Bachelorarbeit, 2021
52 Seiten, Note: second class upper division
OPERATIONAL DEFINITION OF TERMS
ABBREVIATIONS AND ACRONYMS
ABSTRACT
GENERAL INTRODUCTION
1. INTRODUCTION
2. PROBLEM STATEMENT
3. OBJECTIVES OF THE STUDY
3.1 GENERAL OBJECTIVES
3.2 SPECIFIC OBJECTIVES
3.2.1 RESEARCH QUESTIONS
3.2.2 Hypothesis1
3.2.3 Hypothesis 2
4.1Time Scope
4.2 Geographical Scope
4.3 Content Scope
5. Significance of the Study
5.1 To the researcher
5.3 To the ULK Community
CHAPTER ONE: LITERATURE REVIEW
1.1 Introduction
1.2 Conceptual Review
1.2.1Commercial banks
1.2.2 Small and medium enterprise
Table1.1: SMEs definition
1.2.3 Economic Development
1.3 THEORETICAL REVIEW
1.3.1. THEORIES OF COMMERCIAL BANKS
1.3.2 Theories of SMEs economic development
1.4 Review Related Literature
1.5 Conceptual framework
CHAPTER TWO: METHODOLOGY
2.1 Research design
2.2Population study
2.3Sample size and selection
2.3.1Types of the Data
2.3.2Data Collection Methods and Instruments
2.3.2.1 Reliability and validity
2.3.2.3 Validity
2.3.3Documentary Review
2.3.4 Data Analysis Technique
CHAPTER THREE: PRESENTATION OF FINDINGS
3.1 EFFECTIVENESS KCBR FINANCIAL SERVICES TO SMEs
3.1.1 Types of Financial Services
3.1.2 Criteria Required for SMES Loan in KCBR
3.1.3 Size of Loans Amount Applied And Received By The SMEs In KCBR Nyabugogo Branch
3.1.4. Evolution of loans applied and received by customers
3.2. Contribution commercial banks in economic development of SMEs
3.2.1 Sources of Funds for SMEs
3.2.2 Financial performance of SMEs
3.2.3 FINANCIAL PERFORMANCE OF SMEs BEFORE AND AFTER GETTING KCBR FINANCIAL SERVICES
3.3 SUMMARY OF FINDINGS
3.4 CONCLUSIONS
3.5 RECOMMENDATIONS OF THE STUDY
REFERENCE
Bank assurance services This is selling of insurance products by the banks
Bank training services In this study, it is the o rganized activity by commercial banks aimed at imparting information and/or instructions to improve the recipient's (SMEs) performance
Banking Services these are services offered by commercial banks and cover every aspect of the financial market such as overdraft facilities, term loans, trade bill financing, factoring, leasing, export and import finance and even government loan guarantee schemes (Rungani,2009)
Credit facilities These are instruments that aids in credit access from financial institutions
Financial Performance This is the measure of the change of the financial state or financial outcomes of an organization
Mobile phone banking services Are services provided by a bank or other financial institution that allows its customers to conduct a range of financial transactions remotely using a mobile device such as a mobile phone or tablet, and using software, usually called an app, provided by the financial institution for the purpose.
Small and Micro Enterprises is generally defined as a small business employingless than 100 people and having a balance sheet or turnover less than a certain amount
BNR : Banque Nationale du Rwanda
EADB : East African Development Bank
KCBR : Kenya Commercial Bank Rwanda ltd
MFIs : Micro Finance Institutions
MINICOM : Ministry of Trade and Industry
NGOs : Non Governmental Organizations
NPLs : Non Performing Loans
SMEs : Small and Medium Enterprises
UNIDO : United Nations Industrial Development Organization
KCBR: :Kenya commercial bank Rwanda limited
Abbildung in dieser Leseprobe nicht enthalten
SMEs in Rwanda suffer from weak financial performance and a high failure rate. Scholars argue that judging by the poor economic development of the informal sector, not much progress seems to have been achieved, despite government efforts to promote SME activity. Some of the key factors attributed to this poor performance is access to financial services. Therefore, the purpose of this study was to examine the contribution of commercial banks in economic development of SMEs
Normally, SMES play vital and significant contributors to economic development through their critical role in providing job opportunities and reducing poverty levels, an estimated number of up to 40% of the start-ups SMEs fail by year 2 and at least 60% close their doors by year 4. This menace is attributed to poor financial management among small businesses. Accessing credit is a major constraint to the economic development and growth of SMEs and also to poor rural and urban households. This is mainly due to the behavior of lenders in terms of hedging against borrowers’ risks by demanding collateral, which they lack, and also information asymmetry.
