Attachment_11_-_Finscope_SME_finance_thematic_report.6.10.2017_(2).pdf

SMALL BUSINESSES IN RWANDA

Insights from FinScope Rwanda 2016 survey Promoting greater financial inclusion of small businesses in Rwanda.

Impact Assessment Note On FinScope 2016, Rwanda FinScopeInsights

The findings are based on the FinScope Survey Rwanda 2016

Abstract

This paper was prepared by FinMark Trust on behalf of Access to Finance Rwanda.

It summarises the uptake of financial products and services (both formal and informal) of small businesses in Rwanda.

SME FINANCE IN RWANDA:

EVIDENCE FROM FINSCOPE

RWANDA 2016 SURVEY

FinScope Insight Note Rwanda 2016

July 2017

Contents List of Figures 1 Acronyms and abbreviations 2

Executive summary 3

1. Introduction 5

2. Background on the Rwandan Economy 6

2.1. Private sector development in Rwanda 6

2.2. The role of SMEs in economic development 6

2.3. Institutional framework to promote SME development 7

3. SME owner profile 8

3.1 Age 8

3.2 Gender 9

3.3 Level of Education 9

3.4 Location (Urban/Rural and Province) 10

4. Characteristics of Rwandan MSMEs 11

4.1 Business Sector 11

4.2 Business Size 11

4.3 Employment trends by sector 12

5. Financial inclusion of SMEs 13

5.1 Bank account: access and usage 13

5.2 Mobile money account ownership and usage 14

5.3 Access to credit 14

6. Impediments to Rwandan SME growth 15

6.1 Finance related challenges 15

6.2 Sales and Marketing related challenges 16

6.3 Resource challenges 16

6.4 Legal challenges 17

7. Conclusions and implications for stakeholders 18

7.1 Conclusions 18

7.2 Implications for stakeholders 18

7.2.1 Recommendations for policy-makers 19

7.2.2 Recommendations for NGOs and other development agencies 19

7.2.3 Recommendations for financial service providers (FSPs) 19

References 20

List of figures Figure 1: Age of SME owners 8

Figure 2: Gender of SME owners 9

Figure 3: Level of education of SME owners (%) 9

Figure 4: Location of SME owners 10

Figure 5: Provincial distribution of SME owners 10

Figure 6: Business sector in which SMEs operate 11

Figure 7: Business size by number of employees 11

Figure 8: Business size by level of education (%) 12

Figure 9: Employment trends by sector 12

Figure 10: Access Strands for SME owner’s vs the rest of adults 13

Figure 11: Bank account usage among SME owners 13

Figure 12: Mobile money account ownership and usage among SME owners 14

Figure 13: Credit Strands for SME owners 14

Figure 14: Obstacles faced by SME owners 15

Figure 15: Finance related challenges 16

Figure 16: Sales and marketing related challenges 16

Figure 17: Resource related challenges 16

Figure 18: Legal challenges 17

Figure 19: Challenges faced across business sectors 17

AFR Access to Finance Rwanda

BDF Business Development Fund

DPs Development Partners

EICV Integrated Household Living Conditions Survey

EDPRS II Economic Development and Poverty Reduction Strategy 2013 - 2018

FMT FinMark Trust

FSDP Financial Sector Development Strategy 2013-2018

FSDP II Second Financial Sector Development Program II

FSP Financial Services Providers

MDG Millennium Development Goals

MFIs Microfinance Institutions

MINEACOM Ministry of Trade, Industry and East African Community Affairs (MINEACOM)

NGOs Non-Governmental Organisation

NISR National Institute of Statistics Rwanda

PPP Purchasing Power Parity

RDB Rwanda Development Board

SME Small and Medium Enterprise

SACCOs Savings and Credit Cooperative Organisation

VSLAs Village Savings and Lending Associations

Acronyms and abbreviations

Executive summary The government of Rwanda has been working towards development of the private sector in general and SMEs in particular. This is clear from EDPRS II, Financial Sector Development Strategy, Private sector development strategy, and Small and Medium Enterprise Development Policy. This report is prepared to provide insight into the Rwandan SME sector using FinScope Rwanda 2016 survey with the aim of allowing stakeholders to understand the characteristics of SMEs, their owners and the challenges they face as this is useful in crafting strategies useful in accelerating SME development. The report relied on graphical analysis of profile of SME1 owners, characteristics of small and medium businesses they own and the challenges they face in running their businesses and the following useful insights have been gained:

Most SMEs are micro-enterprises. 92 percent of businesses are micro-enterprises among which 68 percent have the owner as the only employee and 26 percent have between 1 to 3 employees. This suggests that most SMEs have limited contribution to national output and employment creation.

Large number of the youth are small business owners. Close to 50 percent of the SME owners are young people between the ages 17 to 32 years which shows the potential of the SME sector in alleviating youth unemployment problem and its contribution to the government’s effort of promoting economic empowerment of young people in Rwanda. This implies that the failure rate is likely to be higher among such enterprises as young entrepreneurs may have limited business experience which provides opportunity to the government to expand business support services to this group of SME owners.

