Financial institution services and the development of small size businesses in Rwanda. Analysis and interpretation

Academic Paper, 2021

63 Pages








Background of the Study
Statement of the Problem
Research Questions of the Study
Objectives of the Study
Hypothesis of the Study
Significance of the Study
Justification of the Study
Theoretical and conceptual framework
Scope of the Study
Definition of Key Terms

Financial Institution Services
Saving services
Loan Provision
Financial Guidance
Development of Small Size Business
Increase of Customers
Increase of Revenues
Productivity Improvement
Research Design
Population and sampling techniques
Research Instrument
Data gathering procedures
Statistical Treatment of Data
Ethical Consideration

Demographic Information
Perception of Respondents on financial institution services
Perception of Respondents on development of small size businesses in Rwanda
Analysis of correlation and Hypothesis Testing




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ADB : Asian Development Bank

AUCA : Adventist University of Central Africa

BDF : Business Development Fund

BNR : Banque Nationale du Rwanda

MINECOFIN : Ministry of Finance and Economic Planning

MINICOM : Ministry of Trade and Industry

NBFIs : Non-Bank Financial Institutions

NGO : Non-Government Organization

ROSCAs : Rotating Savings and Credit Associations

SMEs : Small and Medium Enterprises

SPSS : Statistical Package for Social Sciences

SSB : Small Size Business

UK : United Kingdom


Above all, thanks to the Almighty God for the guidance and strength provided to me throughout the period of my studies.

I would also like to thank AUCA for the efforts and resources committed to my training. Thanks are further extended to all Lecturers of AUCA for their efforts to impart to me all the knowledge I acquired in Undergraduate program.

I would like to express my sincere gratitude to my supervisor, Dr. GISANABAGABO Sebuhuzu for his assistance in conducting this work. Many thanks go to the management of Unguka bank helping and facilitating the researcher for the completion of this study.

Finally, I would like to recognize the contribution of my colleagues at AUCA, for their teamwork spirit displayed for the success of my studies and completion of this research.

My God bless all!!!



It is now increasingly recognized that the small businesses play an important role around the world. Small businesses are considered to be one of the principal driving forces in economic development. They stimulate private ownership and entrepreneurial skills, the greater likelihood that small business will utilize labor intensive technologies and thus have an immediate impact on employment generation. They can usually be established rapidly and put into operation to produce quick returns. This study intends to investigate the role of financial institutions services on the development of small size business in Nyabihu District, especially small size businesses financed by UNGUKA BANK in BIGOGWE SECTOR.

Background of the Study

In Rwanda, after the 1994 Genocide against Tutsi, the government has tried to boost the business sector’s performance by establishing different organizations enabling small size business operations. It is clear that the government alone cannot succeed in its efforts to make this sector productive and successful. Institutions and other concerned bodies for small businesses underline the importance of public and private partnership to initiate various tasks including research and development (which is rare in this sector) to support entrepreneurs and owner-managers in better business operations management. As Rwanda moves towards becoming a middle income country, small size businesses are engine to its economic development. The importance of Small size businesses for economic competitiveness and growth, employment and poverty reduction is widely recognized (BDF, 2011).

The small size businesses support in strengthening entrepreneurship and innovation (Beck & Maksimovic, 2010). They contribute to economy by employing a large number of people and play a big role by increasing economic development. However, the inability of small businesses to access financing remains one of the key constraints to growth. With industrial change and recent government policy shifts, increased integration of global markets and business, many enterprises are experiencing increasing pressure to remain sustainable as their markets grow, and they begin competing with a larger number of firms. In this regard, small size businesses in particular, are exposed to this pressure, as they tend to be disadvantaged comparing to bigger firms that generally have better access to funding and other resources (Bhalla, 2012).

There are demand side barriers such as verifiable borrower information or practical business plans, lack of collateral, absent or inconsistent record keeping and a poor repayment culture among business owners. Emphasized that small size businesses are more innovative compared to larger enterprises due to their diverse character but are limited in innovative capacity due to their financial and human resources (Coombs, 2013).

