The contribution of Financial Institutions in Promoting Private Investments in Rwanda

TABLE OF CONTENTS

DECLARATION

APPROVAL

DEDICATION

ACKNOWLEDGMENT

LIST OF ABBREVIATIONS

LIST OF FIGURES

LIST OF TABLES

ABSTRACT

CHAPTER 1 INTRODUCTION
1.1 Background of the study
1.2 Statement of the Problem
1.3 Objectives of the Study
1.3.1 Specific objectives of the Study
1.3.2 Research Questions
1.4 Scope of the study
1.5 Significance of the study
1.6 Profile of KCB Rwanda
1.7 Organization of the study

CHAPTER 2 LITERATURE REVIEW
2.0 Introduction
2.1 Definition of key concepts
2.1.1Financial institution
2.1.2Bank
2.1.3 Investment
2.2 Theoretical background
2.3 Rwanda Economic status
2.4 Investment Policy in Rwanda
2.5 The strategies used by Banks in promoting private investments in an economy
2.6 The financial services Banks extends to private investors in an economy
2.7 The challenges Investors faces in accessing credit from Banks

CHAPTER 3 RESEARCH METHODOLOGY
3.1 Research Design
3.2 Target population
3.3 Sample size
3.4 Sources of Data
This study was principally guided by two major sources of data
3.5 Data Collection Instruments
3.6 Research procedure
3.7 Data Management and Analysis
3.8 Ethical Issues
3.9 Limitation of the study

CHAPTER 4 DATA PRESENTATION, ANALYSIS AND INTERPRETATION
4.1 Introduction
4.1 Bio- data
4.2.1: Mobilization of Savings
4.2.2: Provision of cheap medium of exchange
4.2.5: Collection of statistics
4.3.3: Discounting bills of exchange
4.4.1: High interest rate charged on credit
4.4.2: Lack of information
4.4.4 Bureaucratic processes

CHAPTER 5 DISCUSSIONS, CONCLUSIONS AND RECOMMENDATIONS
5.1 Introduction
5.2 Discussion
5.3 Conclusions
5.4 Recommendations
5.4.1 Areas of further Research

REFERENCES

APPENDICES

DECLARATION

I declare that this work entitled “ The contributions of financial institutions in promoting private investments in Rwanda: a case study of Kenya commercial bank (Rwanda) (KCB-Rwanda) ” is my own work, that it has not been submitted for any degree or examination in any other higher learning institution, and that all the sources I have used or quoted have been indicated and acknowledged by complete references.

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Name: SAMURAGWA Jean

APPROVAL

This is to certify that this work entitled “ The contributions of financial institutions in promoting private investments in Rwanda: a case study of Kenya commercial bank (Rwanda) (KCB Rwanda) ” was carried out by SAMURAGWA Jean under my guidance and supervision.

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Supervisor: Mr. SEBARUMA Charles

DEDICATION

This work is dedicated to my parents, my brothers and sisters whose help both financially and spiritually have brought me this far.

To my friends and colleagues particularly to Mr GATSINZI Laurent

ACKNOWLEDGMENT

First and for most my profound gratitude goes to the Almighty for His guidance and protection throughout ups and downs for the four past years, and particularly through this period of research. I am most grateful to Him for the strength, health, wisdom and understanding He has given me. I say Ebenezer –this is how far you have brought me.

Second, an academic research is never possible without the tacit and dedicated support of the supervisor and academic colleagues that verily keep you going and reinforce your intellectual acumen and skills through debate and comparison in terms of academic scores.

I owe profound gratitude to my supervisors Mr. SEBARUMA Charles, for his constructive comments, suggestions and encouragement that made the production of this dissertation possible.

I am highly indebted to my parents, family members, and relatives for their unwavering support through prayers, advises and also for their material and financial support throughout my education and research work. Thank you for your love.

My gratitude goes to my friends and colleagues for their advices, support and encouragement. I always remember your courageous words telling me that “No matter the length of the night, the day will still break.”

I furthermore, thank the administration of College of Business and Economics, University of Rwanda to have confirmed that permission of doing research and encouraged me to go ahead with my dissertation.

Finally, special gratitude go to the Lecturers, Senior Managers, Employees and customers of Kenya commercial bank (Rwanda) (KCB Rwanda ) I used in this study for their help and contribution towards the success of this project and I greatly appreciate my colleagues of the Faculty of Social Science and Business Studies. Option Accounting and Finance, with whom I shared on different subjects.

God bless you all.

