The Contribution of Saving and Credit Cooperatives (SACCOS) on the Improvement of Members’ Socio Economic Development in Rwanda. Opportunities and Challenges

Evidence from Umwalimu SACCO-Huye District

Doctoral Thesis / Dissertation, 2020

181 Pages, Grade: Rite












1.1. Background of the study
1.1.1 Historical background of Umwalimu SACCO and SACCOs in general
1.1.2 Conceptual background
1.1.3 Contextual background
1.2. Statement of the problem
1.3. Objectives of the study
1.4. Research questions
1.5. Significance of the study
1.6 Justification of the study
1.7. Scope of the study
1.7.1 Geographical scope
1.7.3 Time scope
1.8. Thesis structure or organization
1.9. Operational definitions

2.0. Introduction
2.1. Definitions of key concepts
2.1.1. Micro-finance
2.1.2. SACCO
2.1.3. Umwalimu SACCO
2.1.4. Cooperative
2.1.5. Savings
2.1.6 Loan
2.1.7. Socio-economic development
2.1.8. Development
2.1.9. Growth and development
2.2. Theories on microfinance: saving and credit cooperatives
2.3. Saving and credit cooperatives’ literature review
2.3.1. The Role of Cooperative Societies in Economic Development Economic Role of microfinance cooperatives Social role of microfinance cooperatives Political Role of microfinance cooperatives
2.3.2. Importance of cooperatives to members
2.3.4. Objectives of saving and credit cooperatives
2.3.5. Cooperative Principles
2.3.6. Services offered by saving and credit cooperatives
2.3.7 Type of services offered by Umwalimu SACCO Saving services Loan products Trainings on Business Management game
2.3.8. SACCOs and MFIs’ lending Methodology and policies Group Lending Individual Lending Credit Unions
2.3.9. Lending Conditions
2.3.10. Advantages and benefits of SACCOs
2.3.11. Challenges faced by SACCOs
2.3.12. Empirical studies Empirical literature review of saving and credit cooperatives worldwide Rwanda’s empirical research on saving and credit cooperatives (SACCOs)
2.4. Conceptual Framework
2.5. Hypotheses of the Study
2.6. Chapter conclusion

3.0. Introduction
3.1. The country overview
3.1.1 Demographics and Political Situation
3.1.2 Rwanda’s Macroeconomic conditions
3.2. Overview of Rwandan’s financial sector
3.2.1. The financial system in Rwanda The banking sector The microfinance sector The Non-Bank Financial Institutions
3.2.2. Banking sector
3.2.3. The Soundness of the Banking Sector
3.2.4. Banking Sector achievements (opportunities) and challenges
3.3. Microfinance development in Rwanda
3.3.1. History of Rwanda’s Microfinance
3.3.2. Types of Microfinance Providers
2.3.5. Financial cooperatives in Rwanda-
3.4. The Role of Rwanda’s Government in Microfinance
3.5 Legal and regulatory framework of Microfinance in Rwanda
3.6. Microfinance in Europe
3.7 Chapter conclusion

4.0 Introduction
4.1. Description of the study Area
4.1.2. Rwanda map with districts-
4.2. Research design
4.3. Population of the study and sampling technique
4.3.1. Population
4.3.2. Sampling technique
4.3.3. Sample size
4.4 Data Collection sources and instruments
4.4.1. Data collection sources Primary Data Secondary Data
4.4.2. Data collection instruments
4.5. Validity and Reliability of data
4.6. Data Analysis
4.6.1 Data analysis techniques
4.6.2. Analysis model specification and criteria
4.6.3. Estimation and evaluation of the model
4.7. Data Processing
4.7.1. Data Coding
4.7.2. Data Tabulation
4.8. Ethical Consideration
4.9. Dissemination of Results
4.10. Summary of the chapter

5.0. Introduction
5.1. Socio- demographic characteristics of the respondents
5.1.1. Distribution of respondents by Age group
5.1.2. Distribution of respondents by gender
5.1.3. Distribution of respondents by marital status
5.1.4. Distribution of respondents by educational levels
5.1.5. Distribution of respondents by occupations
5.1.6. Distribution of respondents by size of dependents
5.1.7. Findings on membership duration of respondents
5.1.8. Membership condition
5.1.9. Findings on Umwalimu saving facilities
5.1.10. Respondent view toward SACCO loan facilities
5.2. Contribution of USACCO activities on the improvement of teachers’ welfare
5.3. Respondents’ type of Income generating activities established after joining USACCO
5.3. 1. Respondents’ type of farming business established after joining USACCO
5.3. 2. Respondents’ type of commerce established after joining USACCO
5.3. 3. Respondents’ type of transport business established after joining USACCO
5.3. 4. Respondents’ house renting business established
5.4. Respondents’ level of income before and after joining USACCO
5.4.1Respondents’ income before joining SACCO
5.4.2 Respondents’ income after joining SACCO
5.5. Contribution of government programs’ on the improvement of teachers’ welfare
5.6. Testing of other hypotheses
5.6.1. Correlation between USACCO services and the members level of income
5.6.2 Correlation between USACCO services and improvement of member’s standard of living
5.7. The relationship between USACCO services and the standard of living improvement of members
5.8. Standard of living of respondents after Joining Umwalimu SACCO

6.0 Introduction
6.1 Summary of the major findings
6.2.1 Summary of findings related to the type of contributions generated by USACCO activities (services) to its members
6.2.2 Summary of findings related to the contribution of small income generating activities established by members to their standard of living, as results of becoming USACCO members
6.2.3 Summary of findings related to the relationship between USACCO’s services and the socio-economic development improvement of beneficiaries
6.2. Conclusion of the study
6.3. Recommendations of the study
6.3.1. Recommendations to USACCO members
6.3.2. Recommendations to the management of Umwalimu SACCO
6.3.3. Recommendations to government and other stakeholders
6.4 Proposals for further research


Appendix 1: Clearance letter
Appendix 2: Authorization for collecting data
Appendix 3 : Questionnaire for umwalimu sacco’s members
Appendix 4: Questionnaire for staff members of USACCO
Appendix 5: Interview guide for USACCO management& Leaders (Representatives) from Ngoma Sector
Appendix 6: Administrative Map of Huye District
Appendix 7: Plan of activities


I declare that, this research project entitled “The contribution of saving and credit cooperatives (SACCOs) on the improvement of members’ socio economic development in Rwanda: Opportunities and challenges”, Evidence from Umwalimu SACCO- Huye District”, is my original work; it has not been presented to any other institution of higher learning for academic purposes.

NTUITE Sylvain Robert

Abbildung in dieser Leseprobe nicht enthalten

Date: 16.11.2020


This thesis is a copyright material protected under the Berne Convention, the Copyright Act 1999 and other international and national enactments, in that behalf, on intellectual property. It may not be reproduced by any means in full or in part, except for short extracts in fair dealings, for research or private study, critical scholarly review or discourse with an acknowledgement, without the written permission of Koblenz-Landau University, on behalf of the author.


This thesis would not have been possible without the input of a number of individuals whose support would not get unmentioned.

Special thanks are directed to my Supervisory team Prof. Dr. Werner Sesselmeier (Main supervisor) and Prof. Dr. Gisela Kubon-Gilke (Co-supervisor) for their wise advices, constructive criticisms, constructive comments and tireless guidance. Without them my academic dreams would have not become a reality.

In a special way, my thanks are extended to all my co-workers at Protestant Institute of Arts and Social Sciences (PIASS), Faculty of Education, department of business studies especially Dr. Innocent Nkundabatware (Dean of Faculty of Education), Francois, Emmanuel Bizimana, etc for their support, cooperation and encouragement which enabled me to complete my study.

My thanks are also directed to my respondents (Umwalimu SACCO members) and the management of USACCO for their cooperation. I am greatly indebted to you all!

I would like to express my sincere appreciation to the leaders of Ngoma Sector for their facilitation and cooperation, especially the Executive Secretary of Ngoma sector and Domina, who is in charge of Education at Ngoma sector.

Finally, I would like to thank my family members and relatives for their endless support and to all those who have facilitated the completion of this academic research.

S. NTUITE Robert


This thesis is dedicated to my beloved parents Mr. Norbert KALOMBO and Mrs. Norbertine Lufika wa Mbayi, who laid down the foundation of my education which made me what I am today.


This study examines the contribution of saving and credit cooperatives (SACCOS) on the improvement of members’ socio economic development in Rwanda: Opportunities and challenges”, Evidence from Umwalimu SACCO- Huye District”. The appearance of saving and credit cooperatives or credit unions has been known as remedy for social ills rooted in poverty because of its efficiency in loans or credits dispensation, social equality for enhancement and reduction of poverty amongst low income earners. Therefore, millions and millions of poor people and non-bankable in developing countries (or third world countries) have been provided access to formal financial services through saving and credit cooperatives’ programs.