Rwandan women are more likely to own micro-enterprises and less likely to own small and medium firms. Women constitute 55 percent of SME owners but 72 percent of them own micro-enterprises with at most three employees, implying that women owned SMEs have limited contribution to job creation. This calls for provision of training programs tailored to women owned SMEs to enable them to grow their businesses.

Majority of small business owners have low level of education. About two-thirds of the SME owners have either no formal education or only have primary education. Such a trend would lead to SME ownership to be dominated by entrepreneurs with lower level of education who often lack the skills to grow their business by introducing new products and services. This calls for provision of business support services to SME owners with no formal education or primary education to enable them acquire the skills necessary in successfully growing their business.

Entrepreneurship in the industrial sector is very low. SMEs in the industrial sector provide the most employment opportunity as they are more likely to hire between 4 to 30 employees. However, only 1 percent of SMEs operate in the sector which means contribution of the SME sector to the industrialisation effort of the government is marginal. Even more concerning is the fact that SMEs in the industrial sector face stronger financial and resource related constraints.

Level of education is correlated with SME size. Size of small business increases with increase in the level of education. Interestingly, small businesses that hire between 4 to 30 employees are more likely to be owned by those with tertiary education while micro-enterprises are more likely to be owned by those with no formal education or only primary education. However, it is puzzling that medium enterprises are owned by either those with no formal education or with primary education.

Majority of the SME owners either rely on informal credit or do not have access to credit. While a third of SME owners could borrow from a bank or non-bank financial institutions the rest either borrow from informal lenders or are excluded from the credit market.

Further research may be required to understand if this restriction is systematic, regulatory or idiosyncratic.

Finance is cited as the primary obstacle to survival and growth of SMEs. Most SME owners cite lack of access to finance as the primary threat to the survival and growth of their business.

More data is needed to gain a deeper understanding of the SME sector in Rwanda. The current report is based on FinScope Consumer survey with a limited data on the SME sector and as a result examining the efficacy of support programs in terms of increasing survival and growth has not been done. Besides, the relative performance of SMEs in each sector based on their usage of financial products such as credit and insurance could not be evaluated. Therefore, FinScope MSME, a comprehensive SME survey that provides much broader data on the SME sector is needed.

1 Although the data comprises micro, small and medium enterprises, we use the term SME instead of MSME throughout the report for the sake of simplicity.

1 Introduction SMEs contribute to economic development by increasing national output, creating jobs and reducing income inequality and poverty. Small businesses also serve as vehicles for entrepreneurship and sources of employment and income thereby driving economic growth. They can also foster sustainable development if they are integrated into community development.

The government of Rwanda has placed a considerable emphasis on the SME sector recognising the crucial contribution the sector can make towards economic growth, job creation and poverty alleviation. Development of the SME sector is an integral element of the Economic Development and Poverty Reduction Strategy (EDPRS) II as well as Private Sector Development Strategy 2013-2018. Developing the SME sector by easing small business access to finance using alternative financing schemes is also part of the Financial Sector Strategy 2013- 2018.

This report presents the Rwandan SME sector by reviewing the role of the sector in the country’s economic growth and poverty reduction endeavours. The legal and institutional framework required to ensure a sustainable SME sector has been highlighted based on review of strategic documents prepared by different government departments. The demographic profile of SME owners, the profile of small businesses, financial access and impediments to growth are presented based on FinScope Rwanda 2016 consumer survey.

The rest of the report is organised as follows. Section 2 presents overview of Rwandan economy by emphasising on the role of SMEs in economic development in general and private sector development in particular. It also presents the legal and institutional framework in place to promote SME development in the country. Section 3 presents SME owner profile by highlighting age, gender, level of education and location of SME owners. Section 4 presents SME characteristics including business sector, size and employment by sector. Section 5 highlights financial access of SME owners by paying particular attention to access to formal and informal credit. Section 6 presents impediments to growth based on SME owner perception about the obstacles they face while running their business. The last section concludes and forwards recommendation to different stakeholders.

2. Background on the Rwandan Economy Rwanda has recorded a magnificent economic performance over the last decade and the country is among the fastest growing economies in the world. Rwanda has achieved a remarkable growth in per capital GDP which has been steadily rising since 1995. It had GDP per capita (PPP) of $485 in 1994 and this has increased by more than threefold to $1,584 in 2014. More than a million people have been lifted out of poverty over the same period. Over the first EDPRS period, the country achieved a perfect developmental “hat trick” of sustained economic growth (8% average), poverty reduction (12% points) and a reduction in income inequality.