SAMURAGWA Jean

LIST OF ABBREVIATIONS

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LIST OF FIGURES

Figure 4.1: Showing the gender distribution among the respondents

Figure 4.2: Showing the Age bracket of respondents

Figure 4.3: Showing the Level of education of respondents

LIST OF TABLES

Table 4.1: Showing responses on the Mobilization of Savings

Table 4.2: Showing responses on the Provision of cheap medium of exchange

Table 4.3: Showing responses on the Remittance of funds

Table 4.4: Showing responses on the Provision of agency services

Table 4.5: Showing responses on the Collection of statistics

Table 4.6: Showing responses on the Overdraft facilities

Table 4.7: Showing responses on the Cash credit

Table 4.8: Showing responses on the Discounting bills of exchange

Table 4.9: Showing responses on the Term loans

Table 4.10: Showing responses on the Letter of credit and traveller’s cheques

Table 4.11: Showing responses on the High interest rate

Table 4.12: Showing responses on the Lack of information

Table 4.13: Showing responses on the Lack of collateral/ security

Table 4.14: Showing responses on the Bureaucratic processes

Table 4.15: Showing responses on the Short repayment period

ABSTRACT

Financial institution development in Rwanda is one of the approaches that the government has focused its attention in recent years in pursuit of its long term vision of providing sustainable financial services to majority of Rwandan population for investment. The study was therefore set to examine the contribution of financial institutions in promoting private investments in Rwanda. The study objectives were: To examine the strategies used by KCB in promoting private investments in Rwanda, examine the financial services KCB extends to private investors in Rwanda and the challenges Investors faces in accessing credit from KCB. To achieve the set objectives, the study collected Primary data from 2 business promotion senior managers, 6 employees and 91 customers from KCB. The study adopted descriptive and statistical approaches in processing data and Special Program for Social Studies (SPSS) computer program was employed in data analysis.

The study findings found out the strategies used by KCB in promoting private investments in Rwanda and included among others; savings mobilization, provision of cheap medium of exchange, remittance of funds, provision of agency services and collection of statistics. The study also identified the financial services KCB extends to private investors in Rwanda which included; overdraft facilities, cash credit, discounting bills of exchange, term loan and letter of credit and traveler’s cheques. However, the study identified challenges faced by private investors in accessing credit from KCB and among those was high interest rate, lack of information, lack of collateral/ security, bureaucratic processes and short repayment period. Therefore the study draws a conclusion that KCB should exert efforts to remedy such drawbacks in order to have effective services to the customers. The study recommended among others lowering of interest rate, and introducing variety of repayment modes.

Key words

Definition of key concepts; Theoretical background; Rwanda Economic status; Investment Policy in Rwanda; strategies used by Banks in promoting private investments; financial services Banks extends to private investors; challenges Investors faces in accessing credit from Banks.

CHAPTER 1 INTRODUCTION

1.1 Background of the study

Efficient and stable investment activities present various opportunities to developing countries. In fact, investment is associated with both economic and social rewards. That is, investment not only plays an important role in job creation but also has a role to play in provision of both infrastructure and social services. However, finance is required for a nation to reach a sustainable level of investment. To provide the needed finance, there are varieties of institutions rendering financial services; such institutions are called financial institutions. Banks are among such institutions that render financial services. They are mainly involved in financial intermediation, which involves channelling funds from the surplus unit to the deficit unit of the economy, thus transforming bank deposits into loans or credits, (Mugume, 2008). Banks have historically been viewed as playing a special role in financial markets for two reasons. One is that they perform a critical role in facilitating payments, The other is that they have long played an important, although arguably less exclusive, role in channelling credit (loan) to households and businesses (Gurley, et al, 2006).

Financial institutions are involved in the process of increasing the level of investments of various economies, particularly the capital goods needed for raising productivity. In developing countries like Rwanda, income is very low and as such high level of investment cannot be made possible without requiring a long period effort at saving. Credit facilities (loan) have a vital role to play here, in raising the investment to the level necessary to achieve a self-sustained growth. The need to achieve sustained investment within any economy can be possible amidst strong financial institution and precisely within the existence of tailored credit facilities that are in accordance with government policies and program in a bid to attaining the desired investment objectives of a nation. The banking sector helps to make loans available by mobilizing surplus funds from savers who have no immediate needs of such funds and thus channel such funds in form of credit to investors who have brilliant ideas on how to create additional wealth in the economy but lack the necessary capital to execute the ideas. It is instructive to note that the banking sector has stood out in the financial sector as of prime importance, because in many developing countries of the world, the sector is virtually the only financial means of attracting private savings on a large scale, (McKinnon, 2007 as cited by Adeniyi, 2006).