The targeted population concerned by the study was 1,940 members of USACCO from which a sample of 92 respondents was purposively selected. The study has adopted a combination of correlation and descriptive research design. It has employed both quantitative and qualitative approaches. The study used both primary and secondary data. The primary data was collected using questionnaire and interview and, while secondary data was collected using documentations techniques whereby, Manual of procedures and Credit policies of USACCO and financial reports have been consulted. The analysis of data was done using SPSS version 21. The data was presented in form of tables, charts and graphs designed by SPSS v. 21. The bio-characteristics of respondents showed that, the majority of respondents were women with 55.4%, majority of respondents’ age is between 26 to 45 years Furthermore, and majority 77.20% of respondents were married. 100% of respondents attended school, where the majority of respondents attended secondary school with certificate A2.

The study has revealed that Umwalimu SACCO services offered to its members have a positive effect on the improvement of members’ welfare. It was found that USACCO services have slightly affected income level of members, assets acquired, access to education and medical care as well as small income generating activities established by members in Huye District. The analysis of data also revealed that there are some variables which have effected USACCO members’ socio-economic status, these were listed as: Education background of a member, number of dependents, the occupation of a member, and number of loans got from USACCO, government programs against teachers’ welfare, and membership duration played very important role on the improvement of standard living of teachers. All these variables were found to have positive effects on teachers’ socio-economic status, except the family size of respondents.

In addition, the findings showed that, the majority of respondents confirmed that, they did not find opportunities to save with other financial institutions, and other respondents did not have access to loan from other financial institutions due to complicated loan requirements. In addition, after they have joined USACCO, their deplorable status somewhat changed, both socially and economically which has contributed to the improvement of their welfare. Therefore, the study testified that, the welfare of USACCO members in terms of assets acquired, income increased was improved compared to situation before joining USACCO. The study concludes that “the level of improvement of living conditions of teachers depends largely to the level of loan granted by USACCO to teachers and membership duration. If the level of teachers’ loan and saving increases, there will be also improvement of teachers’ wellbeing” and finally, USACCO financial service is a veritable instrument for better improvement of economic and social conditions of teachers. The study recommends that, USACCO should provide frequent and regular trainings on business management game to their members. This could help members for good management of their loans and reducing loan defaulters’ cases observed at USACCO. Challenges observed were lack of physical collateral security required by USACCO, complicated loan requirements terms and conditions and insufficient trainings on business management game.

Keywords: Saving and credit cooperatives (SACCOs), Microfinance, microfinance institutions, socio-economic development, standard of living, loans, saving.


Table 1: Main Economic indicators of Rwanda

Table 2: Main Sectors of industry

Table 3: Banks’ Outstanding Loans by Sector

Table 4: Soundness of banking sector for year 2011 to 2016

Table 5: Performance indicators of MFIs

Table 6: Pension sector key financial highlights (FRW billion)

Table 7: T-Bonds outstanding 2013-June 2017 (Frw billion)

Table 8: Outstanding Bonds traded on secondary market as of 30th June 2016

Table 9: Trading activities on the RSE (FRW million)

Table 10: Sample size

Table 11: Results of reliability analysis

Table 12: Respondents’ age

Table 13: Gender of Respondents

Table 14: respondents' school attendance

Table 15: Educational level of respondents

Table 16: Occupation of respondents

Table 17: Dependent size

Table 18: Membership duration of respondents

Table 19: The conditions to be U-SACCO member

Table 20: Respondents view on the saving facilities at USACCO

Table 21: Respondents view on the loan facilities at USACCO

Table 22: Contribution of USACCO loan on the improvement of teachers’ welfare

Table 23: Number of time respondents received loans from USACCO

Table 24: Income from income generating activities established by members

Table 25: Type of farming activities established by USACCO members

Table 26: Type of commerce established by respondents

Table 27: Type of transport business established by respondents after joining USACCO

Table 28: Income generated from house renting established by respondents

Table 29: Monthly income of members before joining USACCO

Table 30: Monthly income of members after joining USACCO

Table 31: Governments’ program on USACCO members’ standard of living

Table 32: The correction between USACCO services and members’ level of income

Table 33: Correlation between USACCO Services and improvement in member’s Standard of Living

Table 34: Standard of living of respondent AJUSACCO


Figure 1: Conceptual framework

Figure 2: Real GDP Growth, Inflation and Interest rate Developments

Figure 3: Inflation and interest rates

Figure 4: Rwanda’s trade volume (USD billion)

Figure 5: Structure of Rwanda’s Financial System

Figure 6: Capital of insurers

Figure 7: Assets Growth, Coverage and penetration rate

Figure 8: Micro-finance types in Europe

Figure 9: Types of MFIs in Europe

Figure 10: Respondents' marital status

Figure 11: Income from Income generating activities established by USACCO members

Figure 13: Respondents' type of farming activities established after joining USACCO

Figure 14: Relationship between membership duration and income improvement

Figure 15: Relationship between membership duration and standard of living


ACCOSCA: African Confederation of Cooperatives saving & credit Associations

AMIR: Association of Microfinance institutions in Rwanda

BNR: Banque National du Rwanda (National Bank of Rwanda)

BRI: Bank Rekyat Indonesia

CGAP: Consultative Group to Assist the Poor

DPP: District Development Plan

EAC: East African Community

PHDR: Poverty Human Development Report

MINECOFIN: Ministry of Finance and Economic planning

MFIs: Micro finance Institutions

MLS: Membership Living standard

RCA: Rwanda Cooperative Agency

FCA: Financial Conduct Authority

MDGs: Millennium development Goals

NGOs: Non-Governmental Organizations

NPLs: Non-performing loans

NISR: National Institute of Statistics

NGO: -Non-Governmental Organization

NST: National strategy for Transformation

PHDR: Poverty Human development Report

RAMA: La Rwandaise d’Assurance Maladie/ Rwanda Health Insurance Fund

SACCO: Saving and credit Cooperative organization (or, Credit unions)

SIMTEL: Simulation and Teleprocessing

SPEED: Social Pact for Empowered Economic Development

SPSS: Statistical Package for Social Science.

UNDP: United Nations Development Program

UNRISD: United Nations Research Institute for Social Development

USACCO: Umwalimu Saving and Credit Cooperative organization

USAID: United States Agency for International Development

USD: United States of American’s Currency (USD)



1.1. Background of the study

The study seeks to assess the contribution of saving and credit cooperatives organizations (SACCOS) on the improvement of members’ socio economic development in Rwanda: Opportunities and challenges”- Evidence from Umwalimu SACCO- Huye District. Nowadays, Poverty is an overarching problem in Africa which is deeply rooted in rural areas. Despite rapid urbanization, over 70 % of the poor still live in rural areas and up to 45 % of the people of the African continent live in absolute poverty (ADB, 2008). About 90 % of the people of Rwanda are poor and live in rural areas. Agriculture and agriculture-related activities being their mainstay with limited access to credits and other financial services from commercial banks or micro-finance institutions mainly due to demand for collaterals or securities (NISR, 2010).

Despite massive progress in the past few decades, global poverty in all its different dimensions remains a broad and entrenched problem. For example, today, more than 700 million people subsist on extremely low incomes. Every year, five million children under five years die of diseases that often could have been prevented or treated by a handful of proven interventions. Again, a large majority of children in low- and middle-income countries attend primary school, but many of them leave school lacking proficiency in reading, writing and mathematics. How to effectively reduce global poverty remains one of humankind’s most pressing questions. It is also one of the biggest questions facing the discipline of economics since its very inception. The Royal Swedish Academy of Sciences (2019);

Africa is considered to be the poorest continent in the world followed by Asia and Latin America (PHDR, 2009). World statistics indicated that three of every four people in the developing countries live in rural areas; most of them were found in Sub-Sahara Africa whose livelihood depends on agriculture economy (Kopoka, 2006).Within Africa, the Sub-Saharan region is the poorest region where poverty is unique in the sense that majority particularly rural people are extremely poor. Rwanda is one of Sub Saharan countries where poverty is also extreme. The available statistical data from World Economic Forum Africa (2015) showed that, the country has reduced the percentage of people living below the poverty line from 57% in 2005 to 45% in 2010. Despite this, 63% of the populations still live in extreme poverty, as defined by the World Bank as they live with less than $1.25 a day. Furthermore, only 17% of Rwandans live in urban areas where 83% of Rwandans are living in rural areas where the incidence and severity of poverty is twice as high as those who are living in urban areas (Human Development Report, 2018). Despite the fact that most of population is located in rural areas, many people residing in these rural districts are faced with low income constraints, that is the case of Rwanda’s primary and secondary school teachers.

