2021/22 FY2022/23 FY2023/24 budget Total revenue 25.3 26.0 22.3 21.8 Taxes 16.0 15.8 15.0 15.3 Other revenues 3.8 3.3 2.6 2.6 Grants 5.5 6.9 4.7 4.0 Total expenditure 32.6 32.2 28.5 28.0 Expense 20.4 20.6 18.7 18.4 Compensation of employees 2.9 2.7 2.4 2.7 Use of goods and services 6.1 5.7 4.9 4.6 Interest payment 1.8 1.8 2.0 2.4 Subsidies 2.5 3.2 2.0 1.8 Grants 5.3 5.5 6.3 5.8 Social benefits 0.4 0.5 0.3 0.3 Other expense 1.3 1.2 0.8 0.8 Net acquisition of non-financial assets 12.2 11.6 9.8 9.5 Foreign financed 6.7 4.9 4.9 5.9 Domestically financed 5.5 6.7 4.9 3.6 Primary balance -5.6 -4.3 -4.2 -3.7 Net lending (+)/borrowing (-) -7.3 -6.2 -6.2 -6.1 Net acquisition of financial assets 1.5 4.3 -0.5 0.9 Net incurrence of financial liabilities 8.9 10.5 6.1 7.1 Domestic 2.5 1.8 0.8 0.1 Foreign 6.4 8.6 5.3 7.0 Source: WBG staff computations based on MINECOFIN various budget executions reports and budget framework papers. 8 Rwanda Economic Update • Edition No. 22 Recent Economic Developments Rwanda’s debt will remain sustainable over the Figure 1.7: Rwanda’s projected growth in the medium term (percentage) medium term, even at its elevated debt trajectory. 15 The December 2023 joint World Bank-IMF debt sustainability analysis (DSA) assessed Rwanda’s 10.9 10 debt to be sustainable with a moderate risk of 8.2 7.1 7.3 7.3 7.0 external and public debt distress, which is in line 5 with previous DSAs since 2020.2 Most of Rwanda’s external debt is owed to multilateral donors on concessional terms. The share of concessional 0 borrowing accounted for over 65 percent of total -3.4 public external debt by the end of 2023. Rwanda’s -5 2020 2021 2022 2023e 2024f 2025f 2026f public debt outstanding also includes a 10-year Eurobond—US$620 million Eurobond—issued in Source: WBG staff computation based on NBR monetary survey November 2023 August 2021 at a coupon rate of 5.5 percent. This tourism demand, construction with the Bugesera was the second Eurobond issuance for Rwanda after airport and ongoing refurbishing of the AMAHORO the US$400 million Eurobond issued in 2023 at a stadium, and manufacturing activities supported coupon rate of 6.25 percent. This was mostly repaid by the Manufacture and Build to Recover Program. using the proceeds from the August 2021 issuance. The current account deficit is projected to remain wider in 2024 due to imports related to post- 1.7. Economic outlook and risks flood reconstruction efforts, and the large airport GDP growth is expected to regain momentum, construction project. Moreover, metal prices are increasing by 7.2 percent on average in 2024– set to decline again as the slower growth in China 26, in line with the previous REU. After bad further weighs on metal demand. Continued strong performance in the last two years, agriculture is FDI inflows and concessional financing will cover expected to rebound in 2024 as favorable weather external financing needs. Inflation is expected to conditions, in the 2023 September-November gradually return within NBR’s target of 5±3 percent “short rains” season. This improvement will also in 2024. be supported by continued growth in global 2 IMF (2020) Request .or Disbursement Under the Rapid Credit Facility. IMF Country Report No. 20/207. Rwanda Economic Update • Edition No. 22 9 Recent Economic Developments The government maintains its commitment to This outlook is subject to substantial downside fiscal consolidation over the medium term. In the risks. While Rwanda has limited direct trade and FY24–FY26 budget framework, the government financial links to the Middle East, the intensification projects spending cuts largely through streamlining of the conflict in the region could lead to further and gradually reducing subsidies particularly disruptions to global trade and economy, thus those related to energy and fuel as well as affecting Rwanda mainly through a reduced of state-owned enterprises by strengthening their global demand of its main export products.. Lower oversight and governance and risk management availability of concessional resources and lower while safeguarding fiscal space for human capital external demand fueled by monetary tightening spending. On the revenue side, the government plans in advanced economies pose further downside to introduce several tax policy measures envisioned risks. The main risk on the domestic front is linked in the Rwanda Medium Term Revenue Strategy to the increasing frequency of weather and climate (MTRS) aiming at improving revenue administration shocks (e.g., drought and floods), which could and cutting tax rates while broadening the tax harm agricultural output and thereby impact base. However, Rwanda’s fiscal consolidation will many farms and households in Rwanda. Decreased be challenged by increased spending related to production could also lead to higher food prices the reconstruction efforts from the April–May 2023 to the detriment of poor households. Investing in flood disaster. Under this baseline, public debt would and operationalizing planned land management peak at 78 percent of GDP in 2024 before gradually interventions would offer meaningful benefits for improving over the medium term. inclusive and climate-resilient growth. 10 Rwanda Economic Update • Edition No. 22 PART TWO MOBILIZING DOMESTIC SAVINGS IN RWANDA Rwanda Economic Update • Edition No. 22 11 Mobilizing domestic savings In Rwanda Rwanda needs to shift its growth strategy from or firms to smooth consumption in the face of government-led to private sector-led, driven by uneven income flows, to accumulate assets for private investment to compensate for limited the future, and to better prepare for emergencies. government spending capacity. Public debt Aggregate investment in an economy—which jumped from 20.4 percent of the national GDP in together with the depreciation determines the 2010 to a peak of 73.6 percent during the pandemic capital stock available for production is driven in 2021, before it marginally retreated to 66.7 percent by the volume of available savings from both in 2022 (World Bank, forthcoming). Meanwhile, national and foreign sources (see Box 2.1). Rwanda’s private investment growth has not kept pace with economy has traditionally relied mostly on foreign public investment. Specifically, private investment savings, including FDI (around 3.5 percent of grew modestly from 12.7 percent of GDP in 2007 to GDP in 2022) and loans from abroad (around 7.3 15.8 percent in 2022. In contrast, public investment percent of GDP in 2022). National savings, which witnessed a more substantial rise, from 5.0 percent include savings from the government (basically of GDP to 13.8 percent during the same period. fiscal balance), households, firms, and the net When compared to regional counterparts in 2022, income of Rwandan citizens from abroad (including Rwanda’s private investment was lower, with Uganda remittances), represented 14.2 percent of GDP in at 16.9 percent and Tanzania at 24.3 percent of their 2022. Remittances contributed about 3.5 percent respective GDPs. Given the backdrop of sluggish of GDP. The main drivers of national savings productivity and limited fiscal resources, Rwanda have been household and remittances. The needs to bolster private investment to adequately accumulation of the fiscal deficit in recent years complement public spending and sustain economic means the government contributed negatively growth (World Bank, forthcoming). to national savings. with the potential to crowd out private sector investments and hamper future Mobilizing savings is fundamental to support growth. This underlines the importance of the investment and growth. Whether they be short-, ongoing fiscal consolidation plan as a key strategy medium-, or long-term, savings enable households to boost future savings in Rwanda. Box 2.1: Saving-investment identity The saving-investment identity states that the savings in an economy can, in turn, be invested, i.e., Investment = Saving which can be further disintegrated (as below) to better understand the relevance of savings, and domestic savings in particular, for an economy: Investment=National Savings+Foreign Savings (incl.FDI and loans from abroad) where National Savings=Domestic Savings+net income from abroad (incl.remittances) and Domestic Savings=Public Savings (T-G)+Household Savings+Business Savings Source: WBG staff elaboration 12 Rwanda Economic Update • Edition No. 22 Mobilizing domestic savings In Rwanda Table 2.1: Components of national savings and iii) policy options to boost domestic savings in 2015- 2020- Rwanda. This section focuses mainly on savings from 2019 2022 households, firms, and remittances.3 Total investments (percent GDP) 23.8 25.2 National savings (percent GDP) 11.5 14.1 2.1. The state of domestic savings Domestic savings 8.2 9.4 mobilization Household savings 8.4 11.8 Government savings -0.2 -2.4 The Government of Rwanda (GoR) has recognized Transfers from abroad 3.3 4.7 the importance of increasing savings to finance Remittances 1.6 2.9 economic growth, yet the enhancement of Foreign savings (percent GDP) 12.3 11.2 savings has been slow. Rwanda aspires to achieve Other inflows from abroad (percent GDP) 9.6 9.0 upper middle-income status by 2035 and high- FDI (percent GDP) 2.7 2.2 income status by 2050, as laid out in its Vision 2050, Source: WBG staff computation based on NISR (GDP numbers), BNR (Balance of with domestic savings and foreign capital key to Payments) and MINECOFIN (Fiscal data) this advancement. Despite these ambitions, the Reliance on foreign financing and aid creates a levels of both domestic and national savings have vulnerability for the economy. In the context of been relatively low since 2010 (Figure 2.1). When depleting generosity of donors, external finance compared to similar countries, Rwanda’s domestic poses a challenge to the sustainability of growth. It savings rate as a portion of its GDP does not stand is therefore an important policy goal for Rwanda to out (Figure 2.2). In seeking economic benchmarks, seek to increase domestic savings (household, firms, Rwanda often compares itself with nations like and government) as part of its objective to move to Singapore and Mauritius. In 2022, Singapore’s gross a middle-income country. This section discusses the domestic savings rate stood at a remarkable 60.1 state of Rwandan saving mobilization focusing on i) percent, significantly higher than Rwanda’s 9.1 the patterns of savings mobilization in Rwanda; ii) percent. Mauritius’s savings rate was 13.8 percent, the assessment of key financial products with the which, while higher than Rwanda’s, highlights the potential to increase national savings, specifically challenges of savings mobilization despite favorable pension, insurance, and long-term savings (Ejo Heza); economic conditions. This contrast suggests that Figure 2.1: Gross domestic savings and gross national savings as percent of GDP (percent) 17.3 16.5 15.3 14.5 14.3 13.4 13.7 12.3 11.8 11.4 11.2 11.1 10.5 8.7 8.7 9.1 9.1 8.6 8.0 7.5 7.9 6.7 7.1 6.5 5.5 5.0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Gross domestic savings (% of GDP) Gross national savings (% of GDP) Source: WBG staff computation based on World Development Indicators Notes: Domestic savings are the part of income that is not spent on current consumption, calculated as GDP minus final consumption expenditure or gross national disposable income minus final consumption expenditure. 