The concept of small size businesses in Rwanda is used to refer to micro as well as small and medium enterprises. The Rwandan small size businesses consist of 98% of the total businesses and account for 41% of all private sector employment (BNR, 2014). Small size businesses in Rwanda face many macro-level challenges faced by large companies, including limited transport and energy, lack of entrepreneurship skills, low levels of societal trust, limited access to financial institutions, challenges with contrast enforcement and a weak education system. Unlike large firms that may have the time and resources to invest in resources and human capacity building, small size businesses often have limited abilities to develop the skills of their staff or take advantage of local economies of scale in terms of energy, transport or row material. The Rwandan strategy plan is to construct a dynamic and viable small size businesses with the purpose of increasing the economic growth through enhanced business support service provision, capacity building and enabling access to finance (MINECOFIN, 2013).

Rwanda’s financial industry has grown significantly over the last twenty-four years, comprising different financial institutions with varying legal structures and ownership structures. The Rwandan financial sector comprises the banking sector that dominates this sector, a small microfinance sector and a number of NBFIs. NBFIs comprise insurance companies, pension funds, and insurance intermediaries. The Monetary Policy and Financial Statement of August 2019 is to access economic and financial developments for the first half of year 2019 and to give an outlook of remaining period of 2019 and beyond. First, this statement present the global economic developments in section one to contextualize domestic economic and financial performance presented in section 2, 3, 4, and 5. Section 6 concludes with monetary policy and financial stability outlook (BNR, 2019).

A successful financial sector reform was expected to generate a dynamic process involving substantial changes in the country’s real activities of production, exchange and finance. Sustainability of the reforms was expected to result in financial deepening, increase in the range of financial products in order to better serve the needs of the economy and enhance transformation of the economy. Therefore, the government focused on the expansion of financial services to low income people who formed the majority in the country particularly in the rural area (MINECOFIN, 2013).

Therefore, the major concern of this study was focused solely on assessing the role of financial institutions services toward the successes of small sized businesses (SSB) and came out with the proposed strategies for improvements in the area of government, financial institutions as well as identifying some of the gaps in our knowledge related to finance in development of small size businesses in Rwanda in Rwanda.

Statement of the Problem

The participation of the majority of the citizens of Rwanda in the modern economy continues to be limited. To a large extent the economy still remains in the hands of foreigners and a few Rwandans (MINICOFIN, 2013). Among the reasons that have restricted their effective participation in the economy includes lack of capital (access to finance) to finance productive projects. Furthermore, banks and other financial institutions are often reluctant to lend the small sized businesses due to high interest rate and a lack of collateral this hampers the ability of small enterprises to raise finance, information asymmetries, market uncertainty and higher transaction costs related to serving distant customers have restricted the flow to finance to small sized businesses (MINICOM, 2015).

The banking system in Rwanda has a very limited level of penetration in the rural areas in this case smallest sized businesses are unreached as more than 80% population is located in rural areas. Most bank branches are located in urban areas with high population densities and high market activity (BDF, 2011). Despite of the fact that, there have been inadequate financing services deliveries to small size businesses sector for over a decade now, an effort to reverse the trend is taking place in Rwanda. Therefore, this study explores the role of financial institutions and services on development of small size businesses in Rwanda.

Research Questions of the Study

1. What are the perceptions of respondents on financial institutions services in terms of saving services, loan services, and financial guidance?
2. How do respondents perceive the development of small size businesses in terms of increase of customers, increase of revenues, and productivity improvement?
3. Is there a significant role of financial institutions services to small size development?

Objectives of the Study

General objective

The main objective of this research is to investigate the role of financial institutions’ services on development of small size businesses in Rwanda, so that the researcher can avail concrete conclusions and recommendations to various stakeholders and participants, and highlighting key areas for potential improvement.