Through vision 2020, Rwanda is aspiring to become a middle-income country by 2020 and has been implementing its long-term strategy through medium-term plans since 2000. It has undertaken far reaching reforms since the 1990s. According to the World Bank (2017), Rwanda is the second-best economy in Africa for ease of doing business. In 2017, the country ranked 56th in the world for ease of doing business standing next to Mauritius that ranked 49th. Rwanda met most of the Millennium Development Goals (MDGs) by the end of 2015.

The economy is characterised by a dominant service sector that accounts for 52.5 percent of the national output. Although large share of the Rwandans participates in the agricultural sector, the sector is mostly subsistence with a large number of rural households’ farm plots too small to earn a decent living. The sector contributed 33 percent to national output in 2014. As is the case with most low-income economies, the industrial sector is small contributing only 14.5 percent of the national output (World Bank, 2017).

The future growth of the Rwandan economy is from the private sector on which the government has placed a significant reliance. Promotion of the SME sector is considered as a major propeller of private sector development in the country. Hence, we highlight in the following sub-sections, the role of the private sector on economic growth and the significance of the SME sector to private sector development by also presenting the legal and institutional framework in place to create a vibrant SME sector.

2.1. Private sector development in Rwanda

Although Rwanda has a small private sector the Economic Development and Poverty Reduction Strategy (EDPRS) II underlines the potential contribution of the sector. The power of the private sector to transform the country, delivering broad-based and inclusive economic growth, has been strongly emphasised. This is due to the fact that the private sector employs the majority of the workforce making it a core pillar of the new strategy. In the new strategy, the government is aiming at creating a vibrant private sector through interventions that include

(i) strengthening the investment process to pro-actively target large foreign investors in priority sectors of the economy;

(ii) accelerating structural changes in the financial sector by increasing long-term savings with the objective of increasing credit to the private sector; and,

(iii) significantly strengthening the business environment through tax and regulatory reform to spur medium and large enterprise growth and attract large investors.

The crucial role of the SME sector in building a vibrant private sector has been explicitly acknowledged in the private sector development strategy. The strategy has identified key interventions and SME development is part of entrepreneurship development programme where the role of SMEs in job creation and urbanisation has been recognised. Expansion of credit to the private sector is also part of the strategy in which introducing innovative financing schemes is considered as an important measure to ease SME access to finance.

2.2. The role of SMEs in economic development

The SME sector comprises 98% of the businesses in Rwanda and the sector accounts for 84 per cent of formal sector employment and 41% of all private sector employment (MINEACOM 2013). Most micro and small enterprises employ up to four people, showing that growth in the sector would create significant private sector non-agricultural employment opportunities. SMEs also contribute to public revenue in the form of taxes. As reported in the SME development policy, SMEs generated 4.9 billion RwF in annual tax revenue in 2010, and hence expanding the SME sector means boosting public sector revenue thus reducing Rwanda’s dependence on foreign assistance. The government also recognises the potential of the SME sector to lower Rwanda’s trade imbalance by increasing the value-added exports that boosts export revenue and reduce the import-export gap.

The SME sector is also expected to play an important role in the economic inclusion of the youth that comprises up to 40% of the population.

Nationally, 50 percent of the youth are unemployed and unemployment is more prevalent among those with tertiary education that those with primary education (NISR, 2016). Over 42% of the youth are either unemployed or underemployed in subsistence agriculture. The

Rwandan Development Board (RDB) through its Entrepreneurship development program aims at building a critical mass of young Rwandan entrepreneurs in the next 5 years and the SME sector is expected play crucial role in achieving this plan.

However, SMEs in Rwanda have remained less competitive compared to regional neighbours. They face many macro-level challenges including lack of finance, limited transport and energy, a missing insurance agency, low levels of societal trust, challenges with contract enforcement and a weak education system.

The Rwanda Development Board, through Entrepreneurship program, aims at providing Rwandans with entrepreneurial skills to help them run and manage their income generating activities and job creation and to encourage new start-ups and support entrepreneurship. The government is also working with larger firms in a vendor development programme to build capacity amongst suppliers and distributors, encouraging large firms to contract out parts of their core business while supporting small businesses to provide new goods and services they require.

2.3. Institutional framework to promote SME development

Having realised the potential of the SME sector in transforming the economy, the Rwandan government has accorded a reasonable attention to the sector. The contribution of the sector to job creation and its use as a breeding ground for larger businesses has been recognised by the government. Consequently, SME development is at the centre of EDPRS II and hence increasing the number of SMEs as well as raising their productivity are integral parts of the strategy.

Through the Financial sector strategy 2013-18, the government aims at increasing SME access to finance through expansion of credit guarantee. This is based on a recognition that the high risk associated with providing credit to SMEs acting as a major barrier to access to finance by SMEs. To mitigate risk, government intervention in form of credit guarantee schemes have played a significant step towards addressing access to finance challenges facing SMEs. The government decided to consolidate all the guarantee and refinancing facilities into one institution, the Business Development Fund (BDF). This is supplemented by promotion by the Bank of Rwanda of the inclusion of SMEs in the credit bureau system which has been empirically found to increase SME access to credit. Micro Leasing and Micro Savings schemes are also planned as part of easing SMEs access to finance.