3 Public saving and government are discussed in section I while the ongoing CEM discusses extensively measures to fiscal consolidation plan. Rwanda Economic Update • Edition No. 22 13 Mobilizing domestic savings In Rwanda Figure 2.2: Gross domestic savings – Rwanda and peers (percent of GDP) 40 35 30 25 20 15 10 5 0 2015 2018 2022 Ethiopia Ghana India Kenya Mauritius Rwanda South Africa Tanzania Uganda Viet Nam Source: World Bank’s WDIs while Singapore’s achievements could set a high bar has enhanced the mobilization of savings. The for Rwanda’s savings goals, Mauritius’s experience percentage of Rwandans utilizing banks for savings serves as a cautionary tale of the complexities increased from 13 percent in 2016 to 21 percent involved in boosting savings. in 2020, indicating a growing trust and reliance on formal banking services. This trend suggests that To mobilize savings, the populations should leveraging the banking sector could be an effective be financially included, and recent data show strategy for fostering continued economic growth strong progress in this regard. Financial inclusion through savings (FinMark Trusk, 2022). Despite in Rwanda increased to 93 percent in 2020, with these improvements, 29 percent of Rwandans the bonus that access through only informal still depend on informal savings methods, such as mechanisms fell from 21 percent to 16 percent. savings groups, without using any formal savings At the same time, the number of bank accounts products. This demographic represents a potential and mobile money accounts has been increasing opportunity to transition individuals from informal steadily (Figure 2.3). This represents a strong to formal savings mechanisms. Comparatively, in scaffold for driving savings, but also raises questions South Africa, the use of informal savings channels about why savings are not where is should be. increased slightly from 24 percent in 2019 to 26 percent in 2022 (FSCA, 2022). Non-bank financial In recent years, Rwanda has seen significant institutions also play a significant role, with 33 advancements in its banking sector, which percent of Rwandans engaging with formal non- Figure 2.3: Number of bank accounts and active mobile money accounts 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 0 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Bank accounts Active mobile money accounts Source: National Bank of Rwanda 14 Rwanda Economic Update • Edition No. 22 Mobilizing domestic savings In Rwanda bank savings products. This rate surpasses the usage encourage more widespread saving, there must be of banks for savings, highlighting the importance a cultural shift towards saving, potentially through of non-bank entities in the financial ecosystem. increased financial literacy programs and strategic Remarkably, only two percent of Rwandan adults engagement initiatives. In addition, while the now keep all their savings at home, a sharp decline rate of inclusion overall is increasing, the fact that from 10 percent in 2016 (Figure 2.4). In contrast, a the percentage of Rwandans—whether they are significant 47 percent of Tanzanians still prefer to financially included or not—is static at 14 percent save money at home as of 2023 (FSDTanzania, 2023). points to the need to focus specifically on efforts to The consistent rate of overall savings, coupled with build a saving culture that is agnostic of if they have the reduction in exclusively home-based savings, any financial account. suggests that more Rwandans are taking advantage of the various available savings methods. 2.2. Determinants of savings behavior at household level Figure 2.4: Saving behavior in Rwanda (percent, 2016 vs. 2020)6 A study on the determinants of household savings in Rwanda conducted by the Institute of Policy Analysis and Research Rwanda (IPAR) in 2020 21% 33% 29% 2% 14% 2018 combined longitudinal household data and primary interviews to reveal that 41 percent of Rwandan households saved in formal financial institution, while 58 percent contributed to a 2016 13% 36% 27% 10% 14% Tontine—a form of community saving groups. And while more households saved through Tontine, the amounts contributed were lower than those Banked Other formal (non-bank) Informal Save at home Not saving saved in bank accounts. The main reason for saving Source: FinScope 2020. in Rwanda were identified as securing food and other household daily needs (41 percent), paying While the positive developments within Rwanda’s for children’s education (18 percent) and raising financial sector are welcome, industry leaders and capital for their businesses (9 percent). Of those policymakers need to address certain challenges that did not save, 57 percent claimed that poverty, to maximize the country’s savings potential. While mindset, and lack of saving knowledge were the the use of bank accounts for saving has notably main causes. For Rwandans, access and trust were increased from 13 to 21 percent, there has been a the most important criteria when choosing any form slight decrease in the use of non-bank accounts, of saving, as cited by 79 percent of respondents. This from 36 to 33 percent, signaling a need to focus on explains the preference towards Tontines—a saving bolstering this area. Additionally, informal savings mechanism that is easily accessible, built upon trust groups continue to be preferred over banks, mobile among members and conducive to saving mostly in money, and Umurenge SACCOs, indicating a reliance small amounts. on traditional saving methods. The prevalence of financial access through informal channels is also The study also found that households where the on the rise, having increased from 27 to 29 percent. head had less education or was female, or the Concerningly, the proportion of adults not saving at household was rurally located or with agriculture all has remained unchanged at 14 percent between as the main source of livelihood were all less 2016 and 2020. This stagnation suggests that to likely to save in a formal institution. Keeping other factors constant, education stands out as the 4 In constructing this strand, the overlaps in savings product/services usage are removed. most influential factor in the amount deposited in Rwanda Economic Update • Edition No. 22 15 Mobilizing domestic savings In Rwanda an account. Not surprisingly, being in poverty and This section introduces the key financial products not benefiting from social protection programs that have the potential to contribute to an increase significantly reduced the propensity to save in in domestic savings. The financial products selected formal institution. are those that are deemed to have the largest potential for impacting household savings. 2.3. Development of financial system and savings 2.3.1. Pension system Although the financial sector in Rwanda has A good pension system provides elderly expanded significantly and diversified over the assistance and is a source of savings for long- past decade, it remains in its early development term investment (Nyang`oro & Njenga, 2022). stages and is highly constrained by the small Rwanda’s approach to pension systems shows market size that limits economies of scale. It both the challenges of traditional schemes and is bank-centric, concentrated, segmented, with the promise of innovative programs in enhancing limited penetration and declining competitive domestic savings. The Rwanda Social Security forces, and financing a small share of economic Board (RSSB) operates a traditional pension scheme agents. According to the 2021 FSAP, there has that functions as a partially funded pay-as-you- been an increase in the market concentration by go defined benefit system, which is mandatory the largest banks with the share of loans by the for salaried workers and optional for non-salaried three largest banks increasing from 47 percent in workers. However, due to the predominantly December 2015 to 55 percent in September 2020. informal employment sector in Rwanda, less than 10 The share of deposits for the largest three banks percent of the working-age population is covered has also increased, from 49 percent in 2015 to 53 by this mandatory scheme. The scheme faces issues percent in 2020. Similarly, the share of assets by the with coverage, adequacy, sustainability, and equity,6 largest three banks increased from 45 to 48 percent partly because of a uniform contribution rate and over the same period. Most importantly, a well- benefit formula regardless of retirement age, and known indicator measuring the degree of banks’ contribution rates that place a heavier financial market power, the Lerner index, indicates that not burden on future generations. only banks have significant market power, but their pricing power has increased in recent years, from In contrast, the Ejo Heza scheme, a voluntary 30 percent in 2016 to 40 percent in 2019. Banks, defined contribution program established in microfinance institutions (MFIs), and SACCOs rely on June 2017, has shown remarkable progress and short term deposits as their main source of funding. potential for boosting domestic savings. Within A large share of deposits come from a few corporate just four years, Ejo Heza has reached 27 percent of and institutional investor clients, reflecting the low the working-age population (World Bank, 2023), availability of retail deposits.5 MFIs and SACCOs drawing significantly from low-income households have driven gains in financial inclusion, especially in and the informal sector, which comprises 87 percent rural areas, however their role remains limited due of its savers. Additionally, the scheme has made a to fragmentation, governance, funding constraints, notable impact on financial inclusion for women, and lack of digitalization. with 49 percent of its subscribers being female, compared to the 32 percent female participation in the formal RSSB scheme. This success, highlighted by the active contribution of 78 percent of its In 2020, 86 percent of adults reported having savings, but only 21 5 percent had done so in a bank, and another 33 percent had formal Based on World Bank internal analysis of Rwanda’s financial sector 6 savings products from non-banks (FINSCOPE 2020). in 2021. 16 Rwanda Economic Update • Edition No. 22 Mobilizing domestic savings In Rwanda subscribers, positions Ejo Heza as a pivotal model for financed through public resources. This shift, increasing domestic savings and providing a more however, would need to be measured and gradual inclusive pension system in Rwanda (Figure 2.5). so as not to cause fiscal strain. A few countries— including Ghana, Nigeria, and Kenya—have also Figure 2.5: Ejo Heza participation, 2018-2022 introduced micro pension schemes where the 2,500,000 informal sector pensions are on the rise and these 2,000,000 may increase the asset base of the pension industry (Assefuah, Moleko, & Abor, 2022). 