Rwanda is one of the best performing countries in Africa and an example of success in post-conflict reconstruction (Bigsten and Isaksson 2008). Following the devastating effects of the genocide against the Tutsis on the Rwandan economy in 1994, the government embarked on an extensive reconstruction program based on sound economic policies, peace and stability. Rwanda has been widely acknowledged for the progress it has made in fighting corruption and promoting private investments. It has made dramatic progress in creating a favorable business environment in recent years, becoming one of the most improved countries in the world in the annual Doing Business Index. There is evidence of a significant increase in private sector investment following the introduction of a revised tax code and implementation of the doing business reforms since 2005 although there was a downturn due to the World economic crisis in 2009. Thus, over the one decade, like other developing countries, Rwanda has experienced an upward trend in private investment. A solid economic growth as well as continued efforts aiming at reforming and privatizing the public sector and strengthening the capacity of the financial system to mobilize domestic savings and allocate financial resources have all contributed to increasing the share of investment in Rwanda. Therefore, reflecting how cautious the level of investment is in Rwanda, this study sought to investigate the contribution of financial institutions in promoting private investment in Rwanda using KCB as a case study.

1.2 Statement of the Problem

Financial institution in Rwanda promotion is one of the approaches that the government has focused its attention in recent years in pursuit of its long term vision of providing sustainable financial services to majority of Rwandan population for investment. In Rwanda, before the current financial and banking restructuring took place, most of financial services for rural and urban investment were offered by the few licensed commercial banks. The realization of the above shortcoming led to the Government’s decision to initiate deliberate action to facilitate alternative approaches in the creation of a broad based financial system comprising of a variety of sustainable institutions with wide outreach and offering diverse financial products. The government’s choice of financial institutions was influenced by the conviction that, given adequate attention, financial institutions have the potential to contribute considerably to the promotion of private investments in the country because it is more adapted to the needs of the entrepreneurs/ investors. For that reason, the government has put in place a competitive, efficient and effective financial system bringing about increased access to basic financial services by the majority of the Rwandans particularly investors. Therefore it was worth assessing the contribution of financial institutions in promoting private investment. In this regards, the researcher decided to undertake the study to investigate the contributions of financial institutions in promoting private investments in Rwanda using a case study of Commercial Bank of Rwanda (KCB).

1.3 Objectives of the Study

The major objective of this study was to examine the contribution of financial institutions in promoting private investments in Rwanda.

1.3.1 Specific objectives of the Study

The specific objectives underlying this study were:-

(i) To examine the strategies used by KCB in promoting private investments in Rwanda
(ii) To examine the financial services KCB extends to private investors in Rwanda
(iii) To examine the challenges Investors faces in accessing credit from KCB.

1.3.2 Research Questions

The study was set to answer the following research questions;

(i) What are the strategies used by KCB in promoting private investments in Rwanda?
(ii) What financial services are extended by KCB to private investors in Rwanda?
(iii) What are the challenges Investors face in accessing credit from KCB?

1.4 Scope of the study

Geographical scope

This study took place in KCB main branch in Nyarugenge District, Kigali city.

Content scope

The study investigated the contribution of financial institutions in promoting private investments in Rwanda using KCB as a case study.

Time scope

The study mainly focused on the period between 2010 and 2012 but references on previous years were made to provide a richer analysis.

1.5 Significance of the study

To KCB and other financial institutions

The study shows financial institutions how to increase rural and urban financing for investment in the economy. Financial institutions would be able to understand their impact on investment in the economy and which strategies they can deploy in order to increase investment in the country.

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 him to attainment of a Bachelor’s degree in Accounting and finance.

To CBE

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

To future researcher

To the researchers with special interest in financial institutions and investment, this study was also very significant because it serves as a good platform of research effort on other issues within the confines of financial institutions.

1.6 Profile of KCB Rwanda

In extending credit, KCB Rwanda plays a vital role. In line with their vision to be the preferred financial solutions provider in Africa with Global reaches, the bank is continually looking for innovative ways to deliver services to the people of Africa. The bank has grown from one Branch in December 2008 to ten in 2012. The Bank alsohas a cash center across the country to conveniently serve all customers.

The bank offer a range of attractive and competitive financial solutions in Micro, Advantage, Retail, SME and Corporate banking; that are tailored to meet the needs of their customers. KCB Rwanda extends its hand to help the customers sail through and realize their dream of investment. Most competitive rates have made KCB financial products popular among the investors. KCB also offer the following facilities to its customers; Branch banking, ATM banking, Internet banking, Mobile banking, Agent banking (Iwacu) and Diaspora banking(KCB Rwanda, 2014)

1.7 Organization of the study

The study was organized into five chapters. Chapter one introduced the study by giving the background information on the research problem, objectives, significance scope and structure of the study. Chapter two dealt with a review of relevant literature. Chapter three discussed the research methodology adopted for the study and relevant justifications. Chapter four presented data analysis and interpretation of the result. Chapter five dealt with summary of findings, conclusions and recommendations .