With the aim of supporting the SME sector, many initiatives have been implemented by the government, Development Partners (DPs), financial and non-governmental organizations (NGO). However, these initiatives have suffered from a lack of resources, coordination and capacity. As a result, the government of Rwanda introduced SME development policy in 2010 with the objective of ensuring a more coordinated effort towards SME development. The SME development policy aims to stimulate growth of sustainable SMEs through enhanced business support service, access to finance and the creation of a conducive legal and institutional framework. More specifically, the policy aims at promoting a culture of entrepreneurship among Rwandans, facilitating SME access to development services including business development services, access to local, regional and international markets and market information, promoting innovation and technological capacity of SMEs for competitiveness, putting in place mechanisms for SMEs to access appropriate business financing; simplifying the fiscal and regulatory framework for SME growth; and developing an appropriate institutional framework for SME development.

12 11 8

17 – 32 years

33 – 39 years

40 – 45 years

46 – 54 years

55+ years

Source: FinScope Rwanda 2016

Figure 1: Age of SME owners (% of SME owners)

3. SME owner profile We analysed profile of SME owners based on age, level of education, gender and location. This is useful in understanding entrepreneurial concentration across these categories.

Definition of SMEs We identify SME owners based on adults own perception of themselves as owners of a business. We considered as SME owners adults that perceived themselves as self-employed or own a business. Accordingly, we have identified from FinScope Consumer Rwanda 2016 survey 602,516 SME owners constituting 10 percent of the adult population. In fact, the figure increases to 737,503 when we include those that source their income from making goods to sell and from renting properties.

It should be noted that the figure for SME owners may not correspond to number of SMEs due to the possibility of co-ownership of a single firm by many individuals or ownership of multiple business by a single individual.

The Small and Medium Enterprise development policy defines SMEs using three criterion including Net Capital Investments, Annual Turnover, and number of employees. Accordingly, the SME sector is defined as firms employing at most 100, annual turnover of 50million RwF, and or Net capital investments of 75million. The policy further classifies firms within the SME sector as follows:

those employing between 1 to 3 people are considered micro-enterprises, between 4 to 30 are considered small enterprises and between 31 to 100 are medium.

3.1 Age

Analysis of SME owners by age allows us to understand the distribution of SME ownership across age groups and hence providing insight about which particular age category ownership is concentrated. As shown in Figure 1, most SME owners are young adults with 45 percent of them aged between 17 to 32 years. Cumulatively, more than two thirds of the SME owners are between the age of 17 and 39 and SME ownership decreases as one moves to higher age categories. This shows the potential of the SME sector in alleviating youth unemployment problem and it actually contributes to the government’s effort of promoting economic empowerment of young people.

It also implies that most SME owners are young entrepreneurs with limited business experience which provides opportunity to the government to expand business support services to SME owners. This also has implication for financial strength of the enterprises. Most SME owners use their own money to finance start-up and growth and young owners that are at early stage of their life cycle may not have enough resources to invest in their businesses and this places more burden on the government to introduce innovative financing schemes for the SMEs.

Figure 2: Gender of SME owners

3.2 Gender

Comparison of SME ownership across gender shows that 55 percent of the SME owners are females while 45 percent are males. This actually closely reflects the gender split of the adult population in Rwanda (57 percent are females while 43 percent are males) rather than cross gender difference in entrepreneurial inclination. However, business size comparison by gender shows that while 72 percent of females own a business where they are the only employees a comparable figure for males is 67 percent. Males are more likely to own a micro or small business than females (24 percent of males own micro enterprises compared to 22 percent of females. Similarly, 7 percent of males own small businesses compared to only 4 percent of females). This implies that female entrepreneurs need to be accorded better attention so they are able to grow their businesses.

3.3 Level of Education

Although people can exhibit a natural inclination towards entrepreneurship, running a successful business in the current technologically advanced age requires possession of business management skills acquired through a formal education or through specialised trainings.

Educated entrepreneurs are better positioned to take advantage of opportunities and circumvent threats. Studies report a significant and substantial effect of an added year of education of a business owner on business profitability.

As shown in Figure 3, two-thirds of SME owners in Rwanda either have no formal education or have only primary education. SME owners with a secondary education are less than half of those with primary education and SME ownership by those with vocational training and tertiary education is a meagre 2 percent and 3 percent respectively. In general, SME ownership declines as one moves upward in the educational ladder.

Lower entrepreneurial inclination by those with higher level of education might be driven by availability of employment opportunity for these group and a concomitant loss of interest in running own business due to contentment with the employment income. In contrast, those with a lower level of education might be compelled to start a business as the only way of generating income. Such a trend would lead to SME ownership to be dominated by entrepreneurs with lower level of education who often lack the aspiration to grow their business by introducing new products and services. This calls for provision of business support services to SME owners with no formal education or primary education to enable them acquire the skills necessary in running a successful business.

