4.1.2 Reserve
requirement
Commercial banks must maintain a given fraction of deposits
with the Central bank. These reserves are mandatory and so, are called legal
reserve requirements. These reserves are stated as percentage of the deposits.
The Central bank can manipulate this reserved requirement to influence money
available to commercial banks and the public.
When the Central bank wants the money supply reduced, it
increases the reserves required and by reducing it, it increases money supply
(Assiimwe H. M.,2009:192).The cash reserve is one of the instruments available
to NBR for controlling base money(implementation of monetary policy by National
Bank of Rwanda2010).
4.1.3 Discount rate
One of the functions of the Central bank is to act as a lender
of last resort, that is, when commercial banks are in dire need of cash, they
can borrow from the Central bank and the Central bank extends credit to the
commercial banks at an interest rate called bank rate (discount rate).
This rate has a direct relationship with the interest rate
that the banks charge their borrowers. When the commercial banks are charged a
higher bank rate, they likewise charge a higher interest rate to the borrowers.
Whenever, the Central bank wants a reduction in money supply, it raises the
bank rate. This forces the commercial banks to raise the interest rate which in
turn discourages borrowing (Assiimwe H. M., 2009:192).
4.1.4 Exchange
Rate
The balance of payments can be in deficit or in surplus and
each of these affect the monetary base, and hence the money supply in one
direction or the other. By selling or buying foreign exchange, the Central bank
ensures that the exchange rate is at levels that do not affect domestic money
supply in undesired direction (macroeconomics course).
4.1.5 Direct Credit
Control
The Central bank can direct Deposit Money Banks on the maximum
percentage or amount of loans (credit ceilings) to different economic sectors
or activities, interest rate caps, liquid asset ratio and issue credit
guarantee to preferred loans. In this way the available savings is allocated
and investment directed in particular directions (Macroeconomics course)
4.1.6 Moral
Suasion
The Central bank issues licenses or operating permit to
Deposit Money Banks and also regulates the operation of the banking system. It
can, from this advantage, persuade banks to follow certain paths such as credit
restraint or expansion, increased savings mobilization and promotion of exports
through financial support, which otherwise they may not do, on the basis of
their risk/return assessment (Macroeconomics course).
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