According to World Bank (2012), income is pronounced as money that individuals earn for their well-being, and comprises many dimensions. It includes having high purchasing power and the ability to acquire the basic goods and services necessary for survival with dignity. Low household incomes also encompasses low levels of health and education, poor access to clean water and sanitation, inadequate physical security, lack of voice, and insufficient capacity and opportunity to better one’s life, and one of the proposed interventions in reducing this challenge and uplifting the standard of living of primary and secondary schools’ teachers in Rwanda. As to resolve definitively these challenges, there was the establishment of Umwalimu savings and credit cooperatives (USACCO) in 2006 which was licensed in 2008 by the National Bank of Rwanda to operate as financial institution. This cooperative was established in 2006, with the guidance of President Paul Kagame to cater for the welfare of teachers by ensuring their socio-economic development. Today, Umwalimu SACCO has got 30 branches -one in each district; and has grown further in terms of equity and clientele with a total of 70,697 operational and active accounts. The teaching population in Rwanda (primary and secondary schools) is at least 62,000, of which 48,000 (constituting 77%) have active accounts and therefore are paid salaries through Umwalimu Sacco where about 44,000 teachers have accessed loans from Umwalimu SACCO ( Umwalimu SACCO, 2018).

Furthermore, the study of Getachew Mergia Tache (2006) cited in Ergetew Temeche (2014), argued that, SACCOs or Credit Unions have been developed to meet the fundamental human need to find a way of saving and borrowing methods without taking risks and without handing over too much power to a moneylender. These financial cooperatives were invented in South Germany in 1846 at the time of agricultural crisis and continues heavy drought in Europe, by two community business leaders: Hermann Schulze-Delitzsch (1803-1883) and Friedrich Von Raiffeisen (1818-1888), who are considered as the founding fathers of the saving and credit cooperatives (SACCOs) movement: Hermann Schultze Delitsche, who established a saving and credit cooperatives for minor artisans and the urban middle classes, and Friedrich Von Raiffeisen (1818-1888), who is known as a cooperative leader who reinvented microfinance by creating rural savings and credit cooperatives. Helmut K. Anheier & Stefan Toepler (2010) added that, Hermann Schulze-Delitzsch introduced similar initiatives in urban areas while Raiffeisen addressed problems in rural areas during the great famine of 1846/47 that inspired him to establish a rural charity association, importing grain from non-affected areas to distribute bread to the poorest. Later on, he founded a loan society (Flammarsfelder Hulfsverein) in order to stimulate savings and provide credit to farmers, allowing them to buy cattle and equipment. These initiatives, however, rested heavily on philanthropy, rendering its viability uncertain. Again, in the 1860s, Raiffeisen followed the example of Schulze-Delitzesch by introducing the concept of cooperative self-help in what would become the first rural savings and credit cooperative (Darlechnskassen-Verein) in Germany. Until his dead, Friendrich Raiffeisen put considerable effort in the propagation of this type of cooperative. In 1872, the first rural cooperative bank (later known as Raiffeisen-bank) was set up, as a structure to strengthen the financial position of the Darhlenskassen. Additionally, rural producer cooperatives were set up for storage, marketing, and distribution of agricultural produce and joint purchase on agricultural factor markets. Indeed, the innovation of Friedrich Von Raiffeisen (1818-1888) laid the foundation of a cooperative movement and provided a prototype for rural credit associations in more than 100 countries, resulting today in hundreds of thousands of cooperatives and affecting the lives of more than 150 million people through the concept of cooperative self-help.

Ergetew Temeche (2014) added also that, in Italy, Luigi Luzzatti established saving and credit cooperatives, which combined the principles established by his two German predecessors. Both forms spread rapidly all over Europe, northern America, Latin America, and Asia from 1900 to 1930 and to Ghana by one Catholic Bishop. Now days, SACCO societies play a very important role in empowering their members Socio-Economic status all over the world.

However in some countries of Africa, the Savings and Credit Cooperatives were promoted between 1965 and 1989; The first SACCO was introduced by Father John Necnulty in Ghana with purpose to assist villagers improve their economic conditions (Fredrick, O., W.2013). The African Confederation of Cooperatives saving and Credit Associations (ACCOSCA) was formed in Kenya in 1968 having goal to attain sustainable and viable SACCOs in Africa. In recent years, in developing countries consideration of the potential of Savings and Credits Cooperatives and Credit Unions as tool for sustainable poverty alleviation has been increasingly recognized (Jonathan, M, et al. 2002). Many of the first savings and credit cooperatives emerged in the English- speaking countries, primarily in Ghana 1955, Uganda 1946 and in Nigeria dates back to 1951-1953 (Mbwana, K., and J. Mwakujonga, 2013). In Tanzania SACCOS emerged in 1954, Kenya in 1964 and Liberia1965. Thus, in Rwanda the first forms of cooperatives were introduced in 1949 by the colonial masters but Credit and Savings Cooperatives started as early as 1988 and were first legally recognized by law number 31/1988 of 1988, (Rwanda Cooperative Agency, 2009). Later law number 08/1999, of June 1999, regulating the banking and non-banking financial institutions in Rwanda affirmed the role of savings and credit cooperatives in Rwanda (ibid 2009). Such institutions were established under the instructions and supervision of National bank of Rwanda (BNR, 2008).

1.1.1 Historical background of Umwalimu SACCO and SACCOs in general

Umwalimu SACCO was created in 2006 and it was licensed in 2008 by National Bank of Rwanda (BNR) to operate as a Financial Institution offering different financial services to its members. Today it has 30 branches, one in each district, and has grown in terms of equity and members with a total number of almost 78,333 active accounts. Members have easy access on their accounts at all Branches of Umwalimu SACCO and Umurenge SACCOs through an interface technology. Through the cooperative and out of their meager earnings, teachers save up to 5 per cent of their monthly net salary; this would automatically qualify them to access loan as Umwalimu SACCO members (Umwalimu SACCO Report, 2018). The aim of establishment for Umwalimu SACCO was to empower the members towards uplifting of their social-economic welfare and to contribute to socio-economic development of the community in which they live. The establishment of the SACCO was the initiative from His Excellence the President of the Republic of Rwanda, Paul Kagame. Both the Ministry of Finance and the Ministry of Education were charged with responsibility of having the idea implemented. The main concern was the economic position of teachers that would not cater for their basic needs, the budget constraint and the wage bill limit as normally advocated by international financing institutions (MINECOFIN, 2006).

The background of SACCOs in the world can be traced based on the origins of modern cooperation. Morris Altman (2016) cited in Muyombano A., et al., (2016), Savings and Credit Co-operatives first appeared in Germany in the 1870's. The idea moved to North America in 1900 with European immigration. Canada, the United States, Australia and Ireland had the most established movements. In many regions of these countries SACCOs are much larger than the commercial banks. According to Muyombano A., et al., (2016), the first Savings and Credit Cooperative were established in mid-19th Century, mainly in Germany by two men considered as the founding fathers of the credit cooperative movements: Hermann Schultze-Delitsche, who established a credit cooperative for minor artisans and the urban middle classes, and Friedrich Von Raiffeisen, the founder of the saving and credit cooperatives or rural credit. After consumer cooperatives, the savings and credit cooperatives is the common type of cooperatives to be found in the modern world, including the Third world (Munyiri, 2006) .

The objective of the scheme is to improve the teachers’ professional lives, get access to loans for different income generating activities that could help them to meet their needs and to improve the socio-economic development of the country. The study assumes that after the establishments of Umwalimu SACCO in Rwanda, the socio-economic status of teachers have improved.

1.1.2 Conceptual background

A SACCO (saving and credit cooperative) is a financial institution under the cooperative form. It is a legal entity, in which individuals save their money and can get loans to invest in various other income generating activities. The basic structure of SACCOs and credit unions is what differentiates them from banks for they are user-owned financial intermediaries. Members typically have a “common bond” based on geographic area, employer, community, industry or other affiliation (MINICOFIN, 2007) cited in Isaboke Peter Kennedy Nyataya (2008). After being a member of SACCO, each member has equal voting rights regardless of the deposited amount of money or the number of shares owned. The principal products of SACCOs are savings and credit, however, some offer money transfers, payment services and insurance; they sometimes join together to create second-tier associations for the purposes of building capacity, liquidity management and refinancing; these second-tier associations can play a useful role in monitoring and evaluation.

Microfinance is the provision of financial services including savings, transfers, insurance and credit for the poor (Pacific Financial Inclusion Program, 2009). Today there is broad awareness that poor people have many and diverse financial service needs, which are typically met by a variety of providers through multiple financial services (The World Bank, 2013). SACCO is an easy way of organizing a community to save and recycle savings in a given locality. Since the nature of a SACCO is local, it mobilizes savings locally, within the community, and then the profits are returned to members in the form of loans (MINICOFIN, 2007). The money stays and works within the membership and the area. This mutually achieved success helps not only build a sense of ownership and pride in an area but also create a culture of saving and investing. SACCOs is a Rwandan based savings credit and co-operatives whose objective is to pool savings for the members and in turn provide them with credit facilities. Other objectives of SACCO are to encourage co-operation among members, teach them proper investment practices and also proper money management. Unlike banks the SACCOs are primarily formed to raise the social welfare of members (MINICOFIN, ibid).