Female 55%

Male 45%

Source: FinScope Rwanda 2016

Source: FinScope Rwanda 2016

2 3

No formal education

Primary Secondary Vocational Tertiary

Figure 3: Level of education of SME owners (%)

3.4 Location (Urban/Rural and Province)

SME development might be affected by geographic location due to difference in the availability of infrastructural facilities and market.

Businesses tend to concentrate in urban areas where they can access market for their products and services. As shown in Figure 4, most SME owners are based in rural areas which is consistent with rural/urban distribution of the adult population in the country. This might also be due to predominance of agricultural SMEs that are mostly based in rural areas.

Rural 71%

Urban 29%

Source: FinScope Rwanda 2016

Figure 4: Location of SME owners

Figure 5 shows the distribution of SME owners across provinces in Rwanda. SME owners are concentrated in three provinces, namely Kigali City, Southern province and Eastern province. The concentration in Kigali city is the highest considering the proportion of adult population living in the city. The city inhabits 13 percent of the adult population yet hosts 24 percent of SME owners. This contrasts with western province that inhabits 22 percent of the adult population but host only 16 percent of SME owners.

Kigali City Southern Province

Western Province

Northern Province

Eastern Province

Source: FinScope Rwanda 2016

Figure 5: Provincial distribution of SME owners

4. Characteristics of Rwandan MSMEs This section presents characteristics of SMEs by focusing on business sector, size and employment across business sectors. The relative importance of level of education on the size of a business is highlighted by comparing business size across level of education.

4.1 Business Sector

Development of the SME sector is needed because the sector can boost national output besides its useful contribution to job creation. The economic role of the sector becomes more important when SMEs operate in sectors of the economy considered strategically important.

However, capital constraints and accessibility of markets may lead to concentration of small businesses in a particular sector.

As shown in Figure 6, SMEs operate predominantly in the wholesale or agricultural sector. The wholesales sector is where 43 percent of SMEs operate followed by 31 percent in the agricultural sector. Despite the 52.5% contribution of the sector to national output only 20 percent of the SME operate in the service sector. The fact that only 1 percent of SMEs operate in the industrial sector means the sectors contribution to the industrialisation effort of the government is marginal. This calls for a concerted effort by the government to help SME owners identify opportunities in the industrial sector and also to provide incentive packages to attract more entrepreneurs to the industrial sector.

Figure 6: Business sector in which SMEs operate

Wholesale

Agriculture

Service

Industry

4.2 Business Size

Size of a business can be measured using different parameters such as annual turnover, total assets or number of employees. Each of the parameters has its own limitations. For instance, volatility in annual turnover may lead to a misclassification of a medium enterprise into small business when turnover falls. Sectoral differences in capital intensity of operations makes using total assets as a basis of classifying businesses by size problematic. Businesses that use capital intensive processes will be classified into higher size categories while those that use less capital-intensive processes are likely to be classified into lower size categories. A similar limitation applies when using number of employees as a basis of size classification which leads to small businesses that use labour intensive processes into higher size classes while those with less labour-intensive processes into lower size classes.

In this report, we classified businesses into different size categories using the number of employees as this was the only available data we could get from the FinScope survey. We created three categories where the first category consists of SMEs in which the owner is the only employee. The remaining three categories, namely, micro, small and medium are created based on the classification guide provided in the Small and Medium Enterprise Development Policy.

As show in Figure 7, two-thirds of the SMEs have no employee other than the owner. A quarter of them are micro enterprises employing between 1 and 3 workers. Small businesses that employ between 4 and 30 are only 5 percent of the businesses while medium enterprises represent 1 percent. This implies that the employment potential of the SMEs is very limited.

5 1

Owner only employee Micro Small MediumSource: FinScope Rwanda 2016

Figure 7: Business size by number of employees

Further analysis of business size by owner’s level of education provides interesting insights. As shown in Figure 8, ownership of a business where the owner is the only employee decreases as one moves up in the education ladder from those who do not have formal education to those with tertiary education. Size of small business increases with increase in the level of education. Interestingly, small businesses that hire between 4 to 30 employees are more likely to be owned by those with tertiary education. However, it is puzzling that medium enterprises are owned by either those with no formal education or with primary education.

6 1

4 1

35 37

No formal education Primary education Secondary education Vocational training Tertiary education Source: FinScope Rwanda 2016

Figure 8: Business size by level of education (%)

4.3 Employment trends by sector

Employment potential may differ across sectors due to difference in labour intensity of businesses in each sector. As shown in Figure 9, more than 90 percent of SME in the agricultural, service and wholesales sector employ at most 3 employees which means the job creation capacity of firms in these sectors is very much limited. Businesses that employ between 4 to 30 employees are concentrated in the manufacturing sector. Given that only a small fraction of adults own a business in the manufacturing sector, promotion of SME development in the sector would promise creation of jobs for many Rwandans. The service sector hosts businesses that employ between 31 to 100 workers.