CHAPTER 2 LITERATURE REVIEW

2.0 Introduction

This chapter critically presented the review of the existing literature related to financial institution and promotion of investment.

2.1 Definition of key concepts

The following terms shall be understood the way they are defined therein:

2.1.1Financial institution

Financial institution refers and encompasses a broad range of organizations that deal with financial management activities ranging from commercial banks, finance companies, merchant banks, discount houses and money market intermediaries to institutions involved in credit, development finance, leasing and factoring (Royne, M., 1996).

2.1.2Bank

A bank is a financial institution where people deposit money and valuable assets, get loans for commercial purposes and transact other financial related issues (Atieno, R. (2001).

2.1.3 Investment

Todara and Smith (2006) defined investment as a steady process by which the productive capacity of the economy is increased over time to bring about rising levels of national output and income.

2.2 Theoretical background

There are both theoretical and empirical evidence suggesting that the development of financial sector accelerates investment. Schumpeter (1934) stressed the role of banking sector as a financier and in that way as an accelerator of productive investments. Basic AK-model developed from endogenous growth theory finds three ways by which the development of financial sector can affect investment level in an economy. First, it can increase the productivity of investments. Secondary, more efficient financial sector reduces transaction costs and thus widens the share of savings channeled to productive investments. Thirdly, the financial sector development can affect savings rate either upwards or downwards (Pagano, 1993).

Greenwood and Jovanovic (1990), Levine (1991), Bencivenga and Smith (1991) as well as Saint-Paul (1992) have constructed theoretical models in which an efficient financial markets improve the quality of investments. In the model of Greenwood and Jovanovic model (1990), financial intermediaries’ prime task is to channel funds to the most profitable investments with the help of collected and analyzed information. High rate of return to be earned on capital promotes growth and economic growth in turn provides the means to implement costly financial structures.

Financial sector also improves liquidity of investments. In the model Levine (1991), the stock markets improve firm efficiency because they eliminate the premature liquidation of firm capital. In the case of liquidity shocks, the investor can sell the shares to another agent. The stock markets influence growth also by increasing the fraction of resources allocated to firms by allowing agents to diversify productivity risk and thus encouraging risk-averse investors to invest more in firms. Both of these three ways accelerate the investment level. In the model constructed by Bencivenga and Smith (1991), the financial sector increases liquidity of investments and decreases the premature withdrawals of investors which are harmful to economic growth. If the financial market work properly, investments to the non-liquid objects which are more productive to the economy increases.

The outcomes of investments are uncertain and bank is needed to diversify the risks. According to Saint- Paul’s (1992) model, productivity growth must be achieved through a greater division of labor and specialization of enterprises. The greater specialization however causes a greater risk. The role of financial intermediation is to support enterprises in specialization by permitting investors to hedge by holding a diversified portfolio. Without working capital sector, specializing would be too risky for an individual investor and efficiency improving projects would be left without financing.

According to the above theories, this study is in support of Basic AK-model developed from endogenous growth theory because financial development enhances allocative efficiency, reduces liquidity risk, and facilitates risk management by offering savers and investors’ investment alternatives for portfolio diversification. It also makes possible maturity transformation, the channelling of short-term assets into more productive long-term assets, all of which enhance investment growth.

2.3 Rwanda Economic status

The economy of Rwanda is categorized into three main sectors: agriculture, service, and industry. These currently make up respectively 37.4 per cent, 42.7 percent and 14.1 per cent of the economy (MINECOFIN, 2008). Since the year 2001, the service sector got expanded and became the largest contributor to GDP, accounting for an average of 42.4 per cent in 2001-2007, and the industrial sector accounts for 14 per cent of GDP (MINECOFIN, 2007, World Bank, 2007). The service and agriculture sectors recorded respectively 43 per cent of GDP in 2001 and 45 per cent of GDP in 2007, 37 per cent in 2001 and 36 per cent in 2007 (World Bank 2007, and MINECOFIN 2007).

Since 2002, Rwanda has implemented a comprehensive reform program to support economic growth. These reforms resulted in substantial achievements in the economic sector. For example, since 2002, the GDP growth rate has ranged from 3-9 per cent per annum and many areas of the Rwandan business environment have improved (for example, communication and IT). The construction sector has been responsible for the continued growth in GDP over the past 10 years.

There is evidence of a significant increase in private sector investment following the introduction of a revised tax code and implementation of the doing business reforms since 2005 although there was a downturn due to the World economic crisis in 2009. Both foreign and domestic investments have increased (PSF, 2008).