1,500,000 1,000,000 With only a modest increase in private pension coverage, the Rwandan government has an 500,000 opportunity to boost pension savings. According 0 to FinScope data, only 13 percent of Rwandans had 2018 2019 2020 2021 As of April 2022 a private pension in 2020, up only two percentage Male active savers Female active savers Total subscribers (dormant + active) points from 2016.7 The government could therefore Source: World Bank (2023). consider the following to boost pension savings: 1) Increase pension participation and coverage The pension systems in sub-Saharan Africa by including the unemployed and those in the (SSA) are characterized by low coverage and informal sector. This could be achieved through participation rates, which therefore fail to a targeted universal pension scheme, expanding guarantee a basic income to the elderly (Nyang`oro Ejo Heza, and greater financial literacy. 2) Bundling & Njenga, 2022). The contributory nature of most pensions with other products such as life insurance private pension schemes is also not favorable due cover, and even matching contributions to foster to high informality, low incomes and high financial greater participation and long-term savings in illiteracy which limit contributions. The pension pension funds. Favorable tax considerations can sector in SSA is generally immature, has low coverage also enhance the growth of contributions and and low contributions. Rwanda, unfortunately, does assets of pension funds.8 3) Leverage innovations not compare favorably to its neighbors on coverage in digital technology to increase pension savings. 4) ratios (Table 2.2). Review regulatory frameworks of the pension sector to open it up to the unserved population. There is Table 2.2: Coverage ratios of pension schemes across selected also a need to streamline management of pensions East African countries and minimize costs of administration, especially for Country Coverage ratio Kenya 20% private pensions. Tanzania 10% 2.3.2. Insurance Uganda 14% Rwanda 10% Insurance can mobilize domestic savings, but its Source: World Bank (2019) uptake remains low. Insurance turns accumulated capital into productive investments and further These challenges in the pension sector in Rwanda enables the mitigation of loss, promotes financial and beyond are coupled with problems of unemployment, large informal sector, and lack of 7 Difference in coverage between Finscope and World Bank data in appropriate vehicles to invest in infrastructure. Figure 11 may be due to differences in methodology but should not be cause for alarm given how minor they are. Due to these conditions, Rwanda should seek to 8 However, any use of tax incentives to boost household savings needs move towards a targeted universal pension system to be assessed against the resulting reduction in public savings to determine whether domestic savings rises or falls. Rwanda Economic Update • Edition No. 22 17 Mobilizing domestic savings In Rwanda stability, and stimulates trade and commerce insurance and household insurance, while the activities that result in economic growth and main decline is in medical insurance. Rwanda also development.9 Health insurance enrollment is falls behind key benchmark countries (notably viewed as an ex-ante measure for individuals to Ghana, Nigeria, and Kenya; Table 2.3) in several key mitigate the effects of future risks.10 It could thus insurance metrics. be argued that households’ participation in health insurance affects their choices of financial services Despite outperforming its African peers in both before and after risks occur. On the one insurance premium contributions, Rwanda’s hand, when members of a household have health insurance industry faces significant challenges insurance, it is likely that their choices of other ex- in enhancing competition and profitability. ante risk management instruments, such as savings Rwanda has higher premiums as a share of GDP and investments, will be influenced to some extent. (1.6 percent) compared to identified African There are two opposing ways in which insurance comparators, but this was still very low compared take-up would impact savings and investments; for to the 6.1 percent global average in 2019. In example, households may decrease them because addition, based on standard insurance sector they perceive a lower need for future medical metrics, Rwanda’s insurance sector requires costs, or increase them because their current out- particular focus to improve the level of competition of-pocket payments on health care are reduced, and profitability of the sector. This is measured via allowing them to increase both other expenditures the HHI which is a commonly accepted measure and savings at the same time.11 While there is no of market concentration and fragmentation. The data at present to determine how the choices of natural level for HHI for the life industry is 2,500 Rwandans are impacted by insurance, knowing that and 1,100 for the non-life industry. HHIs above there is an opportunity to influence that choice to these indicate that the industry is not competitive drive savings is useful at a policy level. and HHIs below this indicate that the industry is competitive and fragmented. Rwanda’s level is 3,624 Insurance uptake in Rwanda is growing, but from for life and over 1,400 for non-life, highlighting how a very low base (Figure 2.6). The main barriers uncompetitive the sector is in the country and how to uptake in Rwanda are affordability and lack poorly it compares to the benchmark countries. of awareness. The main areas of growth are in life Figure 2.6: Insurance uptake % Uptake # policyholders 17% 927,937 507,220 9% 2016 2020 2016 2020 Source: FinScope 2020. 9 World Bank 2006. 10 Jorgensen and Siegel, 2019. 11 Kirdruang & Glewwe, 2018. 18 Rwanda Economic Update • Edition No. 22 Mobilizing domestic savings In Rwanda Table 2.3: Key insurance metrics in select African countries Theme Indicator Ghana Nigeria Kenya Rwanda** Penetration (GWP*** % GDP) 1.14 0.3 2.6 1.6 Size GWP (US$ billion) 0.5 1 2 0.14 Insurer’s asset base (US$ billion) 1 3.2 5.1 0.46 Size of life industry (% of total market premiums) 45 32 40 18* Life N/A 451 N/A 69* Claims ratio (%) Non-life 39 30 63 64* Value Life 1,750 1,173 1,113 3,624* HHI*** 1,410* Non-life 819 464 523 2,037* Life N/A 112 N/A 108* Combined ratio (%) Competition Non-life N/A 125 102 114* Source: (2019). Notes: * Includes only private insurers ** includes both public and private insurers; *** GWP is Gross-written premiums; **** HHI: The Herfindahl-Hirschman Index There are several examples of other countries proposal from one provider is the mandatory displaying policy leadership or flexibility in their coverage for insurance with social protection approach to oversight of the insurance sector features, which although not elaborated upon, which have resulted in the expansion of the typically refers to programs where risks are shared market and greater uptake. In Kenya, for example, and managed by a government entity, similar the Insurance Regulatory Authority is bestowed with to compulsory schemes. In terms of innovative an explicit market development mandate that it has contributions from the insurers themselves, they effectively leveraged to support inclusive insurance identified the development of new products, and broader market development initiatives. Ghana including the digitalization of insurance services, has also been an example of successful coordination and enhancing insurance education and awareness across the industry. Specifically, when the banking as critical factors to increase the uptake of paid regulation did not allow the use of airtime as legal insurance. Finally, on the issue of collaboration tender for payment of insurance premiums in between private and public sector, the responding Ghana, negotiations between the Bank of Ghana providers indicated that partnering on insurance and the National Insurance Commission (insurance awareness and education would be most effective. regulator) were undertaken to permit the payment Providers also noted that working together to of insurance premiums via airtime deductions. enhance capacity, especially to increase the This effort gave rise to the Market Conduct number of insurance specialists (i.e., professional (M-Insurance) Rule of 2017, and with the allowance underwriters, actuaries, data scientists, anti-money of e-signatures and digital insurance providers laundering and combating the financing of terrorism being allowed to operate only with a letter of no (AML/CFT) and fraud examiners, and cyber security objection rather than a full license, there was a specialists, etc.) would have a large and positive significant uptick in the mobile-insurance, which impact on the sector. appealed mostly to the mass market. Rwanda can learn from these examples by having the insurance 2.3.3. Capital markets – retail bonds regulator take a more opportunistic approach to Capital markets are crucial for economic growing the market. development, as they aggregate domestic savings and attract foreign capital for long- Insurance companies in Rwanda have suggested term investments. They channel surplus funds ways to strengthen the sector, emphasizing the or the savings of companies and households into need for innovative government initiatives. A key long term productive use by making long-term Rwanda Economic Update • Edition No. 22 19 Mobilizing domestic savings In Rwanda investments through the issuance and trading of the Philippines, where retail bonds account for 34 long-term securities. Governments also use capital percent of government securities. Rwanda saw a markets to raise funds for various investment consistent increase in the value of its retail bonds projects through the issuance of long-term bonds from 2016 to 2020, but this growth reversed sharply (Njenga, Machagua, & Gachanja, 2022). The result in 2021, a change likely influenced by the COVID-19 is to facilitate capital growth by mobilizing savings pandemic. and converting them into investments, which in Figure 2.7: Retail bonds as a percent of government securities turn stimulates economic growth. 