A New Look at the Bank Lending Channel of the Monetary Policy Transmission Mechanism in Rwanda

Abstract

This paper investigates the existence of the bank-lending channel in the transmission of monetary policy in Rwanda
for the period 2014Q1 to 2022Q4. We directly estimate the loan-supply equation using the recently developed bootstrap
bias-corrected Least Square Dummy Variable (BC-LSDV) technique. The findings indicate that there is evidence of an
operational bank lending channel in Rwanda. The interaction term between central bank indicator with capital and
liquidity does not appear to be a relevant factor in determining the differential impact of monetary policy on the lending
behavior of banks. Further, segregating banks by size, we find that the effect of monetary policy is more pronounced
for the medium-sized banks compared to larger sized banks. The findings provide support for the central bank’s recent
move from monetary targeting to price-based monetary policy to strengthen the effectiveness of the monetary policy. It
is therefore important that the National Bank of Rwanda explores the set of tools in its purview to ensure that policy
changes affect loan portfolios of the entire bank system as intended.