Agriculture Wholesale Industry Service

Source: FinScope Rwanda 2016

Figure 9: Employment trends by sector (%)

% ■ Owner only employee ■ Micro ■ Small ■ Medium

% ■ Owner only employee ■ 1 to 3 ■ 4 to 30 ■ 31 to 100

In general, analysis of characteristics of SME shows that most small business operate either in the wholesale or agricultural sector. A very small percentage of SMEs operate in the industrial sector which is concerning because the sector has a higher potential to create jobs compared to the other sectors. With 95 percent of SMEs employing at most 3 workers, the job creating capacity of the SMEs is marginal.

SMEs operated by owners with secondary and post-secondary education are more likely to provide higher employment opportunity.

Therefore, government policies should target SMEs with growth potential and with higher employment capacity instead of casting a wider net on the whole SME sector.

5. Financial inclusion of SMEs Access to finance allows SME owners to manage their resources effectively. For instance, an SME owner with a bank account can receive payments for goods delivered or services offered without a need to deal with cash. This is important particularly when risk of holding cash is very high due to theft. We present in the following sections access to financial service of SME owners. We also present access of SME owners to mobile money service and credit.

5.1 Bank account: access and usage

Bank account ownership is important for business owners. It allows SME owners to efficiently manage their financial resources because keeping cash in a fragmented manner may lead to loss and it can be exposed to theft. In addition, a small business owner with a bank account can trade with customers through correspondence by sending goods through an agent with the customers depositing the money in a bank account from their place of residence.

Figure 10 shows comparison of bank account ownership between SME owners and the rest of the adult population. SME owners enjoy better access to bank account as evidenced by 43 percent of them having a bank account compared to only 24 percent of the rest of adults in the country. This led to lower informal access and exclusion compared of the rest of the adult population.

43 42 411

24 42 1222

% ■ Banked ■ Other formal (non-bank) ■ Informal ■ Excluded

Source: FinScope Rwanda 2016

Figure 10: Access Strands for SME owners’ vs the rest of adults

SME

owners

Non-SME owners

Although bank account ownership can help in efficiently managing resources such a benefit can accrue to small business owners that use their bank account. Bank accounts can be used to store value and also as a means to access other financial services such as credit and insurance. Therefore, we examined the extent of bank account usage among SME owners and the rest of adults. We measured bank account usage based on the question “Have you used your bank account in the past month?”

As shown in Figure 11, 16 percent of SME owners used their bank accounts compared to only 5 percent of the rest of adults. This implies that SME owners are more likely to use their bank account to efficiently manage their resources than the rest of adults.

Non-SME owners Source: FinScope Rwanda 2016

Figure 11: Bank account usage among SME owners

% ■ Used bank account ■ Not used bank account

SME owners

5.3 Access to credit

Credit allows individuals to start-up a new business or to finance expansion of existing businesses. However, lack of access to credit to entrepreneurs is cited as one of the major impediments to entrepreneurship and private sector development. This is well recognised by policy makers and easing access to finance is among the most important measures needed to promote SME development. The government of Rwanda has been making concerted efforts, both through Private Sector and Financial Sector Development Strategy, to introduce innovative financing schemes tailored to the nature and needs of small businesses.

We compared SME owner access to credit with that of the rest of adults in Rwanda. Comparison is made along access to credit from a bank, other formal, informal and family and friends. As shown in Figure 13, while 1o percent of SME owners accessed bank credit compared to only 3 percent of the non-SME owner adult population. SME owners also have a better access to credit from other formal institutions which contributed to lower reliance on informal finance and credit from family and friends. However, the fact that nearly half the SME owners rely on informal finance shows limited accessibility of formal finance. Informal finance may appeal to SME owners because it is likely to be faster, more flexible and convenient. However, it has two serious limitations. First, informal loans are small and hence they are mostly used for financing operations (working capital) rather than growth (expansion). Secondly, informal lenders charge unreasonably high interest rate that erodes profit of small firms.

5.2 Mobile money account ownership and usage

Mobile cellular subscription has seen a dramatic increase in Africa and along with it came mobile money services. A recent report by the World Bank showed that Africa has achieved a significant improvement in financial inclusion driven by growth in mobile money account ownership. Mobile money services allow individuals to access financial services via their mobile phones.

As shown in Figure 12, 58 percent of SME owners are registered mobile account owners compared to only 31 percent of the rest of the population. In terms of usage of mobile account usage, SME owners show a higher tendency of using their mobile money account more frequently than the rest of the adults. Higher level of usage of mobile money among SME owners is likely to facilitate business and innovations in the mobile money will benefit SME owners that are financially excluded due to lack of access to conventional financial services.