30.0 16% 13.9% 14% Despite the potential, in many emerging markets, 25.0 12.5% 12% capital markets are either underdeveloped or 20.0 Rwf billion 8.9% 10% completely absent. A comprehensive study of 15.0 8% Percent capital markets in sub-Saharan Africa suggests 6.0% 6.0% 6% several interventions that could facilitate the 10.0 4.8% 3.2% 4% mobilization of domestic savings and which 5.0 2% Rwanda could consider. The first such intervention 1.9 5.5 10.0 12.0 27.1 18.8 13.1 0.0 0% is to strictly enforce the enacted laws, regulations, 2016 2017 2018 2019 2020 2021 2022 and rules governing capital markets to enhance Value of retail bonds issued Retail bonds as % of govt securities the stability of the capital markets to increase Source: BNR; World Bank; International Debt Management Symposium (2022). investor confidence. Another recommendation is to incentivize investments by creating a continuous, Recognizing the effectiveness of RTBs in mobilizing stable, and conducive macroeconomic environment, savings, some countries have adopted firm specifically optimizing government debt to revenue strategic approaches to promote them globally, ratio, inflation and public debt dynamics and thus offering valuable lessons for Rwanda. For example, spurring growth of the capital markets. Finally, the central bank of the Philippines, in partnership countries should reflect on and implement prudent with Philippine foreign service posts, periodically and comprehensive policies that support the hosts virtual and regional RTB roadshows to increase development of capital markets (Njenga, Machagua, investment. They have done these virtual roadshows & Gachanja, 2022). in over 50 countries across six continents, including first-time interactions with diasporans in East Africa Recognizing the potential in capital markets, some and South America. This resulted in diasporans in countries are turning to retail government bonds 53 countries investing in the RTB issuance in 2022. as a means to mop up household savings from Brazil too launched a program in which very small both local citizens and the diaspora. This is a good ticket RTBs could be purchased (about US$6.00 option provided that the savings mobilized are not minimum) with low and competitive fees, high being used to finance government deficits but rather flexibility (daily liquidity), and it included tools to represent the opportunity for savers to expand their compare with other assets. The product was wholly savings portfolio, and with relatively risk-free assets. digital with imbedded chatbots/WhatsApp for user These bonds are government investments that engagement, and later included an updated instant offer variable, fixed, or inflation-linked returns. In payment system. Number of investors rose from Rwanda, the proportion of retail government bonds ~200,000 in 2014 to over 2 million in 2022 with a (RTBs) within total government securities has been value US$19 billion equivalent, or 1 percent of GDP. at its lowest since 2016 (Figure 2.7). While Rwanda’s Implementing a similar initiative in Rwanda, with rate stands at 3.2 percent, higher than South Africa’s care to absorb lessons from countries that have had one percent, it falls significantly behind others like success, would be a worthwhile endeavor. 20 Rwanda Economic Update • Edition No. 22 Mobilizing domestic savings In Rwanda Figure 2.8: Remittance inflows and FDI, 2010-2028 (US$ million projections after 2022) 600 800 700 400 600 500 200 400 300 0 200 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2021 2022 2023e 2024p 2025p 2026p 2027p 2028p Migrant remittance in ows Foreign direct investment Remittances in ows Foreign direct investment Sources: World Bank (2010-2022 data) and IMF (2021-2028). The World Bank data are the most recent estimates from KNOMAD, June 2023. The IMF data are from the June 2023 staff report. Rwanda’s Capital Market Authority (CMA) and in 2020, and then growing very rapidly thereafter, the Rwanda Stock Exchange (RSE) can play a exceeding FDI flows (Figure 2.8).13 In 2022, these significant role in mobilizing savings. For small inflows amounted to about US$474 million,14 business investment companies (SBICs), Rwanda equivalent to 3.5 percent of GDP, helping improve needs to develop the legislative and institutional the current account balance. The IMF projects framework for SBICs that can utilize debenture remittances to increase further over the next few financing to provide both equity and loan financing years, reaching 582 million dollars by 2028. to small businesses (Sérieux, 2019). An option could be to create a government-owned company as a It is not clear what has driven the rapid growth of demonstration of the viability of the model, and remittances in recent years. The rates of growth as a path to financing strategically important small in 2021 and 2022—nearly 40 percent and over 21 firm start-ups. Furthermore, CMA and RSE need to percent, respectively—far exceed the global average generate a more active commercial paper market of 10 and 8 percent, respectively. They have also been to meezhort-term bank credit. Last but not least, among the highest in the region, though Tanzania CMA and RSE should continue to provide support, and Uganda also experienced double-digit growth education, and encouragement to investment rates in 2022 (25 and 17 percent, respectively). As clubs, as they could be the substantial contributors described in the most recent Country Economic to driving the awareness and demand necessary to Memorandum (World Bank, forthcoming), part of increase savings. the increase in remittances might have been driven by the post-pandemic economic recovery and partly 2.4 Remittances: an increasing source of by the growing formalization of remittances and national saving in Rwanda increased use of digital transfers.15 Like FDI, remittances can play critical role closing saving gaps in Rwanda.12 Remittance inflows to 13 Globally, FDI flows tend to be volatile while remittances are more Rwanda have risen sharply since 2020. Between stable and rising steadily over time (Ratha, 2011). 14 The World Bank estimate differs slightly from that of the IMF. The IMF’s 2011 and 2016, remittances were steady at around June 2023 staff report indicates that remittances inflows in 2022 were 170-180 million dollars, increasing to 280 million about 461 million dollars. 15 An interview with the country manager of WorldRemit suggests that the surge in electronic payments–as much as 400 percent in 2021, according to the article–was made necessary by the lockdown during the pandemic. See: https://www.africa-press.net/rwanda/all-news/ 12 This section does not discuss FDI. The previous edition of the REU electronic-payments-in-rwanda-increased-by-400 The 2020 FinScope published in July 2023 focused on policy options to increase FDI and also reports that the use of digital payments grew from around 18 improve its inclusiveness in Rwanda (see World Bank (forthcoming). percent of adults in 2016 to 30 percent in 2019. Rwanda Economic Update • Edition No. 22 21 Mobilizing domestic savings In Rwanda Nonetheless, there are indications that the surge especially true given that migration and remittance in remittance inflows will likely be sustained in benefits are more accessible to wealthier, more the near term, as several fintech companies that educated, and skilled households.16 facilitate international money transfers have recently launched operations in Rwanda. These Remittance recipients in Rwanda demonstrate a include Chipper Cash, a U.S. fintech company; greater focus on human capital investment and Flutterwave, a Nigerian fintech company; and NALA more pronounced entrepreneurship behavior Money, a Tanzanian fintech company (Kagire, 2023; than the general population. They allocate more Taarifa, 2023; Sabiiti, 2023). MTN South Africa is to education and health, indicating an emphasis on also expanding its operations in the region to offer long-term human capital investment. Their financial remittance transfer services in several countries, inclusion and literacy are evident in their being including Rwanda. more likely to own a bank account, spend carefully, pay their bills on time, and closely monitor their In stark contrast to the general Rwandan finances—which suggests remittances are likely population, the profile of remittance recipients expanding the financial resources for development. is urban, well-educated, and relatively affluent. Additionally, recipients show a stronger inclination Figure 2.9 and Annex Table 1 highlight these towards entrepreneurship (Figure 2.9), which differences. The majority (70 percent) of remittance means they also contribute to job creation and help recipients live in urban areas, mostly in Kigali. They stimulate local economies. also exhibit higher educational attainment than the general population, with over 20 percent holding Rwanda has taken important steps towards university degrees. Remittance recipients also often enhancing competitive dynamics and lowering belong to higher income brackets, with nearly the costs of remittances. This includes a unified one-third earning over Rwf 300,000, indicating a licensing framework for digital remittance service concentration of remittances in wealthier groups. providers (RSPs) and mobile money operators. This The trend aligns with global observations where framework, by allowing for both inward and outward remittances primarily enhance the welfare of international remittance services, has boosted recipients and lift them out of poverty, while competition and reduced costs. Additionally, inadvertently widening the income gap. This is Rwanda’s risk-based regulatory approach permits Figure 2.9: Remittance recipients vs. general population: select characteristics compared Remittance recipients are almost four times more likely to have attained university education and are over twice more likely to start their own business. Educational attainment Entrepreneurship: Entrepreneurship: General population Remittance recipients University or higher 22.4% 6.1% 36.6% 18.7% Secondary 21.8% 39.1% Primary or less 40.5% 70.8% 0 10 20 30 40 50 60 70 80 Percent Remittance recipients General population Tried to start a business Did not try to start a business Source: WB staff calculations based on FinScope 2020 data. 16 Migration often incurs high costs, which may exclude the poorest households, potentially intensifying inequality until broader access to migration balances the scale. This trend is noted by Adams (2011) and Andresson and Siegel (2020). 22 Rwanda Economic Update • Edition No. 22 Mobilizing domestic savings In Rwanda Electronic Money Issuers (EMIs) to set transaction As such, remittance costs remain high. Lowering limits, improving security and flexibility while fees to the world average (6.2 percent) or to the SDG adhering to AML/CFT standards (National Bank of target (3.0 percent) would mean freeing up millions Rwanda, 2022). Furthermore, the National Payment of dollars of additional resources for development. System Strategy (NPSS) in Rwanda encourages collaborations across the financial sector, including Already, the entry of more digital money transfer banks, MFIs, and mobile operators, fostering operators into the Rwandan market marks a innovation and expanding service reach. The Bank positive step. These channels are substantially of Rwanda’s regulatory sandbox and the Ministry cheaper than traditional money transfer operators of ICT and Innovation’s fintech strategy (2022- (MTOs), and, crucially, reduce the costs for other 2027) further support this ecosystem, enhancing remittance service providers (RSPs). In addition, financial service quality, accessibility, and stability the UNCDF, under the leadership of Economic (MINICT, 2022).17 Commission of Central African States (ECCAS) and National Bank of Rwanda, is developing a roadmap Despite important progress, the cost of for reforms to Rwanda’s legal, regulatory and policy remittances to Rwanda remains high. Remittance environments and to the financial and payment fees in Rwanda are among the highest in the world, system to help promote the inflow of regulated over 20 percent in some corridors (Figure 2.10) remittances through affordable and accessible (World Bank, 2023).18 This need not be the case channels. in East Africa—the East Africa Payment System (EAPS), for example, enables cross-border fund 2.5. Policy levers to increase savings transfers within East Africa. Tanzania caps EAPS This section provides an overview of the various charges at approximately US$ 4—much lower than levers available to national authorities as they the minimum US$ 40 fee for Swift transactions. Yet work to stimulate domestic savings. Seven despite its cost-effectiveness, EAPS has low usage, areas of interventions are explored: i) subsidies potentially due to limited awareness and banks’ and incentives; ii) digital financial literacy; iii) the preference for more profitable Swift transactions.19 enabling environment for digital financial services; Figure 2.10: Cost of sending remittances to African countries (Cost of sending $200 or equivalent) a. Five least expensive corridors a. Five most expensive corridors 35 30 2021Q4 2022Q4 25 20 15 10 5 0 Senegal Cote Saudi United France South South Tanzania Tanzania Tanzania to Mali d’Ivoire Arabia to States to to Senegal Africa to Africa to to Rwanda to Kenya to Uganda to Mali Sudan South Botswana Angola Sudan Source: Reproduced from World Bank (2023a). 