With a government that is committed to achieving sustainable economic development coupled with growth in employment opportunities for its people, Rwanda has made impressive progress in rehabilitating and stabilizing its economy to exceed pre-1994 levels. The overall economy is developing at a significant rate. The average annual growth rate in GDP was 8.8 per cent between 2005 and 2009. Rwanda’s GDP per capita has increased from less than 200 USD in 1994 to 540 USD in 2010. Although still at an early stage, the GoR has set a set path towards economic development in Rwanda (World Bank, 2010).

2.4 Investment Policy in Rwanda

With the on-going economic reforms, the role of the government is limited to guiding, promoting, facilitating and being a service provider for investment. The government as a promoter and facilitator of both local and foreign investments put in place conducive legal framework for protection, promoting, facilitating and guaranteeing investments. As a provider of services, the government provides social and economic infrastructures and investments in human development in undertaking the provision of services, the government encourage and invite both public and private sector participation.

The investment promotion authority (IPA) is established as the focal point of the promotion, coordination and monitoring of local and foreign investments in Rwanda. In sense, the IPA is the custodian, a one stop Centre and oversees the implementation of the investment policy and compliance in all institutions. The authority makes available to all prospective investors the relevant governments that are needed to be completed in respect of the proposed investment in its operations. The authority observes expediency, facilitate consultations with government ministries, non-governmental organizations, business supporting agencies, business communities and other stakeholders. In order to transform the economy of Rwanda, that is, make it more diversified and industrialized, IPA promote, facilitate and monitor investments so that there occurs orderly development and growth in the economy (RDB, 2003).

2.5 The strategies used by Banks in promoting private investments in an economy

Provision of soft and guaranteed loans

Banks promote investments, through the delivery of, responsive, affordable and market oriented financial services tailored to the specific needs of individual or group investors (USAID, 2005). Soft loan approach involve provision of low interest loans with an eligibility criteria such as having reasonable equity participation, demonstrating an ability to repay the loan, providing mentors and/or guarantors with generally no collateral requirements (Chigunta, 2002).

Offering Specific package to customers meeting specific conditions

Investment activity occurs in different sectors, enterprise types and business sizes. Banks focus on entrepreneurs as clients and they are sensitive to the needs of individual rather than focusing on them as customers who are offered standardized products. Banks also adopt use of modern information technology which offers more customer focused and cost saving services (Rosen H. 2003).

Provision of tailor made investment education

Enterprise education is directed towards developing in people those skills, competencies, understandings, and attributes which equip them to be innovative, to identify, create, initiate and successfully manage personal, community, business and work opportunities, including working for themselves (Schoof, 2006).

Credit advisory services

The main purpose of credit advisory services is to empower the borrower to make informed decisions on the various investment options and hence sureties of nonperforming loans as funds are put into proper use (Karugu et al., 2010). Credit advisory target start-up enterprises by helping them improve their creditworthiness hence making them a desired target for lending.

2.6 The financial services Banks extends to private investors in an economy

(i) Loan capital

Loans 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. 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.

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 (Crowley, J. 2008).

According to Vazakidis, et al, (2009), Rural and Agricultural Loans are extended by banks; the rural and agricultural loan portfolio of banks comprises loans to farmers, small and medium enterprises in rural areas, dealers and vendors linked to these entities and even corporate. For farmers, banks extend term loans for equipment used in farming, including tractors, pump sets, among others. Banks also extend crop loan facility to farmers. In agricultural financing, banks prefer an 'area based' approach; for example, by financing farmers in an adopted village.

Banks provides Working Capital Finance Loan which is utilized for operating purposes, resulting in creation of current assets (such as inventories and receivables). Working capital finance consists mainly of cash credit facilities, short term loan and bill discounting (Birchwood, et al, 1999). Under the cash credit facility, a line of credit is provided up to a pre-established amount based on the borrower's projected level of sales inventories, receivables and cash deficits. Up to this pre-established amount, disbursements are made based on the actual level of inventories and receivables. Here the borrower is expected to buy inventory on payments and, thereafter, seek reimbursement from the Bank. In reality, this may not happen. The facility is generally given for a period of up to 12 months and is extended after a review of the credit limit. For clients facing difficulties, the review may be made after a shorter period (Birchwood, et al, 1999).

According to Vong, L.K. (2005), banks extend project finance loans; Project finance loan consists mainly of extending medium-term and long-term local and foreign currency loans to the manufacturing and infrastructure sectors. During the recent years, the larger banks are increasingly becoming involved in financing large projects, including infrastructure projects. Project finance extended by banks is generally fully secured and has full recourse to the borrower company. In most project finance cases, banks have a first lien on all the fixed assets and a second lien on all the current assets of the borrower company. In addition, guarantees may be taken from sponsors/ promoters of the company. Should the borrower company fail to repay on time, the lending bank can have full recourse to the sponsors/ promoters of the company.