.The study was guided by analyzing the contribution of commercial banks in economic development of SMEs The target population for the study consisted of registered SMEs in KCBR as their clients.A descriptive research design as well as an explanatory research design was used. The study used Bouchard formula to sample SMEs and then used random sampling to select the 105 SMEs. The respondents of the study were the owners and managers of the SMEs. The study used questionnaires to collect quantitative data using closed ended questions.
Data analysis will be done using SPSS statistical software version 21. Descriptive statistics (Frequencies, Means and Standard deviation) and inferential statistics (Correlations and regression) were used in analysis. A multiple linear regression model was used for analysis and all tests were conducted at 5% level of significance. The study findings indicated that banking services are positively related with economic development of SMEs. The study concluded that commercial banks in Nyarugenge district are favorable. The study also concluded commercial bank services are effective and they economic development of SMEs significantly. The study recommends that commercial banks should improve their financial services which favor the the better economic development of SMEs.
SMEs (Small and medium-sized enterprises) are businesses whose personnel numbers fall below certain limits. those are non subsidiary firms which employ fewer than given number of employees small enterprise is fewer than 50 employees, while micro enterprises has atmost10 or in some cases 5 workers .(https//oecd.org). But the commercial banks are financial institutions that provides financial services, particularly loans, deposits and payment services, and performs the most extensive financial services for Journal of Business, while Banks are institutions whose current activity is lending and acceptance of deposits by the public (Salko and Dhuci2008).
In Rwanda, before the current financial and banking sector 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 lead 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(minecofin,2013). Financial institutions 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(Reed W. Eduard 1989).
It is recognizing that, financial institutions act as agents that provide financial services for SMEs as well as large and general public. These institutions generally fall under financial regulation from a government authority. Common types of financial institutions include banks, building societies, credit unions, stock brokerages, asset management firms, and similar businesses (Lin and Sun, 2006).The commercial bank plays the role of financial intermediaries in collecting savings and allocating them to higher return investments. They provide financial assistance in meeting the different needs of enterprises. Credit facilities (loan) have a vital role to play here, in raising the investment to the level necessary to achieve economic development of SME (Peter, S. Rose 1993).
KCB Rwanda ltd is among those commercial banks commenced banking services operations at Kigali, December, 2008 with few Rwandans SMEs who were mostly inspired to move into microfinance by the moral and political concern for the plight of Rwandans, as opposed to the overall commercial attraction.
They shared a strong conviction that in KCB LTD they would have the vehicle with which they could reach and touch the lives of the previously un-banked and underserved men and women of Rwandans. The group’s vision and mission was to support the emergence of Rwandan SMEs through the provision of financial services at all levels, especially at SMEs (Muyagu, Triphomus, 2015). Therefore The economic development of SMEs can be possible when there is strong assistance of commercial banks and precisely within the existence of tailored credit facilities and training of how to use it that are in accordance with government policies and program in a bid to attaining the desired investment objectives economic development of SMEs(Nathan, K., 2010 ) However, the importance of this study first relates to a better understanding of the contribution of commercial banks in economic development of SMEs and the ability to understand how banks influence in the development of SMEs.
Access to loan is well known that fastering an adequate flow of financing for SMEs in enhancing its economic development (Manila, 2001). The access to finance is an important in economic development for SMEs, those financial and legal institutions plays an important role in relaxing this constraint (Beck and Demirguc-Kunt, 2006).Different studies of this nature have been conducted to examine the role of financial institutions lending and performance of organizations who utilized the loans ( Bal dock, and Ekanem, 2010).
Therefore, findings which reveal to the fact, access to finance is one of the constraints facing SMEs, but there are others constraints in addition that Among the few studies that show the relationship between access to finance and performances of SMEs in the market place, neither of the studies reveals the exact contribution of financial institutions due to the type of methodology employed. Again, the mixture on the findings reveals that more studies of this nature should be conducted to find out how access to finance results into greater performance of SMEs (Watanabe, 2005).
