The Capital Markets Authority (CMA) has introduced trading in commercial papers at the bourse to increase avenues for raising short-term capital for institutions and individuals.

Commercial papers are a money market instrument with features of a capital market. They bring down the cost of borrowing, which is the target for CMA.

The maturity period of the commercial papers is between three and 12 months.

“If an institution wants to borrow money for a short time for working capital, they can invite people directly to buy their commercial paper without involving the bank, which would normally charge the borrower a high interest rate,” said Robert Mathu, the executive director of CMA.

This might ignite activity on the Rwanda Stock Exchange (RSE), which has not been able to attract many tradable products since it started operations in 2008.

Read: Rwanda bourse emerges top performer among EA peers

Fewer options

With few products listed, market experts say, there are fewer options for investors who would want to raise both short and long-term capital through the financial market.

The Rwandan bourse currently trades in shares of two domestic companies — Bralirwa and Bank of Kigali — as well as two Kenyan cross-listed firms, Nation Media Group and KCB. The market also trades in Treasury bonds and a corporate bond that was issued by Rwanda Commercial Bank (BCR).

The commercial papers will not only increase tradable products but also increase liquidity by helping private institutions to acquire cheap credit.

The average interest rate charged by commercial banks for credit acquired is 19 per cent while the expected interest rate from commercial papers is 16 per cent which is more favourable for the borrower.

The institution borrower must have a minimum of Rwf500 million of equity capital running the business while the minimum capital an investor can raise is Rwf200 million. A borrower also benefits through access to higher rates of return than risk free investment.

“Borrowers should embrace commercial papers because they are safe and easily tradable as financial instruments with high levels of liquidity,” said Shehzad Noordally, general manager of CDH brokerage firm.

Experts believe that the economy is ready for commercial papers, now that the infrastructure is in place.

“Previously investors would provide the excuse of lack of access to finance and claims that the banks were expensive; lack of collateral for loans but now there are people out there willing to take the risk with them,” said Celeste Rwabukumba, the co-ordinator of RSE.

Less costly rate

Experts also say that credit from various lenders comes at a less costly rate than from a commercial bank which takes sole risk with a borrower. Credit is priced because of the risk it carries.

Commercial banks are regulated institutions especially around maintenance of liquidity which means that there are restrictions about how much cash they must hold in the reserves of the central bank in order to transact business.

Shareholders of commercial banks may not give the bank money every time the banks want it, so when banks find themselves in a position where additional lending is restricted, raising money through commercial papers may attract lower risk rating.

“The credit documentation that banks go through sometimes gets administratively expensive. A bank or a business might consider commercial instruments a cheaper option,” said Maurice Toroitich, the KCB Rwanda managing director.