(ii) Payment System

Banks are at the core of the payments system in an economy. A payment refers to the means by which financial transactions are settled. A fundamental method by which banks help in settling the financial transaction process is by issuing and paying cheques issued on behalf of customers. Further, in modern banking, the payments system also involves electronic banking, wire transfers, settlement of credit card transactions, among others. In all such transactions, banks play a critical role (Mugume, A., 2008, Unpublished).

(iii) Financial Services

According to (Odedokun, M. O. 1998), In addition to acting as financial intermediaries, banks today are increasingly involved with offering customers a wide variety of financial services including;

- Banks collect cheques, drafts, bills of exchange and dividends of the shares for their Customer.
- Banks make payment for their clients and at times accept the bills of exchange of their Customer for which payment is made at the fixed time.
- Banks pay insurance premium of their customers. Besides this, they also deposit loan instalments, income-tax, and interest as per directions.
- Banks purchase and sell securities, shares and debentures on behalf of their customers.
- Banks arrange to send money from one place to another for the convenience of their custom­ers.

(iv) Overdraft facility

It is the extent that a business is allowed to overdraw its account. For example, if a firm has 30 million on its account, the bank may allow it to over a maximum of 10 million such that at any one time, the firm can be able to tap a total of 40 million from its account (Stevenson, (2001)

Most banks know that businesses do not always receive money from sales straight away for example if your business sells electrical equipment to an electrical retailer then you may not get paid straight away when you deliver your goods yet you need the money to pay out on labour, machinery, equipment, distribution and so on (its costs) the firm can be allowed by its bank to overdraw its account (St-Onge, 2006). The bank overdraft is the commonest form of business finance. It is used to provide working capital, funding the difference between the time when your business spends money and when it is paid by customers (Munya, 2010).

(v) Bank bills finance

Bank bills of exchange are drawn on acceptance, credit facilities granted by merchant banks to their customers, preferably against short term self-liquidating transactions, which realize funds to meet the bills at maturity. They offer the business person a relatively cheap and reliable source of short term credit (Gove et al, 2009).

Bank bill finance issued at a discount to its face value. For example, if a discounted bill has a face value of $1,000, it may be issued to the holder at $900. When it matures, the holder receives the full $1,000. A discounted bill, especially a short-term issue, often does not pay a coupon rather, the difference between the discount and the face value takes the place of the coupon (Rama Rao, 2008)

2.7 The challenges Investors faces in accessing credit from Banks

Credit rationing

Access to credit does not imply that the demand for credit will be satisfied. Lenders determine how much credit is allocated to clients based on the probability of loan default, often resulting in credit rationing. Credit rationing in this sense refers to the inability for financial institutions to grant as much loans as may be demanded by the clients based on a set of criteria (Stiglitz J, Weiss A (2001).

Repayment schedule and delays in loan disbursement

Musona and Coetzee (2001) have highlighted that the repayment schedule was perceived as too rigid and therefore not adequately taking into account the realities of businesses. Hulme et al. (1999), in the same line of thought, have observed that a long period of waiting for disbursement of a loan, most of the time, pushes clients out of banks (Hulme et al., 1999). This means that the longer the loan disbursement takes the more clients exit from banks.

Loan size/ amount

Hulme et al. (1999) have pointed out that many clients voluntarily withdrew from banks due to the loan amount. In fact, the loan amount sanctioned is based mostly on repayment capacity of the borrower. Many things come into picture, when the bank decides how much home loan a person can get. The monthly income, financial history, other unpaid loans with the borrower, past repayment record, credit card usage history if any, bounced checks, average balance with the banks, nature of employment among others. These factors all clubbed together makes the bank to decide on the amount of loan to be sanctioned to the borrower.

In adapted products

Many authors in financial literature found that financial services of banks are inflexible. Guerin (2009) has shown that banks still had difficulties to adapt their offer to the diversity of clients’ needs. Hulme and Mosley (1999) have pointed to similar observations and therefore have called banks to more diversification of products and segmentation of the clientele in order to better serve them. Thus, when banks products and services do not meet clients’ needs, there is a high inaccessibility rate. Loan size, delays in loan disbursement, repayment schedule, costs of loan, loan eligibility criteria are the variables most cited as proof of this in adaptation.

Lack of education

In underdeveloped countries, some investors of SMEs have average basic education and access to it. This has important consequences for SME’s ability to become self-sustainable, develop entrepreneur behaviours, access finances from financial institutions. This may excludes them almost totally from bank financial services as they lack confidence to present bank documents and follow formalities (Shein, 2008).