17 Our team extends its gratitude to the UNCDF for their expert advice and guidance on this issue. 18 The weighted average costs could be cheaper, considering that digital channels and money transfer operators (MTOs) are significantly less expensive than banks (World Bank, 2023 Q1). 19 We are grateful to the UNCDF’s Migration and Remittances team for sharing their time and insightful contributions. Rwanda Economic Update • Edition No. 22 23 Mobilizing domestic savings In Rwanda iv) gender-focused savings products; v) promoting 57 percent of households reported they were able customer centricity; vi) enabling innovation; vii) to save regularly and 53 percent increased their ramping up Ejo Heza; and viii) fostering remittances contributions to the savings group. These results are and diaspora engagement. noteworthy but also highlighted the need for further studies with modifications in the methodology and 2.5.1. Subsidies and incentives target groups to confirm the validity of incentives Countries worldwide have experimented with under broader conditions. subsidies and incentives to boost domestic savings rates, but the outcomes of these measures Rwanda is advancing its savings mobilization are mixed. These outcomes often come with efforts with initiatives by the central bank; it should substantial costs and risks, including moral hazard also look to adopt proven strategies from global and sustainability concerns. A review of 12 studies markets to bolster its financial sector. The National on health insurance interventions in low and middle- Bank of Rwanda (NBR) has implemented incentives income countries (LMICs) evaluated the effectiveness for savings mobilization, including a tax incentive of such subsidies in increasing insurance enrollment for investments in treasury bonds and bills, reducing (Nigel & Yubraj, 2022). Granted that health insurance withholding tax from 15 to 5 percent. Additionally, is only one type of insurance, and insurance itself there’s no tax on bank savings, education insurance is only one product that can impact savings, this savings, RSSB-Employees Retirement savings, Ejo study still had value given its analysis of incentives Heza, Rwanda National Investment Trust (RNIT) across several different studies. The review found Fund, and other savings funds. Other potential that subsidies were the second most common incentives that have shown promise in different intervention to increase insurance enrollment. The markets could be considered by Rwanda. These subsidies varied in amount, frequency, and timing, include discouraging investments in real estate with a 50 percent subsidy being typical. Generally, while encouraging investment in real assets such subsidies positively affected enrollment; for instance, as infrastructure, factories, machinery, etc. to boost a 50-percent subsidy in rural Burkina Faso raised economic growth. Encouraging banks to market insurance uptake by about 30 percentage points. long-term time deposits more aggressively could Indonesia’s time-limited enrollment subsidies be achieved by offering them distinct lending demonstrated how full and partial subsidies could options for such deposits. Incentivizing large firms enhance enrollment while attracting lower-cost to provide trade/supplier credit to client firms by individuals, thereby reducing adverse selection. allowing them to include the implicit cost of this credit in their operating expenses can make it Rwandans continue to rely heavily on savings more affordable. Finally, policies that encourage groups to save. While efforts are underway to both savings over consuming high-end luxury goods formalize these and to encourage savers to use (whether imported or not), similar to strategies banks and non-bank formal institutions, research used in Mauritius and South Korea, can be effective. in Rwanda has shown success in incentivizing These policies not only make financial saving greater savings for members of these groups more attractive but also make non-productive (Global Communities – Partners for Good, 2020). alternatives like land (outside of agriculture, Specifically, a study on how to catalyze household for example), buildings, and luxury goods less savings through incentives was conducted in 2017 appealing (Sérieux, 2019). and found that, with the introduction of incentives, 24 Rwanda Economic Update • Edition No. 22 Mobilizing domestic savings In Rwanda For Rwanda, it will be crucial to consider how was higher (World Bank, 2023). Additionally, beyond incentives and subsidies, while effective, must be this threshold, a more substantial government balanced with the resource demands and potential match could be the catalyst for larger contributions. for legislative challenges they bring. Though Lastly, expanding coverage through mandatory incentives and subsidies have been proven to yield contributions and using tax collection mechanisms results, they are resource intensive (both in terms could significantly boost participation in the scheme. of administration and funding) and sometimes For instance, redirecting a portion of VAT collections require legislative action or political wrangling. As into Ejo Heza accounts could motivate savings, as such, this avenue for domestic savings mobilization indicated by 60 percent of survey respondents. must be considered against a number of factors to Mandating contributions for higher-income earners determine the feasibility, timeframe, and priority. A in specific tax brackets could also be effective, with good first place to start when considering whether 68 percent of survey participants supporting such a to introduce incentives and subsidies—as well as mandate. These strategic moves could substantially how to sequence the same—would be to undertake increase the impact and effectiveness of Ejo Heza in a detailed study of the return on investment in terms cultivating a robust savings culture in Rwanda. of savings potential realized. The authorities may also consider additional 2.5.2. Ramping up Ejo Heza recommendations aimed at improving the Ejo Heza, recognized as a successful long-term design and functioning of the scheme. They savings model in Africa, has room for growth and include fixing the rate of return on contributions; optimization. Enhancing its reach and subscriber indexing contributions to inflation but not more; contributions could further embed a culture of implementing a single fund management approach savings in Rwanda. The Rwanda Social Security to avoid incentive incompatibility; and introducing Board (RSSB) might consider several adjustments to mandates for a minimum level of financing of Ejo Heza to achieve this. Firstly, allowing subscribers domestic capital formation from fund resources. See to access a portion of their funds in the short Table 2.4 for more. term—between 30 to 40 percent—while locking the remainder until the account reaches RF4m or Ejo Heza holds the promise for mobilizing savings the individual turns 55 could appeal to a broader on a grand and national scale. However, it requires demographic of savers. While borrowing against a rigorous approach to examining the impact and one’s retirement funds reduces wealth accumulation cost of various recommendations. Indeed, the in the long term, any reduction must be weighed number of recommended actions to be taken against the increase in savers and savings resulting are quite numerous, and as such it will likely take from the introduction of this flexibility. Secondly, some time and resources to see the desired impact there’s potential to incentivize increased savings in savings persistency and coverage growth. by raising the minimum threshold required for Notwithstanding this, the return on investment for government matching. A World Bank survey implementing these measures makes Ejo Heza the suggested that 70 percent of respondents would core priority for action. save more if the threshold for government matching Rwanda Economic Update • Edition No. 22 25 Mobilizing domestic savings In Rwanda Table 2.4: Operational recommendations to further catalyze Ejo Heza PS = Impact on Persistency in Saving, which is how long someone contributes CG = Impact on Coverage Growth, which is the increase in members More broadly and consistently communicate the value of Ejo Heza: PS CG Reshape the narrative on why people should save in Ejo Heza—steering away from incentives to X 1 highlighting prospects of a pension, and competitive and safe returns as in the formal sector Recognize and develop different targeting and communication strategies for urban/rural; USSD/ X 2 smartphone users; women/men, individuals with/without phones Create mini ‘how to’ videos that can be shared on WhatsApp/YouTube on how to register, contribute, X 3 check balance, and get enrollment information Engage with other aggregators who might have an ‘observe and auto-deduct’ capability especially in X 4 X urban areas Adopt a ‘Tech with touch’ motto to avoid excluding those with limited digital access (women, children, 5 X low-income members) and in vulnerable situations (after death or disability of a member). Create ‘digital contracts’ using information at registration stage that can be accessed by members with a 6 X X text and can serve as proof of membership Experiment with new business models and customer acquisition approaches: PS CG 1 Organize study tours with countries that have relevant experience to share X 2 Adapt systems and build capacity to allow ‘intermediary logins’ to be generated at the district level X Hire a PR firm to work with the communications team to craft tailored and creative messages targeting 3 X X children, urban workers, women, and youth (age 16-30) 4 Building a ‘richer data set’ by pulling variables from other government databases as relevant X 5 Adding a question at time of registration such as ‘Who helped you register’? Ensure that the drop down under ‘Occupation’ at the time of registration includes the same categories as 6 X Rwanda’s household survey data to allow for easier mapping 7 Analyze panel data of participants with policy relevant questions in mind X Bolster interoperability with other government systems and integration with private sector: PS CG Integrate Ejo Heza platform with banks, SACCOs, mobile money operators so that they can be 1 X intermediaries (similar to cooperatives) who register and collect contributions Integrate the Ejo Heza system with the Rwanda Cooperative Agency to allow for sharing of ‘real time’ 2 X information on cooperatives Source: World Bank (2023). “The Promise of Ejo Heza: A Brighter Future for All Rwandans.” 