Thus, to enhance the socio-economic development of Rwandan community in general, and the teachers’ welfare in particular, the government of Rwanda established a teachers’ cooperative in the name of “ Umwalimu Sacco” that grants loans to teachers to enable them to set up small income generating projects to supplement to their regular professional income (Ntambara, D. 2012). Provision of small loans, regular saving deposits which teachers will deposit in their Umwalimu SACCO and later Umwalimu SACCO provide investment advisory services which in the long run will lead to improved welfare of teachers and enabling teachers to invest in both liquid assets and non-liquid assets to enable them pay school fees, pay medical bills and improve on food security.

1.1.3 Contextual background

In Rwanda, about 48.7 % of the rural populations are below the nationally defined poverty line, while it is 22.1% for urban population. Indeed, the majority of Rwandans live in rural areas, where Poverty is deeper and severer than in urban areas (National Institute of Statistic of Rwanda, 2011). In Rwanda people are classified into six different classes according to their social economic status as per Ubudehe Programs. Ubudehe program is a method of addressing rural poverty through community collective action creating empowerment by helping local people create social capital, nurture citizenship and build a strong civil society (MINECOFIN, 2002). In order to uplifting the living conditions of low income earners, SACCOs were established from each sector as financial intermediaries, channeling savings into loans, provide saving opportunities for the people, especially in the rural areas, but further improvements are necessary to make their services more efficient and sustainable.

Due to claims formulated by primary and secondary schools’ teachers to the government of Rwanda related to their low monthly income earned that could not allow them facing the market price fluctuations caused by the inflation. The government of Rwanda has subsidized the founding of Umwalimu SACCO all over the country. The cabinet meeting of 31st October, 2012 ordered that a special program to support Umwalimu SACCO be put in place for 10 years until 2022.The government then agreed a figure of Rwf 30 billion to be disbursed in 10 years from 2012 in order to have the USACCO reach out to as many teachers across the country for them to access formal financial services affordably. The benefits the members have received from the government support include the government primary and secondary schools’ teachers accessing loans at an interest rate of 11%, down from 14% per year on projects meant to increase their income sources or allow them to own their homes under mortgage financing. Consumption loan rates were also lowered, from 14% to 13% per year. Teachers after putting these loans and savings together will able to establish small income generating activities that could generate to them an additional income that could then improving their standard of living.

1.2. Statement of the problem

Cooperatives and SACCOS are important contributors to economic growth and development of both rural and urban Rwandans. Hence it is worth to examine the level of contribution of these SACCOs on beneficiaries, in terms of socio-economic status improvement. Most empirical studies portray that SACCOS and rural MFIs have led to positive effects on their members as argued by (Kyessi 2010; Isaboke Peter Kennedy Nyataya and Sheria Ruvugiro (2015). However, some studies reported the negative effects of MFIs and rural SACCOS for beneficiaries (Diagne and Zeller 2001; Frohberg and Müller 2007; Dean and Zinman 2010) including Stewart et al (2010) argued that microcredit clients are made poorer and not richer by microfinance, because sometimes their businesses fail to generate enough profit which is necessary for repaying the loans in Sub Saharan Africa. Similarly, Lapenu and Reboul (2006) noted 10% decline of MFIs clients in their household’s standard of living in Comoro, since they had been forced to sell personal items to repay back the loans. Moreover, loans have fueled the economic difficulties for MFI clients because they had increased market competition and hence they reduced the profits obtained from their business. Ngehnevu and Nembo (2010) noticed that the poorest of the poor were not benefited from the Cameroon Cooperative Credit Union League (CamCCUL) financial services.

Furthermore, in economic development and Poverty reduction strategy (EDPRS), Rwanda has the main goal of achieving sustainable economic growth and social development of all levels of citizens. In order to implement its goals, the Rwandan government established microfinance institutions including savings and credit cooperatives as important instruments (tools) to reduce the number of poor people from 60% in 2000 to 30% in 2020. While, inadequate or lack of financial resources is one of the major problems facing poor households in Rwanda. The emergence and development of microfinance institutions, the SACCOs inclusive, has been gaining its popularity in providing financial services to the poor and low income earners ever since their inception in 2008 as an instrument for antipoverty development programs. The ultimate aim of Rwanda’s long-term development plan is to transform the country into a middle-income country by the year 2020. Again MINECOFIN (2007) added that, microfinance can build the capacity of poor people to create employment and generate wealth in a sustainable manner. Therefore, for the effective accomplishment of the aforementioned program (EDPRS) is one of the reasons why the government of Rwanda established Umwalimu SACCO in 2008 to quickly fulfills duties of uplifting the socio-economic development of teachers in Rwanda.

However, in Huye District Umwalimu SACCO has been observed to have created a remarkable impact on the enhancement of teachers’ saving culture and hence, facilitating them in accessing loans which in the long run has enabled their households to invest in various activities and projects. Though primary and secondary school teachers face always with a budget constraint, teachers’ wages should not be comparable to those of other workers of other sectors with the same level of qualifications such as nurses, public servants, etc whom they meet at the market demand and whose salary is larger than that of teachers. Thus, USACCO was formed by the government of Rwanda as, a solution to encourage teachers to pool together savings so that they can access loans to engage in productive activities for their socio-economic development. Following the Umwalimu SACCO members’ continuous saving with their SACCO, they are able to access credit at low but competitive interest rates. With access to these financial savings and credit services, members can start new businesses or improve on the existing businesses and engage in any other productive activities as well as learning how to use earned income wisely and consequently improve on their socio-economic status. However, socio-economic status of members in Umwalimu SACCO is still low as there is a general outcry on the savings procedure and the size of the loans given to members. Thus, if members do not access adequate credit and continue to get small loans, among other obstacles, their goals of improving on their socio-economic development through the establishment of small income generating activities may not be achieved. Hence, it is against the aforementioned backdrops, the researcher decided to undertake the present study in order to have a better understanding on how Umwalimu SACCO has effectively and positively transformed the socio-economic lives of its beneficiaries through the execution of its planned and unplanned financial and non-financial activities.

Again, according to Wolday (2003) quoted by Sheria Ruvugiro (2015), limited researches were conducted in this domain and have only concentrated on institutional sustainability, rather than their impact on member’s living standard improvement. Since inception Umwalimu SACCO, it has not attracted attention of scholars to examine its contribution to the improvement of teachers’ socio-economic development and welfare.

The purpose of this paper is therefore to assess the contribution of SACCOs’ beneficiaries living conditions (as measured by income, saving, asset accumulation, and self-esteem) by paying a special attention before- and after teachers have joined USACCO. Hence, this study is intended to evaluate whether USACCO had any contribution towards the welfare or standard of living of teachers in Rwanda, with evidence of USACCO of Huye District.

1.3. Objectives of the study

The main objective pursuing by this research is to assess how primary and secondary school teachers were experienced the implementation of the Umwalimu SACCO on improvement of their socio-welfare in Rwanda and being focused on USACCO located in Huye District.The specific objectives include the following:

1. To determine the type of contributions generated by Umwalimu SACCO’ activities (services) to its members, in Huye District.
2. To assess the type of small income generating activities generated by members and their contributions on the improvement of their standard of living, as results of becoming USACCO members, in Huye District.
3. To evaluate the relationship between USACCO’s financial products and the socio-economic development improvement of beneficiaries

1.4. Research questions

The following questions will be answered by the research, in order to achieve the specific objectives stated as above.

1. To what extent the type services provided by USACCO contribute to teachers’ socio economic development, in Huye District?
2. What are the contributions of small income generating activities established by teachers to their standard of living, as results of becoming members of USACCO, in Huye District?
3. Is there a significant relationship between Umwalimu SACCO’ financial services and the socio-economic development improvement of beneficiaries?

These specific questions were highlighted by the following sub-questions, which will guide my attention:

i) What was the socio-economic status of members before and after joining USACCOs?
ii) What are the services provided by Umwalimu SACCO to its members, in particular, towards members’ socioeconomic conditions improvement, in Huye district?
iii) Is there a relationship between the USACCO’s activities and the socio-economic development of beneficiaries?
iv) What are the challenges which face Umwalimu SACCO members in improvement of their wellbeing?

1.5. Significance of the study

The study plays a very important role for both at local and national levels. Locally the study is of importance for the local governments and decision makers to understand the relevance of Umwalimu SACCO in improving socio-welfare of teachers. This is to enable them to refocus in case the intended objectives are not being met. The study also offered a great opportunity for the practitioners to get feedback from primary and secondary school teachers who are participating and those not participating in Umwalimu SACCO’ activities and this feedback includes suggestions on what can be done better which can be used to create a positive change in improving the living conditions of teachers. At the national level, the study is of importance in assessing the relevance of Umwalimu SACCO in improving the socio-welfare of teachers. This brings out practically what it takes to establish and manage a successful Umwalimu SACCO and this can be integrated in national policies and programs for teachers in other areas in Rwanda.