Despite the fact that access to finance has been regarded as the major setback facing SMEs but still not clear as what is the exact contribution of commercial banks in the economic development of SMEs. Studies have been reporting the confusing findings regarding the role of commercial bank in the economic development of SMEs. Therefore purpose of this study was to assess the contribution of commercial banks in economic development of small and medium enterprises.
The research intends to reach the following objectives:
The general objective of the study is to examine the contribution of commercial banks in economic development of SMEs
The specific objectives are as follows:
i. To examine the effectiveness of financial services offered by Kenya Commercial Bank to SMEs.
ii. To assess the contribution of Kenya Commercial Bank Rwanda ltd on the economic development of SMEs.
i. Are financial services offered by Kenya Commercial Bank to SMEs effective?
ii. Is there any contribution of Kenya commercial bank to economic development of SMEs?
H1 there is effectiveness of financial services offered by Kenya commercial banks to SMEs.
Ho: There is no effectiveness of financial services offered by Kenya Commercial Bank in SMEs.
H2 (1): there is contribution of Kenya Commercial Bank to economic development of SMEs.
H2 (0): there is no contribution of Kenya Commercial Bank to economic development of SMEs.
4. Scope of Study
Time scope will be the year of 2017 to 2019
The study will be conducted in KCB Nyabugogo branch at Nyarugenge District; it is among of the commercial banks in Rwanda which has the vision of promoting the economic development of SMEs by delivering innovative customer products and services.
The independent variable is commercial banks and dependent variable is economic development.
The investigation was consideration with assessment of the contribution of commercial banks in the economic development of SMEs the researcher will undertaken this study in order to assess if there is big the role of Commercial Banks in SMEs economic development.
This research was useful to different people including commercial banks and other researchers in the following ways:
Considering past events and those of current times, a research continues to play great roles to the researcher. It helps him be more knowledgeable in the area of his research. It is one of the ways of capacity building.
5.2 To owners and managers of KCB
This research will be used to know its contribution level and gaps to be filled in economic development of SMEs in order to increase profit and it will be reference for taking different decisions of KCB
This research will induce further academicians of ULK and beyond its boundaries to conduct other studies in the related fields.University students will be able to know the contribution of commercial Banks in the economic development of SMEs. They use This dissertation to do their researches
5.4 To SMEs
SMEs will get information on contribution of commercial banks in its economic development and this will enable SMEs to be courageous to work with commercial banks.
This chapter deals with the review of relevant literature. The researcher discusses past research done on the topic and other related ones in order for the researcher to analyze, summarize and relate previous studies. It focused on contribution of commercial banks in the economic development of SMEs.
In this section, the researcher selected the key concepts including small and medium enterprise (SMEs) and commercial banks etc which are the following below:
These are financial institution that provides financial services, particularly loans, deposits and payment services, and performs the most extensive financial services for Journal of Business (Daniel, 2011).The financial institutions act as an agent that provides financial services for its clients or members; they are generally falling under financial regulation from a government authority. Common types of financial institutions include banks, building societies, credit unions, stock brokerages, asset management firms, and similar businesses (Welford, 2017).
However, financial institutions provide a service as intermediaries of the capital and debt markets. They are responsible for transferring funds from investors to companies, in need of those funds. The presence of financial institutions facilitates the flow of monies through the economy. To do so, savings are pooled to mitigate the risk brought vide funds for loans. Such is the primary means for depository institutions to develop revenue (Claver, 2002).
1.2.1.1 Bank
This is one of the institution whose current activity is lending and acceptance of deposits by the public (Dhuci, 2008). Through the banking system of a country is realized Acceptance of cash deposits by individuals, companies, other legal entities, by the government, Mobilization of deposits on loans and increase of their value, Mediation of payments as well as the execution of all payments and receipts arising and deriving from transactions carried out for a certain period of time (Zaho and Cani ,2008).The commercial bank plays the role of financial intermediaries in collecting savings and allocating them to higher return investments, They provide financial assistance in meeting the different needs of enterprises (Amaeshi, 2017).In summary, the functions of commercial banks can be considered: Lending function, The liquidity function of payments, Risk management of interest rates and liquidity Monitoring the firm's activity The service function.