Lending terms and conditions

Commercial banks and other formal institutions fail to cater for the credit needs of smallholders, however, mainly due to their lending terms and conditions. It is generally the rules and regulations of the formal financial institutions that have created the myth that the poor are not bankable, and since they cannot afford the required collateral, they are considered creditworthy (Adera, 1995). Hence despite efforts to overcome the widespread lack of financial services, especially among smallholders in developing countries, and the expansion of credit in the rural areas of these countries, the majority still have only limited access to bank services to support their private initiatives.

Interest rate dilemma

According to Stiglitz and Weiss (2001) interest rates charged by a credit institution are seen as having a dual role of sorting potential borrowers (leading to adverse selection), and affecting the actions of borrowers (leading to the incentive effect). Interest rates thus affect the nature of the transaction and do not necessarily clear the market. Both effects are seen as a result of the imperfect information inherent in credit markets. Adverse selection occurs because lenders would like to identify the borrowers most likely to repay their loans since the banks’ expected returns depend on the probability of repayment. In an attempt to identify borrowers with high probability of repayment, banks are likely to use the interest rates that an individual is willing to pay as a screening device.

Lack of credit information

In a study done in South Africa, Stark and Nyirumuringa (2002) have shown that the lack of products and services information between management staff and clients lead to clients’ inaccessibility to credit.

The down payment

Banks require the borrower to fund at least 10% to 20% (varying from bank to bank) of the entire loan amount as the down payment for the loan. This amount has to be deposited before the disbursal of the loan. In the absence of such down payment the bank will refuse loan to the borrower. For a loan of 10 dollars this could mean anything between 1 to 2 dollars. This amount must be readily available with the borrower. In a scenario where the valuation of the collateral by bank is considerably lower than the market price, the balance will also have to be paid by the borrower. This effectively increases the down payment (Ghosh, C. et al, 2002).

CHAPTER 3 RESEARCH METHODOLOGY

This chapter presented the framework for data collection and analysis of the study. The chapter covered research design, area of study, population of the study, sample size, sampling procedure, data collection methods and instruments, procedure for data collection and data analysis;

3.1 Research Design

A cross sectional research design was used, combined with qualitative and quantitative approach because it required an in depth, intensive approach that sought a subjective understanding of economic reality based on statistical descriptions or generalizable predictions.

A survey method of data collection through questionnaire and face-to-face interview was used. According to Corlien Varkevisser and Ann Brownlee (1991), the advantage of this method is that it is less expensive and may result in a more honest response. Literature was reviewed from scientific books, journal articles, and through KCB documents. The researcher reviewed literature for three reasons; in order to justify the necessity of his proposed study (the contribution of financial institutions in promoting private investment) which was justified, it was also adopted to gain an insight on the findings from various literature sources on similar studies which had taken place in the region and in other countries and to contribute to the existing body of knowledge.

3.2 Target population

According to Grinnell Jr and William (1990) the population can be defined as the totality of persons or objects with which a study is concerned. The Kenneth D. bailey (1978) termed population as a universe and defined it as a sum total of all units of analysis. According to Mannheim and C. Rich (1995) population is the set of cases about which one wishes to draw conclusions.

The target population for consideration in this study was drawn from KCB. Therefore a total of 20,093, disaggregated into 10 senior managers (business promotion), 83 employees (business advisory) and 20,000 customers (investors) from KCB constituted the total population for the purposes of this study.

3.3 Sample size

According to Briggs, and Coleman, M (2004), almost always, one of the first questions a student researcher embarking on a survey is “how big should my sample be”. For these authors, there is no single, straight forward answer to this question but guidance can be given at general levels. According to Kenneth D. Bailey (1978) a sample is sub set or portion of the total population under study.

The population researched upon was 20,093 respondents; hence scientific sampling was implied to each member of the population since the number of population was attainable for sampling. The researcher decided to use the unstructured random sampling technique since the population was well in the reach of statistical evaluation.To justify the point, the use ofSloven’s Formula was utilized in the formula of:

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Table 3.1: Categories of respondents:

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Source: Kenneth D. Bailey (1978)

3.3.1 Sampling techniques

The study involved a total of 99 respondents comprising of investors and KCB business promotion senior managers and employees.

To get the sample for quantitative data, Simple random sampling method which refer to a subset of individuals (a sample) chosen from a larger set (a population) was used to select the respondents and the lottery method was used to determine the sample size. The names of each of all customers of KCB were written on a piece of paper properly filled and put in a small paper box and by constant shaking at different intervals, the researcher then randomly picked 91 out of 20,000 customers. This method was used because each and every customer had an equal chance of inclusion in the sample and each one of the possible customer, in case of finite universe, had the same probability of being selected

For qualitative data, the senior managers and employees were selected using purposive sampling and by definition are a non-representative subset of some larger population, and are constructed to serve a very specific need or purpose. These are information rich cases that facilitated in depth interviews. The sample size was 2 senior managers and 6 employees of KCB. This method was used because the results were expected to be more accurate.