Furthermore, the study was significant in the following ways:

(i) Information generated on the study will help the researcher to understand the extent to which financial services provided by Umwalimu SACCO contributed on socio-economic development of teachers.
(ii) The study will help the researcher, Umwalimu SACCO management, members and other stakeholders to understand how the Umwalimu SACCO savings and credit services contribute to the members’ socio-economic development.
(iii) The study helped to widen the researcher’s knowledge on the subject and in particular credit and saving services of Umwalimu SACCO.
(iv) The study will serve as a basis for further research by institutions and other scholars, having contributed to its literature and methodology.

1.6 Justification of the study

The study provides information on the role played by Umwalimu SACCO in improving the socio-economic development of teachers on how they can be sustained in Huye district and in Rwanda at large. This research has been motivated by the introduction of new type of cooperative called Umwalimu SACCO in Rwanda, with an aim of enhancing the socio-economic status of primary and secondary school teachers in Rwanda. The findings of the study will be presented in a form report and the copy of the same shall be shared with the management of Umwalimu-SACCO. Hence serving as database and reference document to facilitate the management in decision making on matters concerned with activities of the USACCO. Through the data gathered for the present study, the members of USACCO will be able to have a better understanding of the role their USACCO is playing towards their own socio-economic development and that of others in the area. The study also will add value to the existing literature on SACCOs in general and USACCO in particular and therefore, benefiting academics as well as researchers as study reference material. Finally, this study will identify the opportunities found at USACCO, propose suggestions, advices, appreciation and recommendations to strengthen the USACCO.

1.7. Scope of the study

1.7.1 Geographical scope

The study was conducted at Umwalimu SACCO, Ngoma sector, Huye District, Southern Province, Rwanda. This location was selected because it is convenient to the researcher in terms of accessibility.

1.7.2 Content scope

This study concerns the Contribution of USACCO on the socio-economic development of teachers in Rwanda, with Evidence from Huye district branch. The study focuses on the contribution of USACCO services as an independent variables and the socio-economic development of beneficiaries was considered as a dependent variable which was measured in terms of members’ ability to start new businesses, expand existing ones, and increased income. Finally the intervening variable were government policies and programs, level of entrepreneurial skills, educational level, family size and Saving culture. Lastly, inquiries will be made on what is thought to be the missing link and what corrective measures should be taken to ensure that the assigned objectives of USACCO are applied in improving socio-welfare for teachers and how they can be sustained.

1.7.3 Time scope

This study covers a period of 10 years, from 2008 to 2019. This is the time the researcher deems suitable for collecting data with the regards to the objectives of the study and also finishing the research on time with regards to the University timeline and convenient for the researcher to achieve the award in time. The year 2008 was taken into consideration because it was the starting year of Umwalimu SACCO in Rwanda and 2019 is the current year of the study.

1.8. Thesis structure or organization

The thesis is divided into six main chapters including this introductory chapter. This first chapter presents, firstly, the introduction, statement of the problem, purpose of the study, research objectives, research questions, and significance of the study, scope of the study and the organization of the study. The second chapter focuses on the literature review. It covers literature related to topic by different authors and the theoretical foundations of the study. It is also concerned with the consultations of existing literature on the topic; it aims at fetching the knowledge from the works or conducted by other researchers. The third chapter covers the overview on financial system and microfinance activities in Rwanda and oversea. It includes the introduction on Microfinance, concepts of microfinance &MFIs, Microfinance in Rwanda and in European countries. The chapter four presents the research methodology used in this dissertation; it covers methodological approaches that were employed in the research, research design, research instruments and sampling techniques used during the study. The fifth chapter provides the presentation, analysis and interpretation of research results and verification of hypotheses; and Chapter six is dedicated to the summary of major findings, discussion, conclusions and recommendations and suggestions for further research. The detail structure of thesis is arranged as follows:

Chapter 1: General Introduction
Chapter 2: Literature Review
Chapter 3: Overview on financial system and microfinance activities in Rwanda
Chapter 4: The research methodology
Chapter 5: the presentation, analysis and interpretation of research results and verification of hypotheses
Chapter 6: Summary of major findings, discussion, conclusions and recommendations and suggestions for further research.

1.9. Operational definitions

SACCOs: These are savings and credit cooperative organizations which are initiated by both governments and private individuals or firms in order to improve the welfare and income of the general public in which they are located.

Microfinance: it is an economic development approach that involves providing financial services, to low-income clients, where the market fails to provide appropriate services. The services provided by the Microfinance Institutions include credit, saving and insurance services.

Membership: is a quality of people to belong to a group, association, cooperative, organization… in the line with the present study, membership is the quality of SACCO members who have fulfill all condition to become members to have fully paid their share.

Teachers: these are skilled individuals who impart knowledge from nursery, primary, to secondary education giving instruction to the young generations.

Socio-economic development: Socio-economic development is the process of social and economic development in a society. The ultimate objective of social development is to bring about sustained improvement in the well-being of the individual, groups, family, community, and society at large. It involves sustained increase in the economic standard of living of a country’s population, normally accomplished by increasing its stocks of physical and human capital and thus improving its technology.

Micro-credit: according to (Meagher, 2002) micro-credit is a component of microfinance and is the extension of small loans to entrepreneurs, who are too poor to qualify for traditional bank loans. Furthermore, in developing countries especially Rwanda micro-credit enables very poor people to engage in self-employment projects that generate income, thus allowing them to improve the standard of living for themselves and their families.

Micro finance Institutions (MFIs): Ledgerwood, (1999) defined MFI as a microfinance institution or an organization, that is engaged in extending micro credit loans and other financial services to poor borrowers for income generating and self-employment activities.

Opportunities and challenges: these are the benefits and hindrances of Umwalimu SACCO.

Finally, this chapter has covered the introductory background of savings and credit cooperative (SACCO), the statement of problem that the research aims to resolve, research questions and objectives of the study; the following next chapter two examines the literature pertaining to the research topic.



2.0. Introduction

The previous chapter one mentioned the general introduction of the study, background as well as the statement of problem; this chapter examines and presents an increasing body of knowledge pertaining to saving and credit cooperatives. This chapter therefore, provides theoretical and empirical information of the study from publications on topics related to the research problem that have allowed the researcher to formulate the hypotheses of this study based on the theoretical foundations of the study found in this chapter two. It begins with definitions of key concepts of the topic, a theoretical review where a number of theories that explain saving and credit cooperatives and microfinance are discussed in length, an empirical review is thereafter provided where previous studies on the SACCOs are presented and discussed and ends with hypotheses of the study.

2.1. Definitions of key concepts

2.1.1. Micro-finance

Micro-finance is a term used to refer to different methods for giving poor people access to financial services and the main difference among definitions is about the range of services and target clients. According to the Consultative Group to Assist the Poor (CGAP, 2018), microfinance is the “provision of basic financial services to poor (low income) people, who traditionally lack access to banking and related services”. Hence, Microfinance is an economic development approach that involves providing financial services, to low-income clients, where the market fails to provide appropriate services. The services provided by the Microfinance Institutions include credit, saving and insurance services.

Again, The Asian Development Bank (ADB) defined microfinance in 2000 as “the provision of a broad range of financial services such as deposits, loans, payment services, money transfers, and insurance to the poor and low-income households and their micro-enterprises”. It was noted that ADB’s definition of microfinance low-income households, micro-enterprises as well as people below the poverty line. This is why, microfinance or saving and credit cooperatives are most developed in developing countries. Furthermore, saving credit cooperatives are mostly used by developing countries to alleviate the poverty.

2.1.2. SACCO

A SACCO (saving and credit cooperative) is a financial institution under the cooperative form. It is a legal entity, in which individuals save their money and can get loans to invest in various other income generating activities. The basic structure of SACCOs and credit unions is what differentiates them from banks for they are user-owned financial intermediaries. Members typically have a “common bond” based on geographic area, employer, community, industry or other affiliation (MINICOFIN, 2007). Again, Kimberly, Zeuli, and Robert (1980) and United States Department of Agriculture (USDA) in 1987 add that, “A Cooperative is a user-owned, user-controlled business that distributes benefits in the basis of use.” SACCOs are user-owned financial institutions that offer both savings and credit services to their members.

Getachew (2006) argued that, in SACCO Society once overhead and other expenses are paid, reserve for cushion against any loss, and for expansion of services set aside, the remaining income from loans is returned back to members in the form of dividend on savings, share or both. The difference between a SACCO and other forms of co-operatives is that the SACCO can accept deposits from its members as savings and also issue out loans to qualifying members of the SACCO. Furthermore, SACCOs in Africa are intended to offer alternative development approaches directed towards improving the desirable situations in low-income countries. They are community membership based-financial institutions that are formed and owned by their members with a view to promoting and enhancing their members’ economic interests, hence, contributing favorably to the Human Integrated Development.