On the other hand, through different actions such as keeping accounts, approving advances and loans, making transfers etc., gives the possibility to banks to recognize the economic development of various firms and businesses and to control the impacted on them (Ayuso, 2017). Banks promote firms' development by positively influencing in the mitigation of information problems between the investor and the borrower by ensuring a more efficient use of the depositor’s funds (Allen and Gale 2008).
1.2.1.2 Loan
In finance, a loan is a debt provided by one entity (organization or individual) to another entity at an interest rate, and evidenced by a note which specifies, among other things, the principal amount, interest rate, and date of repayment (Helg, 2007).A loan is the act of giving money, property or other material goods to another party in exchange for future repayment of the principal amount along with interest or other finance charges (Carroll, 2011).
A loan may be for a specific, one-time amount or can be available as open-ended credit up to a specified ceiling amount (Samuel, 2007).A loan in terms of small business finance is a sum of money advanced to a business that must be repaid, with interest at some point in the future. The lender must bear the risk that the borrower may not repay the loan. The interest rate charged is the price for that risk. A loan is money, classified as debt, for temporary use ( Buchholtz, 2006)To get a loan from a commercial bank for a small business, you will need to have a track record. You must show sales growth, assets and some reasonable sales projections for your company. According to the website Reference for Business, small businesses are the fastest-growing part of the economy, as of publication (Reilly, 2013).
Commercial banks will compete for your business by offering a variety of interest rates and loan lengths and by reducing the amount of collateral they require to secure a loan. According to the Wall Street Journal, small-business banking is not merely a matter of hard numbers but depends heavily on the relationship between the loan officer and the business owner. In short, the role of commercial banks with small businesses has become increasingly personal and relationship-oriented (Kowari, 2003).
The European definition of SME follows: "The category of micro, small and medium-sized enterprises (SMEs) is made up of enterprises which employ fewer than 250 persons and which have an annual turnover not exceeding 50 million euro, and/or an annual balance sheet total not exceeding 43 million euro." (Strydom, 2009).A comprehensive definition of an SME in South Africa is therefore any enterprise with one or more of the following characteristics:
- Fewer than 200 employees
- Annual turnover of less than R64 million
- Capital assets of less than R10 million
- Direct managerial involvement by owners.
The term SMEs covers a wide range of definitions and measures, varying from country to country and between the sources reporting SME statistics (Strydom, 2009).There is no universally agreed definition of SME; some of the commonly used criteria are number of employees, value of the assets, and value of sales and size of capital. Among them the most common definitional basis used is employees because of the comparatively ease of collecting this information (Damodaran,2017).
Classification of business by size, according to SBA : Very small : under 20 employees , Small between 21 and 99 employees , Medium between 100 and 500 employees , Large enterprise up of 500 employees ( Meghana,2003).
In the Unites States and Canada: SME generally include the firms with less than 500employees. The U E defines a Microenterprises as 1 to 10 employees; Small enterprises between 11 and 50 employees and medium between 51 and 250 employees. The annual turnover of Euro 40 million or less, balance sheet valuation not exceeding Euro 27 million (US Small Business Administration, March, 2008).
According to the World Bank 2004: Micro enterprise less than 10 employees, total assets of up to $ 10 000 and total annual sales of up to $ 100000; Small enterprise up to 50 employees , total assets and sales of up to $ 3 million and Medium enterprise up to 300 employees, total assets and total sales of up to $ 15 million (World Bank ,2004).
In Japan: SME is defined as a firm with employees of 300 or less and capital size of 300 million or less in manufacturing, a firm with employees of 100 or less and capital size of 100 million yen or less, and a firm with employees of 50 – 100 or less and capital size of 50 million Yen in retail and service sector (Bataa, 2008).According to Garikai (2011) SMEs are defined by number of workers employed, capital employed and sales turnover.
Petrakis and Kostis (2012) explore the role of interpersonal trust and knowledge in the number of small and medium enterprises. They conclude that knowledge positively affects the number of SMEs, which in turn, positively affects interpersonal trust. Note that the empirical results indicate that interpersonal trust does not affect the number of SMEs. Therefore, although knowledge development can reinforce SMEs, trust becomes widespread in a society when the number of SMEs is greater (Garikai, 2011).