Own mobile money account

Use at least once a week

Use many times a month

Use less than once a month

Source: FinScope Rwanda 2016

Figure 12: Mobile money account ownership and usage among SME owners

11 7

■ SME owners ■ Non-SME owners

10 22 28446

3 10 31650

% ■ Banked ■ Other formal (non-bank) ■ Informal ■ Family and friends ■ Excluded

Source: FinScope Rwanda 2016

Figure 13: Credit Strands for SME owners

SME

owners

Non-SME owners

6. Impediments to Rwandan SME growth Despite their crucial role in promoting economic development by increasing national output, reducing unemployment and poverty, SMEs often face many obstacles that impede their growth and sometimes threaten their survival. Any SME development programme should thus be designed with the aim of uprooting the obstacles and making the business environment conducive for SMEs to grow and thrive.

Therefore, in this section we present the most binding constraining SMEs face.

As shown in Figure 14, having been cited by 17 percent of SME owners finance is the most constraining factor. SMEs problem in accessing finance arises due to both their own characteristics and absence of innovative credit products by financial service providers that suits SMEs operational reality. SME own characteristics becomes an impediment because most SMEs are owned by a single person who does not have the willingness to relinquish control by inviting a partner with resources. There is also evidence that some SME owners do not have any plan to grow their business out of a fear that a bigger business is too difficult to manage. This suggests that an effort to grow the SME sector must take into account entrepreneurs’ intention and must focus on those with the willingness and potential to grow. The other cause of lack of access to finance is absence of innovation by banks and other lenders institutions. Lender often rely on collateral and turn down a loan application that is not backed by a collateral irrespective of its potential viability. This might be driven by contentment with existing market where they lend to well-established medium and large businesses that do not pose high credit risk. They often ignore the fact that SMEs can make a good source of potential market if supported well. Many alternative schemes were proposed to ease financial constraints of SMEs including factoring, leasing, enhancing credit scoring and credit guarantees. These schemes need to be implemented by taking into account the institutional and legal framework of the country on one hand and the nature of SME business on the other hand.

Sales and marketing related problems are also cited by SME owners as impediments to growth next to finance. As reported in the previous section, most small business owners have at most primary education and hence they may not have skills required to design their products and services according to customer preferences. Consequently, they often face low demand for their products and services which poses a threat to their survival. They may not be able to engage in aggressive marketing activities even when they have products and services that may be highly demanded by customers. Studies show that very few small business owners endeavour to advertise their products and services through the radio, TV, newspapers etc. and most of them rely on word of mouth.

Source: FinScope Rwanda 2016

Figure 14: Obstacles faced by SME owners

Finance

Sales & Marketing

Other resources

Legal

Skills and staff

6.1 Finance related challenges

The major challenges SMEs face that are related to finance include shortages of cash flow, inability to get finance, inability to collect outstanding receivables from credit customers and inability to access credit from banks. Cash flow problems may arise due to lack of a cash budget where planned collections and disbursements are mapped. Absence of a cash budget means disbursements may be made haphazardly placing strain on the cash balance of a business. A prudent cash management requires that businesses plan their disbursements by matching them with cash collections.

Besides inability to access credit from banks and other lenders, SMEs owners also cite problem in collecting outstanding receivables from credit customers as a challenge. A problem in recovering outstanding receivables may arise due to either a lax credit policy where bad customers buy on credit or a weak collection management. Small businesses need to have a more formal way of appraising credit standing of their customers and credit sales should be made using legally binding procedures. A legally binding sales contract can be used as a security to access working capital financing from a bank or other lenders. It can also be used to raise finance through factoring where there are institutions engaged in this type of financing arrangements. A legally binding contract also facilitates collection because businesses can resort to the court in case of default of the customer.

Figure 15: Finance related challenges

Cash flow

Obtaining credit

Banks did not want to help

6.2 Sales and Marketing related challenges

As highlighted in the previous section, SME owners often lack sales and marketing skills. Consequently, they fail to attract customers due to either incorrect design of their products/services or due to lack of marketing. In addition, small businesses are challenged by low prices driven by too much competition in the market. Most often, due to low level of innovation small businesses replicate a product or service that has many suppliers. This can be curbed by providing training to SME owners on product/service design based on customer preferences.

6.3 Resource challenges

SMEs require resources such as a business premise, equipment, storage facilities, transport and utilities. SME owners cite unavailability of a business premise as a setback to their success. They also cite lack of equipment, storage facilities, transport and utilities as a challenge to their growth.

Source: FinScope Rwanda 2016

Figure 16: Sales and marketing related challenges

Not enough customers

Selling price too low

Too many competitors

Raising awareness of products

What product/service to sell

Source: FinScope Rwanda 2016

Figure 17: Resource related challenges

Business premises

Equipment

Storage facilities

Transport

Electricity

Water

6.4 Legal challenges

Studies report that the survival and growth of small business can be threatened by legal and regulatory requirements that lead to loss of value. Tax compliance is the most cited within the legal challenges faced by small business owners. Tax compliance can be a burden if the tax law is designed without giving due regard on the potential demand it places on small businesses. Such a law may lead to considerable amount of useful time spent on organizing documents needed to submit a tax return or at times the cost of compliance may not be commensurate with revenue small businesses generate. A complex tax law may compel small businesses to hire a consultant imposing a considerable strain on their finances. Therefore, it is imperative that tax laws that are easy to understand and cheap to comply are introduced to avoid obstacles that arise in relation to tax compliance.