2.1.3. Umwalimu SACCO

Umwalimu Savings and Credit cooperative (U-SACCO) is a SACCO for Rwandan teachers mandated to empower the members towards uplifting of their social-economic welfare and to contribute to socio-economic development of the community in which they live ( Umwalimu SACCO-Annual financial report, 2018). The principal activities of Umwalimu-Savings and credit cooperative as all other saving and credit cooperative are the provision of microfinance, savings and credit services to teachers.

2.1.4. Cooperative

Masharani (1978) defines a co-operatives society as “an association of people who have voluntary come together for the purpose of improving their standards of living and have agreed to be guided and governed by certain specific principles known as cooperative’s principles. Thus, an association refers to any group of people who have joined together for a particular purpose ranging from social to business, and usually meant to a continuing organization.

According to RCA (2018), “A cooperative is an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly-owned and democratically-controlled enterprise, according to internationally recognized co-operative values and principles”. A co-operative is different from a conventional business due to: It fulfills a social or environmental objective, or is formed to fulfill its members’ needs; its democratic ownership and control; its way of working and its legal structure.

Cooperative Organizations may carry out activities in all sectors of economic and social life, and they are divided into the following categories: (i) Production Cooperative Organizations; (ii) Commercial and Consumer cooperative Organizations; (iii) Savings and Credit Cooperative organizations; (iv) Services Cooperative Organizations and (v) Multipurpose Cooperative Organizations. (RCA, Idem)

2.1.5. Savings

Quicken, 2019 stated that, savings refer to money you put aside for future use rather than spending it immediately. In addition to the benefits of saving up for future purchases, delaying an impulse purchase also helps you decide whether it is something you really need, or a waste of money you will regret shortly after buying (Quicken, 2019). Indeed, saving is the conservation of money for the future spending. Methods of saving include putting money aside in a bank or pension plan. Saving also includes reducing expenditures, such as recurring costs. In terms of personal finance, saving specifies low-risk preservation of money, as in a deposit account, versus investment, wherein risk is higher. “Savings are an important determinant of financial development because when economy is getting stronger, the earnings of people increases which in turn increases the savings resulting in financial development within the country” (Luca, 2000).

2.1.6 Loan

In finance, a loan is the lending of money from one individual, organization or entity to another individual, organization or entity. According to Signoriello J. (1991), a loan is a debt provided by entity (organization or individual) to another entity at an interest rate, and evidenced by a promissory note which specifies, among other things, the principal amount of money borrowed, the interest rate the lender is charging, and date of repayment.

Thus, a loan entails the reallocation of the subject assets for a period of time, between the lender and the borrower. In a loan, the borrower initially receives or borrows an amount of money, called principal, from the lender, and is obligated to pay back an equal amount of money to the lender at a later time.

2.1.7. Socio-economic development

Socio-economic development is a process that seeks to identify both the social and the economic needs within a community, and seek to create strategies that will address those needs in ways that are practical and in the best interests of the community over the long run. The general idea is to find ways to improve the standard of living within the area while also making sure the local economy is healthy and capable of sustaining the population present in the area. Socio-economic development occurs in neighborhoods in metropolitan areas, sections of smaller cities and towns, and even in rural settings. (Sullivan et al., 2003)

Social development is a process that results in the transformation of social structures to improve the capacity of a society in order to fulfill its objectives (World Bank, 2009). UNRISD adopts a broad definition of social development one that is concerned with Processes of change that lead to improvements in human well-being, social relations and Social institutions and that are equitable, sustainable, and compatible with principles of democratic governance and social justice (UNRISD, 2011). In general social development analyzes how societies progress, stagnate, or regress because of their local or regional economy, or the global economy.

2.1.8. Development

Todaro, M (1985:85) defines development “as a multidimensional process involving major changes in social structures, popular attitudes, and national institutions, as well as the acceleration of economic growth, the reduction of inequality, and the eradication of absolute poverty. Thus, Todaro believes there are three core values of development and these core values are life-sustenance, self-esteem and freedom to choose.

Therefore, development, in its essence, must represent the whole gamut of change by which an entire social system, tuned to the diverse basic needs and desires of individuals and social groups within that system, moves away from a condition of life widely perceived as unsatisfactory and toward a situation or condition of life regarded as materially and spiritually better.

2.1.9. Growth and development

The terms economic growth and economic development sometimes are used interchangeably, but they are fundamentally different. (Perkins et al., 2006) argued that, Economic growth refers to a rise in national or per capita income and product. If the production of goods and services in country rises, by whatever means and along with it average income increases, the country has achieved “economic growth”. While, economic development implies more, particularly improvements in health, education, and other aspects of human welfare. Countries that increase their income but do not also rise life expectancy reduce infant mortality, and increase literacy rates are missing out on some important aspects of development. If all of the increased income is concentrated in the hands of a few rich elite or spent on monuments or military apparatus, there has been very little development in the sense that we mean (Perkins et al., 2006).

2.1.10. Economic development

Furthermore, Todaro M. (1985) the concept of economic development gets a unique meaningful and understanding from the books published by the Professor Michael Todaro who stated that, the term development implies the process and the positive changes in the growth of the wealth of given country and therefore the growth of the well-being of its citizen. It is necessary to mention that the economic that the economic development may be seen as synonymy of well-being of the country. Indeed, the term economic development also emphasizes the importance of constant economic growth that is achieved through the competency of the national companies and their work force through the various innovations, raising the economic competency of the countries.

2.2. Theories on microfinance: saving and credit cooperatives

This section involves the presentation and discussion on theories considered as foundation of the study. Therefore, theories are formulated to explain, predict, and understand phenomena and, in many cases, to challenge and extend existing knowledge within the limits of critical bounding assumptions. The theoretical framework is the structure that can hold or support a theory of a research study.

The theories on microfinance were advanced by scholars, have been considered by the researcher for the purpose of this study. Many studies indicated that various microfinance institutions have successfully extended unsecured small loans to poor households and entrepreneurs while that was the failure of traditional or formal financial institutions or banks.

To explain for the success of this infancy industry or microfinance towards poor holds and people, several economic theories are used, which are called: Theories of asymmetric information and economies of scale have explained us that formal financial institutions are reluctant to provide microfinance services. The theory of group lending with joint liability, which originally is a method of lending but presently developed as a theory in microfinance, explains Microfinance Institutions can avoid the above stated problem by creating financial contracts that impose joint liability and create dynamic incentives to mitigate the effects of asymmetric information. The economic theory treats microfinance institutions (MFIs) as infant industries and the psychological theory differentiates microfinance entrepreneurs from traditional money lenders by portraying them as social consciousness driven people (Khandakar et. al., 2004).

According to Jeffrey S. Royer (1987), the general purpose of any economic theory is to provide a framework for the analysis, understanding, and prediction of economic behavior. Theory gives meaning to the events economists observe.

(a)Theory on asymmetric information

According to Sean Ross (2018), the theory of asymmetric information was developed in the 1970s and 1980s as a plausible explanation for common phenomena that mainstream general equilibrium economics couldn’t explain. In simple words, the theory proposes that an imbalance of information between buyers and sellers can lead to inefficient outcomes in certain markets. This theory was developed by three US economists (George Akerlof, Michael Spence, and Joseph Stiglitz). All three won Nobel Prize in Economics in 2001 for their earlier contributions; implied the simple fact that two sides in a transaction do not have the same information. One of the most vital tasks of the bank is to ensure about the repayment probability of borrowers to protect its depositors and shareholders against risks. Therefore, the banks need to use information effectively to solve the three economic problems: What kind of loan contract to provide, to whom and what interest rate. The bank required significant expenses to gather, processing and storing information on borrowers. Asymmetric information in credit market can lead to adverse selection and moral hazard, which can be source of credit risk and be the main concerns of any bank. Thu Trang BUI (2017)1 adds that, adverse selection arises because the bank cannot perfectly observe the characteristic of borrowers. They give the same treatments to the risky borrower and the safe ones. So when the screening mechanisms cannot effectively distinguish, the standard solutions for bank are to demand collateral in order to ensure that only safe types enter the market. However, typical microfinance clients are the poor; they don’t possess sufficient wealth for collateral under the bank’s regulation. Therefore, they are denied accessing to the credit services.

This might create moral hazards after the transaction when the borrowers may deviate from the terms of the loan contract used for loan purposes. One solution for the bank’s lenders is to have to control and evaluate the borrower’s actions after giving loan, and this approach is costly. The bank, therefore, try to demand collateral as a mean of mitigating the problem of moral hazard. Once again, poor borrowers are excluded from the market because of asymmetric information problems.