For the purposes of this policy, SMEs are to be considered based on the following conditions (in line with the World Bank report of 2004) whereby two of the three conditions must be met. For the avoidance of doubt, in this policy when using the popular term “SME”, it is taken to include micro enterprises as well as small and medium enterprises. Registered cooperatives may also benefit from this policy in so far as they are SMEs.
However it is difficult to give a precise and universally acceptable definition of SMEs because various countries and scholars use yardsticks such as employment levels, capital outlay and energy to define SMEs. They include a wide variety of firms ranging from village handcrafts Makers, small machine shops to restaurants and computer software firms. They require a wide range of skills and operate in very different markets and social environment (Carr, 1996).
Abbildung in dieser Leseprobe nicht enthalten
Statistically, SMEs are defined basing on the number of employees and or the value of assets. The lower limit for small scale enterprises is set at five-ten workers and upper limit at fifty –one hundred workers. The upper limit for medium scale enterprises is set at one hundred to two hundred fifty workers (Hallberg, 2000).
According to Todaro (1985), economic development is defined as multi dimensional process, involving major changes in social structures, popular attitude and national institutions as well as acceleration of economic growth, the reduction of inequality and the eradication of poverty”. The researcher can say that development in its sense must represent the whole or change by which an entire social system turned to the diverse basic needs and desires of individuals and social groups. This development includes the specification that social groups have access to organizations, basic services such as education, housing, health services, and nutrition, and above all else, that their cultures and traditions are respected within the social framework of a particular country (Carr, 2012).
Economic development is a multifaceted and multidimensional process in terms of its substance, characteristics, and goals. While the traditional indicators of economic development, such as economic growth, is still important, other factors of development are not necessarily captured by economic growth and the improvement of overall economic efficiency, such as relief of poverty, inequality, and unemployment (Seers,2018). Additionally development goals include better education, higher standards of health and nutrition, a cleaner environment, more equality of opportunity, greater individual freedom, and a richer cultural life (World Bank, 2016, p. 4); however, for conceptual clarity, there should be a distinction between economic development and development in a broader sense encompassing non‐economic values and goals, and these additional development goals are more appropriately included in the latter.8 This section discusses the three essential components of economic development, “growth,” “distribution,” and “innovation.”
This section is based on banking and contribution of commercial banks in economic development SMEs
Banking in the modern sense of the word can be traced to medieval and early Renaissance Italy, to the rich cities in the north like Florence, Venice and Genoa. The Bardi and Peruzzi families dominated banking in 14th century Florence, establishing branches in many other parts of Europe. Perhaps the most famous Italian bank was the Medici bank, set up by Giovanni Medici in 1397. The earliest known state deposit bank, Banco di San Giorgio (Bank of St. George), was founded in 1407 at Genoa, Italy (Kay, 1993).
According to Kolmar (2003), the word bank was borrowed in Middle English from Middle French banque, from Old Italian Banka, from Old High German banc, bank"bench, counter". Benches were used as desks or exchange counters during the Renaissance by Florentine bankers, who used to make their transactions atop desks covered by green tablecloths. The earliest evidence of money-changing activity is depicted on silver Greek drachma coin from ancient Hellenic colony Trapezus on the Black Sea, modern Trabzon,c. 350-325 BC, presented in the British Museum in London. The coin shows a banker's table (trapeze) laden with coins, a pun on the name of the city. In fact, even today in Modern Greek the word Trapeza means both a table and a bank (Kowari, 2003).
This is one of the institution whose current activity is lending and acceptance of deposits by the public (Dhuci, 2008). Through the banking system of a country is realized by Acceptance of cash deposits by individuals, companies, other legal entities, by the government, Mobilization of deposits on loans and increase of their value, Mediation of payments as well as the execution of all payments and receipts arising and deriving from transactions carried out for a certain period of time (Zhao and Cani, 2008).