3.4 Sources of Data

This study was principally guided by two major sources of data.

3.4.1 Primary data source

The data was obtained from KCB. The information was obtained by use of self-administered questionnaires and interviews.

3.4.2 Secondary data source

This data was obtained from published materials, which includes journals, textbooks, operational manuals, annual reports among others.

3.5 Data Collection Instruments

Data was collected using different instruments. Hence use of; interviews and questionnaires,

3.5.1 Interviews

According to Bailey (1994), an interview is an instance of social interaction between two individuals, the interviewer and the respondent. The interviewer fills in the instrument as the respondent answers questions he or she asks him or her.

The researcher used face-to-face interviews to allow an in-depth examination of the key informants, who comprised of senior managers and employees of KCB, on issues related to the contribution of financial institution in promotion of investment in Rwanda. These were information rich cases and normally very busy people who did not have time to complete questionnaires. On the advantages of interviews, Campion and Hudson (1994) observe that face-to-face interviews enable the interviewer to establish rapport with respondents; allow interviewer to observe and listen; permit complex questions to be asked than in other types of data collection and allows extensive delving to establish interviewees emotions, feelings, attitudes, prejudices and opinions. The face-to-face interview guide contained a basic checklist for relevant topics covered.

3.5.2 Questionnaires

The researcher employed self-administered questionnaires which are as Bailey (1994) noted instruments of data collection that are handed out to respondents and are filled by them without any assistance from the interviewer.

The researcher chose this instrument because he wanted to cover a large representative sample of 91customers of KCB. Face-to-face interviews took too much time and effort to be of any use.

As Cano (2000) observed, self- administered questionnaires are cheaper to use and can be distributed on a large scale. In addition, sensitive topics, like the one covered by the researcher, could only be effectively studied or examined using questionnaires. Furthermore, standardized questionnaires used in this study eliminated interviewer bias and solicit a very high response rate as Bernard (2006) had observed.

The questionnaire were semi-structured and had open ended and closed questions. To ease the processing of data, options for answers were provided where applicable.

3.6 Research procedure

The researcher communicated to the relevant authorities to seek access to respondents. The researcher explained that the information provided was purely for research purposes. The face-to-face interview guide was employed for key informants in their respective capacities through appointments. Self-administered questionnaires were given out personally by the researcher to the selected sample of KCB customers. There was a scale regarding the answers provided against which a respondent only ticked one that bore close relation to the question asked in the questionnaire.

3.7 Data Management and Analysis

3.7.1 Qualitative analysis

Qualitative data was edited and analyzed using themes derived from the objectives of the study which were the strategies used by KCB in promoting private investments in Rwanda; the financial services KCB extends to private investors in Rwanda and the challenges Investors faces in accessing credit from KCB

3.7.2 Quantitative analysis

Data collected from the primary survey were compiled, sorted, edited, cleaned, tabulated and weighted and analyzed using Statistical Package for Social Scientists (SPSS) computer aided program.

3.7.3 Report writing

After data analysis, the report writing process started. The report involved fived (5) chapters from Introduction to the Study, Literature Review, Research Methodology, Results and Interpretation and Discussion, Conclusion and Recommendations.

3.8 Ethical Issues

Ethical issues in this research were concern, among other things, maintaining confidentiality about the information gathered from respondents, using secured data for academic purposes only and ensuring that the respondents’ personalities were not exploited.

3.9 Limitation of the study

This study being a case study was supposed to be carried out on the entire customers, senior managers and employees of KCB but because of limited resources and time, the study was conducted on only 99 respondents. Although only 99 respondents were used out of all the customers, senior managers and employees, they were scientifically selected to minimize the errors and as such the results derived from the study, were reliable. Besides, KCB has existed for a long time, been stable, had reasonable capital base. Hence the findings from the study were assumed to be representative of the whole situation in the country.

The second major constraint was the methodological limitation. Given that the study was based on a case study approach, it follows that it inevitably exhibits the limitations of the method. Critics of the case study believe that the study of a small number of cases can offer no grounds for establishing reliability or generalizability of findings. This point was valid when one considered that given the sensitive nature of the research some key informants within KCB would deny the researcher access to important documents or information and this would lead to information asymmetry. In light of this, others would decline to be interviewed.

However, to overcome the above limitations there was careful planning ahead of time. The planning took into account use of different data collection techniques such as in-depth interviews and questionnaires in order to improve the validity of data. Communication with interviewees and questionnaire respondents was done on time in order to facilitate meetings. Besides, prior awareness of these limitations invoked constant sensitivity to their possibility so that due care was constantly enforced.

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