Specific Objectives

1. To determine the perception of respondents on financial institutions services in terms of saving services, loan services, and financial guidance.
2. To determine the perception of respondents on the development of small size businesses in terms of increase of customers, increase of revenues, and productivity improvement.
3. To study the role of financial institutions services on development of small size businesses in terms of increase of customers, increase of revenues, and productivity improvement.

Hypothesis of the Study

According to Babbie (2017), hypothesis is a specific testable expectation about empirical reality that follows from more general proposition, more generally, an expectation about the nature of things derived from a theory. It is a statement of something that ought to be observed in the real world if the theory is correct. Therefore, the researcher stated the following hypothesis:

There is a significant role of financial institutions services on development of small size businesses in Rwanda particularly in small businesses financed by UNGUKA BANK in BIGOGWE SECTOR.

Significance of the Study

This research is to be beneficial not only to the researcher herself but also to AUCA, other researchers, and to small size businesses.

To the researcher: The study was of great importance to the researcher due to the broad knowledge and understanding that was achieved from the research and led her to attainment of a Bachelor’s degree in Business Administration.

To AUCA: This study adds on the existing literature and helps the academicians by getting more reference in nature when carrying out research on similar or related topics and that is why a copy was handed over in the library.

To other researchers: In this context, this research study will help other future researcher to build their research on the same area. Moreover, the researchers will benefit from the research study to improve their knowledge and skills about financial services and their role on development of small size businesses in Rwanda specifically in Rwanda.

To small size businesses: This research will help small size businesses to know how it will plan and improving its operations with the support provided by financial institutions services. Normal small size businesses use two source of finance; internal or external sources of financing. The internal funds are always insufficient to undertake the required level of business hence the call is always made for external finance from relevant financial institution to fill the financial gap.

Justification of the Study

The Rwandan government’s choice of financial institutions has been the conviction that, given adequate attention, financial institutions have the potential to contribute considerably to the development of people in Rwanda. It is also the researcher’s belief that invaluable benefits to management of those charged with governance in the area of financial services will emerge on how to streamline the positive effect of those services to small size businesses thus increased capital and ultimately ensure attainment of the institutional objectives and extending their activities. The study will also add to the existing knowledge on financial services and how they contribute to development of small size businesses. The reason for the researcher in choosing this research in the area of financial services and their benefits to small size businesses is lack of more literature review on financial services specifically in Rwanda. Only few researches have been conducted on financial services and development of small size business in the context of financial institutions of Rwanda.

Theoretical and conceptual framework

Theoretical framework

Galloway, (2016), desrcibe that financial institutions are organizations that process monetary transactions, including business and private loans, customer deposits, and investments.

According to Modigliani (2013), savings refer to money you put aside for future use rather than spending it immediately.

Signoriello (2011), stated that loan is a sum of money borrowed from the bank to assist for certain planned or unplanned events. The borrower is required to pay back the loan, including the interest charged over a stipulated period.

Financial guidance is a process of determining an individual's financial goals, purposes in life and life's priorities, and after considering his resources, risk profile and current lifestyle, to detail a balanced and realistic plan to meet those goals (Bolang, 2009).

Small size businesses are privately owned corporations, partnerships, or sole proprietorships that have fewer employees and/or less annual revenue than a regular-sized business or corporation. Businesses are defined as "small" in terms of being able to apply for government support and qualify for preferential tax policy varies depending on the country and industry (Drucker, 2009).

According to Jones and Gammell (2014), increase of revenue is to increase the price of your product or service.

According to Robbins (2015), productivity is the feature of that which is productive, that is which is useful or profitable.

Conceptual Framework

A conceptual framework is an analytical tool with several variations and contexts. It is used to make conceptual distinctions and organize ideas. Strong conceptual frameworks capture something real and do this in a way that is easy to remember and apply (Rosenthal, 2001). This study is comprised by two variables which is financial services as an independent variable with its sub variables of saving accounts, loan provision, and financial guidance. Dependent variable is small size business development with its sub-variables of increase of customers, increase of revenues and productivity improvement.