(b)Theories on economies of scale

In economics, the economies of scale are achieved when more units of a good or service can be produced on a larger scale, yet with fewer input costs.

According to this theory, economic growth may be achieved when economies of scale are realized that implies lower average cost as the result of mass producing a good. In finance, it can be understood as both when loans are large and when the number of borrowers increases, the average lending cost decreases. This theory in one side encourages lender to make large loans rather than a number of small loans to reduce cost. In the other side, it suggests that if lenders can make some loans in the same ways, the average transaction fixed cost also decreases. Therefore, to expand quickly and keep the costs of handling each loan application low, financial institutions may offer simplified and standardized loan contracts but by so doing can lead to a fall -off in portfolio quality because of economizing on the resources needed to select the best potential borrower. To find out the solution, financial institutions have been interested in finding new lending methodologies to the economies of scale and increase the quality of borrower such as making use of advantage of new lending technologies such as Group Lending Methodology2.

Group lending with joint liability: In the late 1970s. The success of Grameen Bank introduced a practical solution for the problem of adverse selection and moral hazard: that is group lending with joint liability which is now known as a theory of social liability or peer lending. Indeed, the solution is the idea that instead of offering individual liability contracts, the bank lends to a group of borrowers who are jointly liable for each other’s loan. So, if one member of the group defaults on his debts, other members in the group must repay the bank a portion of the defaulting member’s loan in addition to their own liabilities. The group loan contract differs from an individual loan contract in that group members are now liable for their fellow member’s loan. Therefore, safe borrowers will not wish to match with risky types since the latter are more likely default on their loan, leading a higher expected joint liability cost. Group lending with joint liability overcomes the problem of moral hazard by passing the monitoring activity onto the borrowers themselves. They will monitor their peer and pressure those individuals who misuse their loan to act accordingly. Since group members will typically know each other well in advance of the date of borrowing, so their information for each other can be available they will save the expense less than it would be for the lender and increase the quality of borrower. Furthermore, when financial institutions made loan to the group, the fixed cost transaction would be lower than if they made individual loans.

The Law of diminishing return and profitable microfinance:

In other words, the total output initially increases with an increase in variable input at given quantity of fixed inputs, but it starts decreasing after a point of time. In economics, diminishing return law plays an important role in explaining a firm’s behavior. It states that if other factors are fixed in supply and successive units of a variable factor are added to them, then the extra output derived from the employment of each successive unit of the variable factor must, after a time, decline though they may increase prior to that and this may hold for revenue as well as output. In finance, the law of diminishing return can be expressed as when more capital is added, the marginal return tends to increase to a point beyond which any additional capital could lead to a lower marginal return.

The reason to apply this theory into saving and credit cooperative can lead to a n inception that a small business seems to have higher marginal return than large business because they lack access to capital and any additional capital could be in the first stage of increasing marginal return, while large businesses seem to be in the second stage of decreasing marginal return.

Therefore, microfinance Institutions can expect a profitable and sustainable development by meeting their high cost by charging high interest rate to their members.

(c ) Modernization Theory of development

Modernization theory is a theory used to explain the process of modernization that a nation goes through as it transitions from a traditional society to a modern one. The theory has not been attributed to any one person; instead, its development has been linked to American social scientists in the 1950s.This theory of development suggests that economic dimension alone is insufficient and adds theories on institutional and social change Incorporates non-economic elements such as social practices, beliefs, values and customs (McClelland, Achieving Society) Diffusion and speed of change is critical as is removal of various cultural and social barriers Backward internal structures-rather than external factors-cause underdevelopment (Kimberly Winston, 2018)

2.3. Saving and credit cooperatives’ literature review

A great deal of attention and funding has been directed toward microfinance over the past few decades. Scholar interests in microfinance lagged behind the development of microfinance industry. The development of MFI is the pre-conditions for them to complete their important goals. However, the factors determining the development of microfinance sectors in are not clearly known because development can be measured in different ways basing on saving and credit cooperatives’ specific characteristics and their objectives.

According to Nguyen Kim Anh et al, (2014); Nghiem Hong Son (2006), Micro-finance institutions are considered developed if they contribute to both economic development and poverty reduction, that made the main difference between MFIs and commercial banks. While commercial banks try to achieve sustainability before expanding access even when they are still young, saving and credit institutions focus on their first goals of depth and width access right from its establishment and then their operation, financial and institutional sustainability.

Again, studies conducted on saving and credit cooperatives have shown that countries of the world with high membership include the United States (87 million), India (20 million), Canada (11 million), and South Korea (4.7 million) and Japan (3.6 million). By the end of 2006, there were 46,377 credit unions in 97 countries around the world, which collectively served 172 million retail members with over US$1.1 trillion in terms of assets. Today, a good number of credit unions existing with a view to furthering not only sustainable community development at local but also at international level as well. Saving and credit cooperatives are known in different countries by different names, for example, in a number of countries in Africa, they are referred as savings and credit cooperative organizations (SACCOs) with an emphasis on savings before credit.

The nature of financial services that a credit cooperative provides depends on, to some extent, its size. The Vancouver City Savings Credit Union in Canada, for example, by the end of 2002 had more than 340,000 members and $10.5 billion assets, had forty-two branches and provided to its members with every kind of financial service that was available. Credit unions have not only played a distinct and significant role in providing financial services to Canadians but also in the small business sector and are, the second largest lenders to small businesses in the Canadian economy (World Bank, 2008).

Robinson (2001), summarizes the role of microfinance institutions: Improving financial security; Facilitate growth of enterprises; allow storage of excess liquidity for future use; Improve the livelihoods of low income earners and those of their dependents; help people of low income reduce risk, improve management, and realize high return on investments and ensure social change through empowering women and changing gender relations in the community and households.

Fisher et al., (2002), rightfully, pinpointed that Micro-Finance Institutions (MFIs) can facilitate the poor people to work their way out of poverty by delivering financial services through appropriate mechanisms. The microcredit is necessary but not enough for microenterprise development, its promotion and the success of microenterprises depends on the whole range of resources, for instance, natural resources, human resources and financial resources. It has been noted that implementers of credit schemes have taken the claim that their work will eventually lead to progressive social change, for example, through empowering women and change in gender relations in society. Fairbairn and Hammond (1997) state that financial services are not the panacea for poverty alleviation, but other strategies are needed for the very poor who need food and employment before they can make use of financial services.

2.3.1. The Role of Cooperative Societies in Economic Development

For over 160 years now, cooperatives societies have been an effective way for people to exert control over their economic livelihoods. Dogarawa (2005) provided a unique tool for achieving one or more economic goals in an increasingly competitive global economy. As governments around the world cut services and withdraw from regulating markets, cooperatives are being considered useful mechanisms to manage risk for members in Agricultural or other similar cooperatives, to help salary earners save for the future through a soft-felt monthly contribution that is deducted from source, own what might be difficult for individuals to own by their efforts, strengthen the communities in which they operate through job provision and payment of local taxes (Dogarawa, 2005). He added that, today, in an era when many people feel powerless to change their lives, cooperatives represent a strong, vibrant, and viable economic alternative (Dogarawa, 2005). The author furthermore posited that cooperatives are formed to meet peoples' mutual needs (Dogarawa, 2005). They are based on the powerful idea that together, a group of people can achieve goals that none of them could achieve alone. This is evidence which indicated that cooperatives empowering people to achieve their targeted goals.

According to (RCA, 2018), the main strength of cooperatives is that they pool the resources of their members and as a consequence they allow their members to reduce costs, face the various challenges of the enterprise and increase their individual visibility and their capacity to negotiate prices and market their products: members, individually, would have greater difficulties running their enterprise. Cooperatives are enterprises that produce goods and services like any other enterprise. They differ from other enterprises in that their owners, known as “members”, organize their activities to serve their needs first, before seeking to maximize profits or increase their share in the market. Cooperatives are interested above all in enhancing their members’ capacity to produce or to consume.

(RCA, 2018) adds that, many cooperatives may produce goods or services for sale in the market, and may make significant profits, while others may simply provide a service to their members. Some cooperatives may distribute the profits from the sale of products among the members but most allocate any benefits to the development of the cooperative, limiting the compensation to members in proportion to their transactions with the cooperative. That is why in many countries, cooperatives are considered as non-profit organizations. As a rule, a cooperative is owned by many members and each member has equal voting rights, independently of the capital they invest. This is known as the “one member one vote” principle.

Moreover, McAuthur and Stuard (1993), have pointed out the major developmental role played by cooperatives in the modern world as mentioned below3.

To close this section, the researcher asked himself, how do SACCOs work?