For Makokha (2006), Within the global financial markets, these institutions connect market participants with capital deficits (borrowers) to market participants with capital surpluses (investors and lenders) by transferring funds from those parties who have surplus funds to invest (financial assets) to those parties who borrow funds to invest in real assets. The oldest bank still in existence is Monte dei Paschidi Siena, headquartered in Siena, Italy, which has been operating continuously since 1472(Bernard, 2007).According to Roberts and Dowling (2002) these main types we also have:
Savings Banks: These banks are suited for employees with a monthly salary. Low waged people may open an account in the savings bank.
Industrial Development Bank: These banks are committed towards enhancing the growth of industries by providing loans for a very long period of time. This is vital for the long term growth of the industries (Bernard, 2007).
Land Development's Bank: These banks promote growth in the food sector, by giving loans to farmer at a relatively lower interest rate. The loan is usually given on the basis of land. If a farmer has lots of agricultural fields then the more will be the loan provided (Dowling,2002).
Indigenous Banks - native banks. They are normal moneylenders; only this time, handling huge amounts of money. They collect money from the community and provide loans to business men and industrialists for a short amount of time (Roberts, 2002).
Mortgage Banks: These banks are specialized in providing mortgage loans alone. In order to sell loans they depend solely on the secondary market (Dowling,2002).
Exchange Banks: These banks will be available in more than a single country. They provide services for the buying and selling of gold and silver; transactions will be in foreign currencies. These banks are mainly concerned with financing foreign trade (Roberts, 2002). There are many several of function of exchange banks such as remitting money from one country to another country, Discounting of foreign bills, Buying and Selling Gold and Silver, and Helping Import and Export Trade.
Consumer's Bank: These are consumer friendly banks; they encourage the consumer in buying commercial products and provide options for easy repay of the loan amount. Such banks are usually found only in advanced countries like U.S.A. and Germany (Dowling, 2002).The main objective of this bank is to give loans to consumers for purchase of the durables like Motor car, television set, washing machine, furniture, etc. The consumers have to repay the loans in easy installments (Dowling, 2002).
Commercial banks offer wide range of financial services, including:
1.3.1.4.1 Deposit and lending services
According Dowling (2002), a commercial bank makes money by lending to individuals and businesses. It gets the money to lend from deposits consumers make in the bank. An investment bank, on the other hand, can hold stocks and bonds and may offer those to investors in the marketplace. Small businesses rely on commercial banks for a variety of services that make it easier to do business and grow a company (Daniel, 2011).
1.3.1.4.2 Payment services
An important service offered by banks is that they offer facilities that enable customers to make payments. A payment system can be defined as any organized arrangement for transferring value between its participants. Heffernan (2017) defines the payment systems as a by-product of the intermediation process, as it facilitates the transfer of ownership of claims in the financial sector.
These payment flows reflect a variety of transactions: for goods and services as well as financial assets. Some of these transactions involve high value transfers, typically between financial institutions. However, the highest number of transactions relates to transfers between individuals and/or companies (Kowari, 2003). If any of these circulation systems failed, the functioning of large and important parts of the economy would be affected. Banks play a major role in the provision of payment services For personal customers the main types of payments are made by writing cheque from their current accounts or via debit or credit card payments (Heffernan, 2017).In addition to payment services, personal banking includes the offer of a broad range of deposit and lending services. These are explained as under:
Current or checking accounts: that typically pay no (or low) rates of interest and are used mainly for payments .Banks offer a broad range of current accounts tailored to various market segments and with various other service attached.
Time or savings deposits: this involves depositing funds for a set period or time for a predetermined or variable rate of interest. Banks offer an extensive range of such savings products, from standard fixed term and fixed deposit rate to variable term with variable rates.
Consumer loans and mortgages are commonly offered by banks to their retail customers. Consumer loans can be unsecured or secured on property and interest rates are mainly variable (but can be fixed).In addition, banks offer an extensive array of mortgage products for the purchase of property.
1.3.1.4.3 Investment Services
One way to grow a small business is to invest profits for additional income or growth. Commercial banks typically have an investment department that can guide you in the selection of stocks, bonds, money market accounts and real estate. Having this strong relationship with the investment department can strengthen your relationship with the loan department (Brown, 2011).