Abbildung in dieser Leseprobe nicht enthalten

Figure 1 . Conceptual framework

Source: Researcher own compilation, 2019

Scope of the Study

This section is composed of conceptual scope, geographical scope, and time scope. Conceptually, this study investigates the role of financial institutions services on development of small size businesses in Rwanda with in 31 small businesses financed by UNGUKA BANK in BIGOGWE SECTOR as case study. Regarding the geographical scope, this study is restricted to in 31 small businesses financed by UNGUKA BANK in BIGOGWE SECTOR which is located in Western province, Nyabihu district. In terms of time scope, this study on the role of financial institutions services on development of small size businesses in Rwanda with in 31 small businesses financed by UNGUKA BANK in BIGOGWE SECTOR as case of the study was conducted within academic session of June, 2019.

Definition of Key Terms

Financial institution refers and encompasses a broad range of organizations that deal with financial management activities ranging from commercial banks, finance companies, and money market intermediaries to institutions involved in credit, development finance, leasing and factoring.

Small size businesses are non-subsidiary, independent firms which employ less than a given number of employees.



This chapter consists of the review on conceptual framework of this study. Many literatures have been written on the subject of financial services as an independent variable with different sub variables of saving, loan, and financial guidance. While on the other hand there is small size business development as dependent variable of financial services with its sub variables of increase of customers, increase of revenues and productivity improvement. To understand these variables a researcher has to find the general phenomenon of the same by studying what other scholars of financial institutions services and small size business development have explored in the world.

Financial Institution Services

Asian Development Bank (ADB) defines financial institutions bank as “the provision of a broad range of financial services such as deposits, loans, money transfers, and insurance to small enterprise and households.” Locke (2010) defines microfinance as “a credit methodology that employs effective collateral substitutes to deliver and recover short-term working capital loans to micro-entrepreneurs.”Financial institutions entail the provision of financial products and services to business. The concept of financial institution though not new, is gaining ground as a preferred mode or financing of small and micro businesses which are excluded from the mainstream financial intermediation systems (Brehm, 2010).

According to Organ (2015), financial institution lending, savings and financial services, provide the poor with effective way to move out of poverty, build income, create wealth and asset their mortgage risks. Financial institutions services include the provision of a broad range of financial services to the lower income class in the society. Financial institutions services entail the provision of financial services including savings, credit, cash transfer, financial management, insurance and other financial services to small business.

Financial institutions involve the provision of financial services to clients in lower income segments of the society, including, small scale traders, vendors in the streets, farmers and other small scale business people. According to a publication financial vital economic growth (2005), financial institution is a facility or special instrument vehicle that helps the poor people with focus to acquire small credit facilities for business start-ups, acquire attention. Signorelli (2011), noted that there are different providers of financial services. He identified institutions such as NGO’s, cooperatives, credit unions, government banks, commercial banks and non-bank financial institutions.

Access to finance helps all firms to grow and prosper. However, lack of access to credit is a major impediment inhibiting the growth of small businesses. There is no structured institutional mechanism in Rwanda to facilitate the flow of financial resources from formal sector through financial institutions to such enterprises. Generally, small businesses operate on tight budgets, often financed through owner’s own contribution, loans from friends and relatives and some bank credit (MINECOFIN, 2013). They are often unable to procure adequate financial resources for the purchase of machinery, equipment and raw materials as well as for meeting day-to-day expenses. This is because, on account of their low goodwill and little fixed investment, they find it difficult to borrow at reasonable interest rates. As a result they have to depend largely on internal resources (Bernheim, 2014).

The definitions assigned to small businesses vary across countries and institutions. Accessing finance has been identified as a key element for small and micro enterprises to thrive in their drive to build productive capacity, to compete, to create jobs and to contribute to poverty alleviation. Without finance, small and medium enterprises cannot acquire or absorb new technologies nor can they expand to compete in global markets or even strike linkages with larger firms (MINICOFIN, 2013).