2.5.3. Digital Financial Literacy (DFS) citizens with the knowledge, skills, and confidence The evolution of DFS provides substantial to make informed, relevant, and timely financial opportunities to deepen financial inclusion and decisions. A 2020 study in Rwanda showed a highly encourage certain desired outcomes, such as significant positive relationship between the literacy greater savings mobilization. This fast-paced of a household head and their likelihood of having growth does, however, come with mounting a savings account. Rwanda has several government- consumer risks, exacerbated by demand-side driven initiatives on financial literacy such as Access challenges such as low awareness, low trust in DFS, to Finance Forums; programs for empowering and limited digital and financial literacy (AFI, 2021). Rwandan youth with financial skills (School quiz challenges for secondary schools and Zala smart Rwanda’s commitment to financial literacy financial literacy programs for teenagers); and credit empowers citizens to make sound financial information system and micro insurance awareness decisions, yet there remains a gap in digital campaigns. These are all valuable, but what is lacking financial literacy amid the rise of fintech risks. is targeted education to improve digital financial BNR has developed a National Financial Education literacy, particularly in midst of evolving consumer Strategy with the primary objective of equipping risks from fintech. 26 Rwanda Economic Update • Edition No. 22 Mobilizing domestic savings In Rwanda Building financial capability has wide-ranging institutions, the majority felt self-assured in 2020, consumer protection benefits across financial with over 90 percent understanding the terms and products. Despite this, a robust body of evidence conditions of their financial agreements. However, reveals that, on average, conventional approaches there are still significant gaps in financial literacy, to financial education—that is, financial-literacy especially in mathematical skills, understanding of events, training sessions, seminars, workshops, and financial concepts like inflation and interest rates, classroom-based lectures—are mostly unsuccessful and calculations. Addressing these gaps should be in sustaining behavioral change (World Bank, a key focus in marketing DFS and developing digital 2021). Emerging evidence suggests that key financial literacy programs. behavioral tools and practices, such as simplifying financial education into concrete, actionable steps, Digital financial services offer a means to reduce personalizing education, providing short, timely costs and improve the efficiency, security, and messages, and making education convenient and transparency of financial transactions, enabling easy to access have improved consumer knowledge, the delivery of customized products to the decision-making, and financial behaviors. underserved poor. To effectively break down Considerations should be placed on implementing barriers to saving product adoption from both the required financial capability programs that will supply and demand perspectives, countries have improve savings behavior but doing so with a view started to lay the groundwork for DFS. However, towards the most effective methods (both in terms achieving sustainable growth and maintaining of outcome and cost). This should be a high priority, financial integrity and competitive markets undertaken in the short term, and should have a necessitate a more comprehensive array of enabling high level of feasibility, especially if coordinated with conditions, divided into three main categories: other financial inclusion and stability initiatives. a conducive legal and regulatory framework, supportive financial and digital infrastructure, and 2.5.4. Enabling environment for digital supplementary government support systems. financial services Rwanda’s high mobile penetration rate (86 Policy makers must tackle essential challenges to percent), coupled with a young demographic (60 foster a DFS-friendly environment, which includes percent are below 31 years), positions the country ensuring widespread digital connectivity and advantageously for both advancing and benefiting mobile access. This involves considering whether from digital financial services. However, challenges to allow non-banking entities to use national persist, such as limited access to computers and the payment systems and issue electronic money and internet, with only 18 percent of Rwandans having determining the regulatory framework for extensive such access in 2020. Obstacles hindering DFS ‘agent networks’ to facilitate digital cash transactions. adoption include a lack of awareness, unreliable Additionally, the implementation of digital and service networks, unclear transaction costs, biometric identification systems is crucial. Enabling insufficient agent float, and agent unavailability. access to government data platforms is necessary Notably, 28 percent of non-mobile money users cited for integrating various services and ensuring a the absence of transaction needs as their reason competitive DFS landscape. It is also essential to for not using these services. Furthermore, with 74 establish regulations for non-traditional financial percent of the population residing in rural areas, the service providers to maintain a level playing field sparse distribution of access points restricts many and protect consumers while fostering innovation Rwandans from utilizing DFS. In terms of financial in the sector. literacy and confidence in engaging with financial Rwanda Economic Update • Edition No. 22 27 Mobilizing domestic savings In Rwanda Box 2.2: Digital savings groups In Rwanda, Tontines or community savings groups are widespread but face challenges in meeting members’ demands for transparency and diverse financial services. Digital savings groups (DSGs) offer solutions by enhancing user experience and providing better transparency and efficiency. 1. Benefits of DSGs DSGs grant users better credit access and simplify profit calculations, encouraging more savings. Real-time visibility of profits increases understanding and motivation for saving. Automation reduces errors and saves time, building trust. Digital recordkeeping and cashless operations improve fund security and can empower less dominant group members, although poor design can exacerbate digital divides. 2. User Experience Traditional savings groups involve time-consuming cash handling and record-keeping, prone to errors. Digital solutions streamline these processes, saving time and reducing mistakes, but may introduce fees. Despite this, digital solutions can offer time savings and reduce theft risk. However, the adoption of digital methods may be slow due to costs and barriers like device ownership and digital literacy. 3. Consumer Protection DSGs present scalable opportunities but also pose consumer protection challenges. Proper data privacy and security practices are crucial, with funds remaining under group control and solution providers ensuring robust security measures against data breaches. Strong encryption and adherence to data privacy standards are necessary to protect member data. Source: SEEP Network, 2020. To increase financial access and savings for themselves. This retained portion is often used mobilization, the government should consider for customer acquisition, as encouraged by the taking a holistic and firm approach to supporting central bank. This approach has proven successful: its growth. Using the framework of the G20 High- from 2016 to 2022, MTN Ghana alone paid out Level Principles (HLPs) for Digital Financial Inclusion, approximately US$65 million in interest to over 15.7 the table below includes policy recommendations million customers. In 2022, across all providers in that can stimulate digital savings to increase Ghana, US$25 million was distributed as interest.20 domestic savings, particularly from the segments In Tanzania, the central bank mandated that the of the population that have tended towards lower interest must benefit customers but it remained savings rates (Table 2.5). flexible on how. As a result, both Airtel Money and Vodacom M-Pesa share interest income on trust In Rwanda, current regulations prohibit non-bank accounts in a similar way, although the amounts e-money issuers from paying interest or sharing are calculated differently. 21 Finally, in Kenya profits on e-money accounts, disincentivizing the interest earned by EMIs is applied at their mobile savings. This practice differs from policies discretion. The outcome of this is that in each in several other countries where interest payments market interest is being calculated according to encourage mobile savings. For example, in Ghana, what works best for the market participants but is e-money issuers (EMIs) and banks have agreed on ultimately being used in furtherance of the uptake an interest rate for the float, which is comparable of digital savings accounts. to that paid on checking accounts (around 1.5 percent). EMIs pass on a minimum of 80 percent of 20 CGAP, 2016. this interest to their customers, retaining 20 percent 21 All Africa (2015). ‘Tanzania: Vodacom to Dish Out Bonus to M-Pesa Clients’. See: https://allafrica.com/stories/201507271613.html 28 Rwanda Economic Update • Edition No. 22 Mobilizing domestic savings In Rwanda Table 2.5: High Level Principles (HLPs) to promote digital savings Incorporate saving elements in national financial inclusion strategies. Highlight the importance HLP 1: Promote a digital of affordability, flexibility, accessibility, and customization in digital savings account offerings. approach to financial Facilitate the integration of digital savings account options with government-to-person inclusion payments and encourage providers to offer options for earmarking portions of salaries for digital savings accounts. Establish policy practices for enabling digital savings competition while facilitating cooperation HLP 2: Balance innovation and effective partnerships. Support a “multispeed” approach to digital savings inclusion, as and risk to achieve digital some consumers may be ready to move beyond digital savings accounts to digitally enabled, financial inclusion market-based wealth-building products. Develop a legal and regulatory framework allowing banking institutions to pursue digital HLP 3: Provide an enabling savings partnerships with nonbank entities and conduct limited purpose banking services and proportionate legal and through retail agent networks. Where appropriate, consider regulatory sandboxes for limited regulatory framework for purpose, technology-driven digital savings account deployments. Harmonize, where prudent, digital financial inclusion the