(DTIS) Update, Volume 1 – Main report - Enhanced Integrated ...

At the same time there exist several constraints to the integration of the Burundian financialsystem with the regional market. Burundi (with Rwanda) was a late entrant to the EAC, having joinedin 2007, while Kenya, Tanzania, and Uganda have a longer history of mutual cooperation. Moreover, asa former Belgian colony (also like Rwanda) Burundi follows the civil law tradition, as opposed to thecommon law tradition among the other three Partner States. Many other concerns about Burundi’s placein the emerging regional market in financial services are actually rooted in the present. Some of theproblems associated with being a small financial system are most apparent in Burundi. Developing acoherent strategic vision of how its financial system will be integrated with the EAC and animplementation plan based on this vision, will clarify and demonstrate Burundi’s ownership of theprocess of integration and also how effectively it realizes the benefits of being part of the regionalfinancial market. The alternative is to see the direction and development of its financial system largelypassed to the more advanced institutions in other EAC countries.The EAC has worked on a post-membership convergence principle, with countries joining andthen seeking to harmonize their laws and regulations for the financial sector with other memberstates. One consequence of this approach for Burundi is that parts of the financial sector may be exposedto cross-border activity and competition, especially from sophisticated financial institutions from largermarkets, before the regulatory and supervisory frameworks have had the time to build the requisitecapacity. As a result, Burundi may be called upon to build capacity on a “crash basis”. Thesecircumstances in turn may require a greater willingness to seek capacity-building solutions, which mayrequire some willingness to surrender a degree of sovereignty in order to gain the benefits of scale.Despite this, attitudes towards convergence with the EAC are very positive at an official level, reflectingin part a strong political commitment at the highest level to the EAC.It is not clear, however, that this enthusiasm for regional integration has found its way to theprivate sector. The Burundian financial and business communities convey a sense of resignation ratherthan enthusiasm towards EAC membership. There is acute awareness that Burundi’s low level ofdevelopment means that the consequence of membership is likely to be a substantial increase incompetition from larger and better capitalized firms and financial institutions based in more developedEAC countries – particularly Kenya.2.4 The path aheadFor Burundi the path ahead is a difficult balancing act between realizing the gains from being partof a larger regional market and managing the risks associated with regional integration. For alandlocked country that relies heavily on trade, some of the early gains will likely be in the form ofbetter financing for trade related activities. Over time, Burundi will have the opportunity to leapfrogseveral stages of financial sector development, learning from the experience of its more advancedneighbors. However, it will also have to simultaneously build capacity at an accelerated pace to keep up.The legal framework already accommodates for the entry of foreign financial institutions and doesnot seem to place any undue restrictions on their operations subsequently. Foreign banks arepermitted to set up a presence in the Burundian market either by greenfielding or via a joint venture oracquisition. While participation by a single investor (foreign or domestic) in a bank is capped at 20percent, investment in local private bank can exceed this cap with the permission of the Burundiancentral bank (BRB) and can constitute the controlling stake in the bank. There are no significantoperational limits on foreign banks either. Foreign insurance companies are also allowed entry in asimilar manner in automobile, life and reinsurance services (ownership in insurance company by a singleinvestor, domestic or foreign, is capped at 33 percent), and there are also no significant restrictions onthe operations of insurance companies.While the single investor caps seem restrictive they are not in of themselves the biggest hurdle tothe entry of financial institutions in Burundi. In fact, several regional financial institutions are already121 / 153