Small businesses play a significant role in economic development, both in developed and emerging markets. Now the question arises: how small and medium enterprises (SMEs) finance their operations? What is the role of financial institutions in the growth of small businesses? Financial institutions are intermediaries between surplus and deficits. They play a role of intermediating people, business companies or enterprises indeed of funds (borrowers) with lenders. Financial institutions offer a large range of financial services that small businesses deem key to facilitate trade and cover financial risks (Bouyala & Lusardi, 2011).

Saving services

Savings has recently been recognized as a major force in Savings and Credit Cooperatives. In the past, Microfinance focused almost exclusively on credit; savings were the "forgotten half" of financial intermediation (Jesco & Peter, 2009). The importance of savings mobilization has been highlighted in several papers in the context of Savings and Credit Cooperatives. Few analyses have been shaped in order to take an in-depth look at the savings mobilization strategies, which are employed by various institutions and are then compared to the results. Deficiency of savings facilities creates problems at three levels: (i) at the individual level, (ii) at the level of the financial institution; and (iii) at the level of the national economy.

At the individual level, the lack of appropriate institutional savings facilities forces the individual to rely upon in-kind savings, such as the savings in the form of gold, animals or raw materials, or upon informal financial intermediaries, such as Rotating Savings and Credit Associations (ROSCAs) or money-keepers. These alternative informal savings facilities do not guarantee the combination of security of funds, ready access or liquidity, positive real return and convenience, which are basic requirements or necessity of a depositor. Microenterprise programs can play a significant role for foster savings among the poor populations, with considerable benefits both for the savings and for the programs (Benhabib & Spiegel, 2011).

Benhabib and Spiegel (2011), domestic Savings provide the assets for the economy’s investment in future production. Without them, the economy cannot grow unless there are alternative sources of investment . People’s propensity to save varies significantly. Common astuteness states that as a person’s disposable income increases, so does his or her capacity and willingness to save. Persons, who are living at subsistence or near subsistence levels, often we call them low-income groups, thought to be among those who are least able to contribute to economic savings. It is demonstrated that most of the developing countries, where the poor constitute the great majority, have a lower propensity to save. It has been concluded that ‘the poor cannot save’.

Exploring issues related to saving mobilization, among the poor people who are self-employed in productive activities, is one of the important purposes of this study. Experiences from the empirical findings have shown that many low-income people have the capacity to save and they usually do it through informal channels. Informal approaches for savings engross the formation of alternative structures, like group or associations, through which people undertake financial activities such as lending and savings (Barrett & Clay, 2009).

Finally, the process of saving on a regular basis can be an empowering experience for people used to living at the margin, and can contribute to an improvement in the quality of their lives. It serves to capitalize on the productive activities, which sustain the family and thereby enhancing income of the family (Desimone, 2010).

Loan Provision

Loan can be broadly classified into: fund-based lending and non-fund based lending. Fund based lending: This is a direct form of lending in which a loan with an actual cash outflow is given to the borrower by the Bank. In most cases, such a loan is backed by primary and/or collateral security (Robert, 2011). The loan can be to provide for financing capital goods and/or working capital requirements. Non-fund based lending: In this type of facility, the Bank makes no funds outlay. However, such arrangements may be converted to fund-based loans if the client fails to fulfil the terms of his contract with the counterparty. Such facilities are known as contingent liabilities of the bank. Facilities such as 'letters of credit' and 'guarantees' fall under the category of non-fund based loan (Goldsmith, 2010).

A substantial quantum of loans is granted by banks to small and medium enterprises (SMEs). While granting credit facilities to smaller units, banks often use a cluster-based approach, which encourages financing of small enterprises that have a homogeneous profile such as leather manufacturing units, chemical units, or even export oriented units. For assessing the credit risk of individual units, banks use the credit scoring models. Banks also facilitates the flow of credit at reasonable interest rates to the SME sector (Slaking, 2009)


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Financial institution services and the development of small size businesses in Rwanda. Analysis and interpretation
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financial, rwanda, analysis
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Ines Uwamahoro (Author), 2021, Financial institution services and the development of small size businesses in Rwanda. Analysis and interpretation, Munich, GRIN Verlag,


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