application of a risk-based approach to customer due diligence for e-money wallets and bank deposits, as imbalances can hinder the acquisition of digital savings customers. HLP 4: Expand the DFS Support the development of nonbank e-money issuer-to-bank interoperability, which serves as infrastructure ecosystem the technological backbone for digital savings partnerships and distribution strategies. Ensure customer funds protection standards are robust for bank deposits and e-money HLP 5: Establish responsible accounts. Ensure customers are afforded critical information about digital savings accounts at digital financial practices to point of opening, noting that information sharing may occur unconventionally, such as directly protect consumers on a mobile phone or through an agent-facilitated document collection process. HLP 6: Strengthen digital and Incorporate saving elements in financial education strategies. financial literacy HLP 7: Facilitate customer Continue to implement, refine, and expand national identification systems, and align know- identification for DFS your-customer requirements for basic transaction accounts and savings accounts. In cooperation with digital savings providers, gather and publish data on deposits facilitated HLP 8: Track digital financial through digital channels, as such information is critical for understanding digital savings inclusion progress opportunities and risks. The shift towards fostering a digital-first approach excluded from formal financial services. Semi- to the financial sector requires a whole-of-sector formal savings are common in Sub-Saharan reorientation which can begin immediately but Africa with approximately 50 million unbanked may take time to crystalize. Given the increasing adults saving semi-formally. Of this, 35 million are digitalization of financial services, this reorientation women.22 Some behavioral factors prevent women is a high priority and should have high feasibility from saving formally. First, low-income women given its minimal cost. This effort will, however, generally do not consider banks and most other require significant coordination across public and formal financial institutions as the best place to private sector. save what they consider to be small amounts. More importantly, formal savings accounts often are less 2.5.5. Gender-focused savings products inviting to women by design. For example, women Women play an important role in managing more likely lack formal identification or do not household finances, from handling day-to-day own a mobile phone, tend to live far from a bank financial needs to planning for both the future and branch, and would need support for onboarding emergencies. Women are more often better savers and to effectively use savings products. They, as than men, making them key drivers of savings in a consequence, cannot leverage the benefits of any economy. This potential is often not realized, formal savings, either with financial institutions or however, by women living in low- and middle-income via digital channels. countries where they remain disproportionately Women’s World Banking, 2023. 22 Rwanda Economic Update • Edition No. 22 29 Mobilizing domestic savings In Rwanda In Rwanda, prevailing social norms shape the To capture this customer segment, savings financial experiences of women entrepreneurs, products must be designed in a way that can tackle affecting their access to, use of, and gains from both the behavioral barriers and operational financial services. These norms dictate that women challenges as faced by low-income women. The should put family before their business ventures, first and possibly most important step is to develop lack financial privacy from their husbands, and defer a savings culture among women while ensuring that to men for financial management.23 Such norms are their small deposits are welcomed by formal FSPs. not unique to Rwanda but are common throughout To provide continuing incentives to save, FSPs could Sub-Saharan Africa. The expectation for women to consider a reward system may be used to encourage prioritize family is deeply entrenched and varies them to actively save, while slowly building the by age, marital status, and location. For example, sense of discipline and competition. The rewards younger married women in rural areas often face can incremental interest rates based on the size/ more societal pressure to meet family needs than tenure of deposits or be extended only to active to invest in saving or expanding their businesses. savers. While the development, marketing and Although it is socially acceptable for women servicing of financial products is outside the direct entrepreneurs to seek loans from Financial Service sphere of influence of national authorities, requiring Providers (FSPs) for business growth, this acceptance that providers submit sex-disaggregated data to the does not typically extend to starting new ventures. central bank and then conducting regular analysis Additionally, there is an expectation for women to would be a good first step to surfacing gaps that can be financially transparent and to share property and be addressed by FSPs. income rights with their spouses. Despite a growing acceptance of shared financial decision-making, 2.5.6. Promoting customer centricity the prevailing belief in Rwanda is that men should While the authorities have limited influence on control family finances. savings products, there is still room for moral suasion and using the licensing process to drive Despite these challenges, women should still be products that encourage more savings. This is encouraged to adopt formal savings products. particularly relevant given that some Rwandan These allow them to gain an entry point to the financial service providers that responded to a formal financial sector, provides safe, secure, and survey for this report expressed that there is a trustworthy places for them to save, and empowers general lack of capacity in providers when it comes them to better manage their financial lives and to developing mass market financial products and mitigate risks. By designing savings products that services. They recommended that the government respond to the needs of low-income women, FSPs support industry through capacity building. On would make significant business gains—for example, way this could be done is by creating customer they can acquire a new and relatively large customer centricity programs such as the CGAP24 Customer- base that is currently excluded, while tapping into Centric Guide, which is a collection of hands-on inexpensive local currency funds which not only toolkits and experiments that helps providers help to meet their liquidity needs but also to finance design and deliver effective financial services for their on-lending activities. Once customers become low-income customers. Customer centricity means acquainted with the basic products, FSPs can extend putting the customer at the forefront of every their offering to include more beneficial products for decision while developing a product. It means low-income women such as microloans, payments, understanding customers’ situations, perceptions, and micro-insurance. and expectations and delivering products, services Access to Finance Rwanda, 2022. 23 Consultative Group to Assist the Poorest. 24 30 Rwanda Economic Update • Edition No. 22 Mobilizing domestic savings In Rwanda and experiences that create customer satisfaction, and in-demand savings products; and at most, use loyalty and advocacy. This approach should have strong moral suasion and their licensing mandate the outcome of increasing uptake and engagement to influence the type and appropriateness of with a given financial product. The importance of savings products in the market. These types of customer centricity in financial service product customer-centricity focused initiatives may take development is already recognized in Rwanda in the time to yield results, and even then, may depend draft Rwanda Fintech Policy (2022–2027) wherein on the extent to which financial service providers ‘promoting customer-centric financial inclusion absorb the guidance. In addition, they may require to drive economic and social transformation’ is a some regulatory reform, soft power, and generally national goal (MINICT, 2022). bringing about a change in industry overall. While the results may be fruitful in the future, they would As part of the product licensing process, Rwandan certainly be difficult to assess in the short term. authorities may consider requiring providers to prove that their savings, pension, and insurance 2.5.7. Enabling innovation products have been developed using a customer Regulators worldwide face the challenge of centric approach. In addition, they should also fostering financial innovation while ensuring respond to the needs of lower income and system stability—a balance vital for safe and marginalized segments. Indeed, with the advent sustained growth.25 To achieve this, policymakers of digital banking, some central banks have might adopt several strategies. Firstly, reducing or mandated that providers seeking those licenses eliminating regulatory barriers can aid innovation. must prove that will further inclusion. For example, This includes creating a flexible regulatory the Monetary Authority of Singapore (MAS) requires framework that allows discretion in encouraging that digital banks “provide clear value proposition, innovation, streamlining the product approval incorporating the innovative use of technology process, and providing regulatory certainty, such to serve customer needs and reach under-served as clarifying the legal status of digital signatures segments of the Singapore market.” Similarly, in and sales, as experienced in Ghana and Kenya. Malaysia, licensing requires that ‘under Schedule 5 Secondly, enabling infrastructure is crucial. of the Financial Services Act or the Islamic Financial Developing national databases can provide a Services Act, an applicant is required to demonstrate resource for providers to innovate effectively. In to the [central] Bank’s satisfaction a commitment addition, regulators should proactively facilitate in driving financial inclusion, including ensuring new business models through a ‘test and learn’ quality access and responsible usage of financial approach, utilizing regulatory sandboxes or waivers, services, particularly to underserved and hard- and encouraging innovation by training, signaling, to reach segments that may be unserved.’ While and communication with market players. Holding it may be difficult to influence providers that are innovation contests and showcasing successful already operational, central banks do still have some examples from other markets can also stimulate leverage over new providers or products to ensure creativity. Lastly, addressing market structure that these contribute optimally to the conditions for constraints is important. Regulations should be domestic savings mobilization. designed to incentivize innovation and discourage market fragmentation and unfair competition. Rwandese regulators are positioned to catalyze This might involve risk-based supervision and innovation in the savings sector while leveraging reevaluating the structure of insurance providers their authority to shape the market. At the very to prevent conflicts between life and non-life least, they may offer guidance to financial service providers on introducing more varied, innovative, World Bank, 2020. 