Several microfinance institutions and SACCOs require a minimum monthly contribution from members. This helps them to instill a saving discipline. The money saved by members is not accessible to the member unless they choose to withdraw from the SACCO or take out a loan. This protects the savings and prevents impulsive spending of cash saved. Economic Role of microfinance cooperatives

The economic role involves the provision of opportunities for improved incomes to members. Besides, playing an important role in the economies of countries, as evidenced by their market share of the GDP, cooperatives are used as a tool to help alleviate poverty. They facilitate access to credit, procurement and storage, distribution of inputs and marketing of products. Hence, cooperatives supplement the functions of state credit institutions and marketing corporations. In general, the main economic activities in which cooperatives have ventured in include agriculture, fishing, financial services, production and labor, mutual guarantee or insurance, in retail and wholesale, housing and public services. Social role of microfinance cooperatives

The social role includes protection of members from risks not only through mitigating risks and solving social problems but also by improving living and working conditions of farmers and factory workers: providing their members with financial services with a view to facilitating them with needful in responding to unexpected problems; making production and consumption credit available to small-scale producers and agriculturists; offering production, health, funeral and life insurance and protecting consumers from adulteration of commodities; taking other social responsibilities such as providing care to the aged, children and handicapped, and the creation of employment for socially disadvantaged population as well. Political Role of microfinance cooperatives

In democratic countries, cooperatives express their views on different issues concerning their communities’ welfare such as environmental conservation and the provision of services such as health care, education, the creation of employment and taxation, amongst others. Above all, they defend the interests of their members and that of the public in general. For instance, consumer cooperatives set standards for consumer protection. The contribution of cooperatives to civic life is embedded in the fact that they are viewed and serve as schools of democracy. The principles of voluntary and open membership, as well as democratic membership control, ensure cooperatives are seen as schools of values comprising honesty, transparency and equity.

2 .3.1.4 Contribution of saving credit cooperatives to Poverty reduction

SACCO is a Rwandan based savings credit and co-operatives whose objective is to pool savings for the members and in turn provide them with credit facilities. Other objectives of SACCO are to encourage co-operation among members, teach them proper investment practices and also proper money management. Unlike banks the Sacco are primarily formed to raise the social welfare of members. U SACCO is a Rwandan based savings credit and ... then the profits are returned to members in the form of loans (MINICOFIN, 2007)

According to (Branch & Cora 1999), saving and credit cooperatives played an important role in poverty reduction in the following ways.

- Financial cooperatives contribute to poverty in various way; financial cooperatives by proving saving products help to reduce member’s vulnerabilities to shocks such as medical emergencies or consumption smoothing. They encourage thrift for future investment, education and small business enterprises.
- Financial cooperatives also provides to their members access to credit for financing micro, small and medium enterprises that generate additional employment and incomes and provide agriculture credits that help small farmers increase production and improve income. The primary product offered by financial cooperatives is low-cost saving facilities for the poor depositors. Empirical research of the last decade has demonstrated that for saving services exists even among the poorest.
- If formal means of saving are unavailable, poor people tend to use livestock, jewelers or informal arrangement that typically have a low or negative interest rate.
- For people living in poverty saving is critical to counterbalance the cyclicality of income. For example, coffee farmer in Rwanda join financial cooperative to save money for period before the next harvest and to reserve money for low yield years.
- Financial cooperatives (SACCOs) provide access to credit for members who might not have typically access to the saving commercial banks.
- USACCO is a Rwandan based savings credit and co-operatives whose objective is to pool savings for the members and in turn provide them with credit facilities. Other objectives of SACCO are to encourage co-operation among members, teach them proper investment practices and also proper money management. Unlike banks the Sacco are primarily formed to raise the social welfare of members.
- The SACCOs have managed to establish themselves in different localities. Whereas in urban areas wage and salary earners have formed Urban Sacco, in rural areas, farmers have formed Rural SACCOs. There are also traders, transport, and community.
- Many people who initially used to keep money in holes from their houses and in suitcases are getting involved in USACCO program and have opened savings accounts and this is sign that the institution is yielding. Contribution of SACCO in increasing members’ income

SACCO plays an important role in lower income groups through increasing their asset via establishing a credit relationship, establishing an enterprise, accessing working capital, increasing income through business expansions, meeting housing credit needs and increasing wealth through savings(Branch & Cora 1999). Among many advantages, there are four primary strengths of SACCO’s institution i.e. Savings mobilization, services for lifetime asset growth, mixed outreach, and full services array of the credits getting from SACCO contributes on saving of beneficiaries from after getting from 10000 to 700000 and above towards economic development where 51.1% prove that loans granted contributes to the development of beneficiaries and community through satisfying the daily needs of households. The credits getting from SACCO contributes on saving of beneficiaries from after getting from 10000 to 700000 and above towards economic development where 51.1% prove that loans granted contributes to the development of beneficiaries and community through satisfying the daily needs of households.

2.3.2. Importance of cooperatives to members

- Cooperatives are important tools to helping members out of illiteracy through training;
- Members receive training on how to practice modern farming methods;
- Members can easily receive farming inputs such as improved seeds and fertilizers;
- Availability of market for their produce and at reasonable price;
- Mutual support to vulnerable members of the cooperatives especially by paying “Mutuelle de Santé” or medical care, giving goats, pigs and rabbits;
- Cooperatives provide support funds to their members from their reserve accounts to cater for issues like school fees, health bills and building houses;
- Cooperatives members easily access loans from the financial institutions for development projects;
- Cooperatives provide dividends to members which defer depending what each member supplied to the cooperative4.

2.3.3. Importance of cooperatives to Rwanda

- Cooperatives pay taxes which are useful5 to country’s infrastructural development;
- Cooperatives are very good channels to disseminating government programs such as Girinka, Ubudehe, 9 & 12 year basic education, made in Rwanda among others to all members;
- Cooperatives provide jobs thus solving the problem of unemployment in the country;
- Increased production in different sectors such as Agriculture and off farm activities;
- Cooperatives can lead to the development of the district where they operate;
- Cooperatives can help in solving the problem of balance of payment while exporting locally made and produced goods.

2.3.4. Objectives of saving and credit cooperatives

According to Ahimbisibwe, (2006) the objectives of SACCO are to promote the economic interest of their members and in particular to: Promote thrift among its members by affording them an opportunity for accumulating savings and paying reasonable interest without risk on such savings. Create a source of funds from which it can afford relief to its members in need by making loans to them for productive and provident purposes at fair and reasonable rates of interest and with easy terms of repayment, Continuously educate members on how savings can be made on regular basis and the wise use their savings.

Furthermore SACCOs provide service to its members such as financial counseling so that the members can solve most of their financial problems, and the risk of management service to ensure the safety of members‟ savings and loans. Fight against poverty through improving the members‟ economic and social conditions by enabling the access financial services. Fight against exploitation of powerless individuals by the powerful individuals or institutions, by pooling their own resources to meet their needs.

2.3.5. Cooperative Principles

The United States Department of Agriculture listed three principles that uniquely characterize a cooperative organization:

- The User-Owned Principle: The people who own and finance the cooperative are those who use the cooperative.
- The User-Control Principle: The people who control the cooperative are those who use the cooperative. They democratically elect a board of directors. The board sets the overall operating policies, approves the annual budget, oversees its operation, and distributes the benefits derived from use of the cooperative to members. The board also hires professional management to handle the day-to-day operations.
- The User-Benefit Principle: The cooperative's sole purpose is to provide and distribute benefits to its users on the basis of their use. While the goal of agricultural cooperatives is not to generate a return on investment, they, like all businesses, must cover costs and generate capital to cover expansion and unforeseen emergencies. However, The International Cooperative Alliance (1995) cited in Division of Agriculture and Natural Resources,2020 listed seven principles of cooperative that are more socially-minded:
- Voluntary and Open Membership
- Democratic Member Control
- Member Economic Participation
- Autonomy and Independence
- Education, Training and Information
- Cooperation Among Cooperatives
- Concern for Community


1 Thu Trang BUI (2017). Factors affecting microfinance development in Vietnam, Université Paris 13 Sorbonne Paris Cité- Doctorate thesis, 2017

2 Idem

3 Isaboke Peter Kennedy Nyataya (2018). Op.cit

4 RCA, 2018 retrieved on line:

5 Idem

Excerpt out of 181 pages


The Contribution of Saving and Credit Cooperatives (SACCOS) on the Improvement of Members’ Socio Economic Development in Rwanda. Opportunities and Challenges
Evidence from Umwalimu SACCO-Huye District
University of Koblenz-Landau  (KOBLENZ-LANDAU UNIVERSITY , School of social sciences, department of Economics)
PhD Dissertation
Catalog Number
ISBN (eBook)
ISBN (Book)
contribution, saving, credit, cooperatives, saccos, improvement, members’, socio, economic, development, rwanda, opportunities, challenges, evidence, umwalimu, sacco-huye, district
Quote paper
Sylvain R. Ntuite (Author), 2020, The Contribution of Saving and Credit Cooperatives (SACCOS) on the Improvement of Members’ Socio Economic Development in Rwanda. Opportunities and Challenges, Munich, GRIN Verlag,


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