1.3.1.4.4 Corporate Credit Cards
You can get credit cards in the name of your company from a commercial bank. This will help you keep track of all business purchases because they will all be on one statement. A commercial bank will count a credit card as an unsecured loan, meaning you will not have to put up any collateral (Polio, 2010).You can issue credit cards to company officers and instruct them to use them to make all purchases. This places the commercial bank in the role of organizing and tracking your expenses (Whalen, 2004).
1.3.1.4.5 Bookkeeping
For Bernard, (2007), Commercial banks will help a small business with its bookkeeping. This help begins with bank statements that categorize expenses. However, commercial banks will also help a small business create profit-and-loss statements. These banks have increasingly taken on the role of helping business owners create financial reports and other essential records for their companies. These essential records include tax documents that show the deductible expenses, taxable income and exempt income for a small business (Bernard, 2007).
As seen above the main function of banks is to collect funds (deposits) from units in surplus and lend funds (loans) to units in deficit. According to William and Barrett (2000), Deposits typically have the characteristics of being small- size, low-risk and high-liquidity. Loans are of larger-size, higher-risk and illiquid.
Banks bridge the gap between the needs of lenders and borrowers by performing a transformation function such as Size transformation, Maturity transformation, and Risk transformation
Size transformation: According European Commission (2001), savers are willing to lend smaller amounts of money than the amounts required by borrowers. Banks collect funds from savers in the form of small -size deposits and repackage them into larger size loans Banks perform this transformation function exploiting economies of scale associated with the lending /borrowing function, because they have access to a larger number of depositors than any individual borrower (Siegel, 2001).
Maturity transformation: According to Kotler and Lee’s (2005) Commercial Banks transform funds rent for a short period of time into medium and long term loans. For example they convert demand deposits (i.e. funds deposited that can be withdrawn on demand) into 25-year residential mortgages.. On the other hand, banks' assets (funds lent to borrowers) are normally repayable in the medium to long term. Banks are said to be 'borrowing short and lending long' and in this process they are said to 'mismatch' their assets and liabilities. This mismatch can create problems in terms of liquidity risk, which is the risk of not having enough liquid funds to meet one's liabilities (Helga, 2007).
Risk transformation: According to Kastler and Lee’s (2005) Individual borrowers carry a risk of default (known as credit risk) that is the risk that they might not be able to repay the amount of money they borrowed. Savers, on the other hand, wish to minimize risk and prefer their money to be safe. Banks are able to minimize the risk of individual loans by diversifying their investment, pooling risks, screening and monitoring borrowers and holding capacity and reserves as a buffer for unexpected losses (Siegel, 2013).
This section is based on Background of SMEs in Rwanda, Enabling Policy Environment and Infrastructure, opportunities provided by SME in Rwanda, SMEs and Access to Finance in SMEs.
Rwanda’s vision 2050 identifies six priority pillars and three cross–cutting areas, the development of which is crucial for making the necessary long term transformations in Rwandan society. One of the pillars is the development of an efficient private sector spearheaded by competitiveness and entrepreneurship. SMEs comprise 98% of all the establishments: micro-sized establishments - those employing between 1 and 3 people account for 92.6% of all establishments while enterprises with only one account for 72% for establishments (minecofin, 2011). This indicates that growth in the SMEs sector could be of Strategic importance in addressing the challenge of unemployment in general and youth unemployment in particular Growth of SMEs sector also has the potential to lower Rwanda’s trade deficit, owing to the low export potential mainly driven by traditional crops (coffee and tea) and minerals.Rwanda’s vision is to address this trade imbalance by increasing export earnings through value addition. Several initiatives to support of SME development have been undertaken by various factors including the government, development partners, and development finance institutions (Ministry of Trade and Industry, 2016).
The Policy environment was oriented towards large companies. The Government has acted by developing an SME development policy under the Ministry of Trade and Industry and the 2011 - 2012 SME development Action Plan in addition to initiatives to improve the ICT infrastructure in the country. The vision of the policy is to create a critical mass of viable and dynamic SMEs, significantly contributing to the national economic development and the mission is to stimulate growth of sustainable SMEs through enhanced business support service provision, access to finance and the creation of a conductive legal and institutional framework. The objective is to foster job creation and an increase in the tax and export base through the promotion of competitive new and existing SMEs (MINICOM,2010).
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