25 Rwanda Economic Update • Edition No. 22 31 Mobilizing domestic savings In Rwanda insurance services. Such comprehensive regulatory countries, India and Israel, have had multiple reforms and proactive measures can pave the way for successful rounds. There are several reasons, a more innovative and resilient financial landscape. including uncertainty about the country’s ability to repay and doubts about the viability of the projects Based on feedback received from a sample of the funds are to be used for. As such, Rwanda may FSPs in Rwanda that responded to a survey for have to tread carefully if they chose to go down this paper, it is evident that there is need for this path. Engagement with the diaspora to a more enabling environment for innovation. support financial sector may not require too much While innovation and product development are the additional effort since the diaspora engagement responsibility of providers, authorities can play a is already part of Rwanda’s other development role through regulation and supervision that enable objectives. Rwanda may start off with some a conducive environment for such innovation. One initiatives that are low-hanging fruit such as action already taken by government has been the allowing Rwandans without bank accounts to take introduction of regulation no 41/2022 of 13/04/2022 advantage of domestic capital markets. governing sandboxes for digital innovations or Figure 2.11: Value of inbound remittances FinTech. As per the BNR website, eight different (US$ million) firms are participating in the sandbox as part of the 500 first four cohorts. Other cohorts, some which are general, and others focused on insurance products, 400 have application periods throughout 2024.26 300 Across product classes, the financial sector in 200 Rwanda is characterized by a lack of innovation. Aiming to address this, the BNR has introduced 100 sandboxes to stimulate product development. The participants in the sandbox have products related 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 to payments, crowdfunding, lending, remittances, Source: Brookings; BNR; World Bank. and insurance brokerage. Unfortunately, there are no products focused on savings. Having a sandbox The introduction of remittance comparison application cohort focused on savings mobilization platforms–e.g., Monito—can help drive down could result in the necessary innovation. Efforts costs through increased transparency and should also be made to encourage banks to partner competition. For selected remittance corridors, with FinTech to pilot saving products in the sandbox these platforms provide information on the fees given that currently it appears that banks and MFIs charged and exchange rates used by MTOs.27 In are not active in the sandbox. addition to encouraging healthy competition by listing all available MTOs in a particular corridor, 2.5.8. Fostering remittances and diaspora they also guide users toward choosing lower-cost engagement options by providing clear cost disclosures from Diaspora contribution to national savings can various providers.28 Nakasone et al, (2022) are be improved by fostering their participation in currently conducting a rigorous evaluation of the domestic capital market. While several African impact of these platforms on financial behavior. countries like Kenya, Ethiopia, and Nigeria have attempted to utilize diaspora bonds, only two 27 The IOM recently partnered with three such sites: https://weblog. iom.int/migapp-helping-migrants-save-comparing-money-transfer- 26 National Bank of Rwanda. Regulatory Sandbox Regulation. https:// options www.bnr.rw/laws-and-regulations/regulatory-digest-market- 28 See the study by Appleseed (2009) conducted with five remittance consultation/regulatory-digest/regulatory-sandbox-regulation/ service providers. 32 Rwanda Economic Update • Edition No. 22 Mobilizing domestic savings In Rwanda Box 2.3: Promoting savings through remittances and diaspora engagement Target population: Salvadoran migrants from the Washington D.C. area. Intervention: Study randomly offered migrants financial products with varying degrees of ability to monitor and control savings in bank accounts in their home country. Four treatment groups were established, each of which was offered one of four options: • No new financial product • A new account in someone’s name in El Salvador, which could be used to remit funds; the sender could deposit but not withdraw or monitor withdrawals. • A joint account between the sender and someone in El Salvador; the sender could withdraw and observe the account balances. • An account opened only in the name of the sender. Results: Migrants are more likely to open accounts and save larger sums if they are offered an account in their name only (Treatment 3). Treatment 2 also recorded a statistically significant uptake (but lower than treatment 3), as well as a substantial increase in savings. By having greater control over savings accounts in their countries of origin, migrants increase both the holding of formal accounts and the balances accumulated in those accounts. Source: World Bank; Brune et al 2011, 2016; Dupas and Robinson 2013. Setting up remittance comparison platforms would 2.6. Conclusion require some form of financial regulation mandating There are a number of conditions which, once the disclosure of fees and exchange rates used by optimized, can serve to increase savings. Most money transfer operators to ensure transparency notable among these are the presence of a functional and fairness.29 long-term savings scheme for the informal sector (Ejo Heza), a substantial and committed diaspora Behavioral insights offer evidence that labeled or that can be tapped into the increase savings, and for-purpose remittances, earmarked for specific the improving access to formal financial services. purposes such as education, encourage migrant workers to send more remittances. Remittance There are several levers that can be pulled which, receivers in Rwanda are already allocating larger in combination, can have an impact on mobilizing shares of their budget to educational expenses, savings. These each have implications in terms hence lowering the fees could substantially expand of cost, timeline, level of coordination and the the much-needed investment in human capital extent to which government has a direct impact development (De Arcangelis at al., 2015; Rinehart- on them. These considerations notwithstanding, Smit et al, 2020). In addition, evidence from Indonesia Rwanda has many policy levers at her disposal highlights that enhancing financial literacy training to drive savings. On the demand side, there is for migrants and their families could amplify the significant space for women, the elderly and rural already financially prudent behaviors of remittance populations to be encouraged to further engage receivers (Doi, McKenzie, & Zia, 2014). Some country with the formal financial sector via the introduction systems require pre-departure training programs of savings products that speak more directly to their for migrants, including on financial literacy (Ang & needs. And on the supply side, providers have yet Tiongson, 2023). to demonstrate the type of customer centricity See, for example, the Dodd-Frank legislation in the US. 29 Rwanda Economic Update • Edition No. 22 33 Mobilizing domestic savings In Rwanda during product development that will catalyze There has been a draft savings mobilization significant uptake of new savings products. Also, strategy which was not formalized, as well as which Rwanda continues to position herself as an several reports focused on how domestic savings innovation hub as it relates to ICT, innovation in in Rwanda can be increased. 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The Promise of Ejo Heza: A Brighter Future for All Rwandans. Washington, DC: World Bank. https:// documents1.worldbank.org/curated/en/099033123085039385/pdf/P1765760e814d806d09ad90af5463223bde.pdf World Bank. (forthcoming). Rwanda Country Economic Memorandum (CEM). Kigali: World Bank. World Bank Group. (2024). Subdued Growth, Multiple Challenges - Global Economic Prospects - January 2024. Washington, DC: World Bank Group. https://www.worldbank.org/en/publication/global-economic-prospects 36 Rwanda Economic Update • Edition No. 22 ANNEX TABLE 1. MATRIX OF KEY POLICY RECOMMENDATIONS The following is a matrix highlighting the priority policy actions recommended for authorities in Rwanda: Short- High vs High vs Medium- Medium vs Low # Action Term Priority Feasibility (ST vs MT) (HP vs MP) (HF vs LF) 1 Ejo Heza: Allow short-term access to a portion of funds saved in the scheme ST HP LF 2 Ejo Heza: Increase the minimum savings level to be eligible for government MT MP LF incentives: 3 Ejo Heza: Scale up coverage through mandates and aggregators MT HP HF 4 Ejo Heza: Improve and ramp up communication and mobilization to reach ST HP HP new subscribers 5 Ramp up digital and financial literacy initiatives around savings ST HP HF 6 Create an enabling environment for digitally enabled savings, insurance and ST MP HF pension products 7 Enable innovation through regulatory reform and mechanisms such as ST HP HF sandboxes 8 Engage Rwandan diaspora to subscribe to government retail bonds MT MT HF 9 Update licensing requirements to encourage the development of more MT MT HF appropriate savings products 10 Accelerate the digitization of savings groups and linking of savings groups to ST HP HF formal financial institutions Rwanda Economic Update • Edition No. 22 37 Annex ANNEX TABLE 2. SUMMARY OF CHARACTERISTICS OF REMITTANCE RECIPIENTS IN RWANDA Characteristic Total Population (%) Remittance Recipients (%) Urban Resident 25.92 69.27 Sector of business ownership* Agriculture 3.58 2.02 Industry 0.48 0.39 Services 9.17 19.63 Female Head of Household 14.50 19.48 Educational attainment No Formal Education 18.77 6.43 Primary Education 52.05 34.08 Secondary Education 21.77 36.6 University or Higher 6.07 22.35 Vocational Education 1.22 0.55 Annual Income (Rwf ) 12,000 - 30,000 16.79 3.16 30,001 - 80,000 20.56 25.33 80,001 - 200,000 33.66 21.74 More than 200,000 29.00 49.77 Poverty Below the poverty line 42.57 15.26 Often skipping meals 24.17 6.43 Financial Behavior Always Carefully Consider Purchases 61.46 68.07 Always Pay Bills on Time 26.79 40.98 Always Keep an Eye on Finances 37.55 50.46 Income Often Not Covering Living Costs 44.22 31.92 Use of Financial Products Bank Card 52.24 67.62 Savings Account 60.35 64.93 Registered Mobile Money User 55.05 89.62 Tried to start a business 18.66 39.05 Note: * The percentages listed for each sector (agriculture, industry, services) represent the proportion of all adults, not just business owners. Individuals can also be involved in more than one sector. The totals for each sector thus do not add up to 100%. 38 Rwanda Economic Update • Edition No. 22 Photo credits: Rwanda Development Board