Source: FinScope Rwanda 2016

Figure 18: Legal challenges

Tax compliance

Laws and regulations

Registering the business

We examined the challenges SMEs face across sectors to gain a deeper insight into the most constraining challenges faced by firms in each sector. As shown in Figure 19, SMEs in the manufacturing sector are more constrained than firms in the other sector. Lack of resource is a binding constraint for SMEs in the manufacturing sector evidenced by 40 percent of them reporting this as an obstacle.

Unpacking resource related challenges faced by this group of SMEs shows that they are constrained by lack of transport for moving raw materials and final products. Proportionally more SMEs in the manufacturing sector also report finance as an impediment to their survival and growth which is understandable because firms in this sector need to invest in different assets such as machinery and equipment.

2 3 3 7 8 6

10 9

11 12

Skills and staff Legal Resources Sales & Marketing Finance

Source: FinScope Rwanda 2016

Figure 19: Challenges faced across business sectors

% ■ Agriculture ■ Manufacturing ■ Wholesale ■ Service

7. Conclusions and implications for stakeholders This section presents the conclusions drawn from analysis of SME owner profile and characteristics of SMEs in Rwanda. However, it should be noted that the analysis was based on FinScope Consumer survey with a limited data on the SME sector and hence a broader insight can be gained through a comprehensive FinScope MSME survey.

7.1 Conclusions

We have drawn the following conclusions from graphical analysis of profile of SME owners, characteristics of their businesses and the challenges they face:

■ Most SMEs are micro-enterprises. 92 percent of businesses are micro-enterprises among which 68 percent have the owner as the only employee and 26 percent have between 1 to 3 employees. This implies that most SMEs have limited contribution to national output and employment creation.

■ Majority of the youth are small business owners: Close to half the SME owners are young people between the age 17 to 32 which shows the potential of the SME sector in alleviating youth unemployment problem and its contributes to the government’s effort of promoting economic empowerment of young people in Rwanda. This also implies that the young entrepreneurs may have limited business experience which provides opportunity to the government to expand business support services to these group of SME owners.

■ Rwandan women are more likely to own micro-enterprises and less likely to own small and medium firms. Women constitute 55 percent of SMEs but 72 percent of them own micro-enterprises with at most three employees, implying that women owned SMEs have limited contribution to job creation. This calls for provision of training programs tailored to SME owner women to enable them to grow their businesses.

■ Majority of small business owners have low level of education: About two-thirds of the SME owners have either no formal education or only have primary education. Such a trend would lead to SME ownership to be dominated by entrepreneurs with lower level of education who often lack the aspiration to grow their business by introducing new products and services. This calls for provision of business support services to SME owners with no formal education or primary education to enable them acquire the skills necessary in successfully growing their business.

■ Very low entrepreneurship in the industrial sector. SMEs in the industrial sector provide the most employment opportunity as they are more likely to hire between 4 to 30 employees. However, only 1 percent of SMEs operate in the sector which means contribution of the SME sector to the industrialisation effort of the government is marginal.

■ Level of education is correlated with SME size. Size of small business increases with increase in the level of education.

Interestingly, small businesses that hire between 4 to 30 employees are more likely to be owned by those with tertiary education while micro-enterprises are more likely owned by those with no formal education or only primary education. However, it is puzzling that medium enterprises are owned by either those with no formal education or with primary education.

■ Majority of the SME owners either rely on informal credit or do not have access to credit. While a third of SME owners could borrow from a bank or non-bank financial institutions the rest either borrow from informal lenders or are excluded from the credit market.

■ Finance is cited as the primary obstacle to survival and growth of SMEs: Most SME owners cite lack of access to finance as the primary threat to the survival and growth of their business.

■ SMEs in the industrial sector face stronger financial and resource related constraint: SMEs that operate in the industrial sector cite lack of transport as a major resource related challenge. Large number of them also cite finance as a serious threat to their survival and growth.

7.2 Implications for stakeholders

Based on conclusions drawn from analysis of the FinScope Consumer Rwanda 2016 survey relating SMEs in Rwanda we forward the following policy recommendations for policy makers, NGOs and Financial Service providers.

7.2.1 Recommendations for policy-makers

The government of Rwanda has been working towards development of the private sector in general and SMEs in particular. This is clear from EDPRS II, Financial Sector Development Strategy, and Private sector development strategy. The government is cognizant of the fact that creating a vibrant SME sector requires participation of all sectors of society including NGOs, development agencies and the private sector. The government of Rwanda should take leadership in promoting the development of the SME sector as hence needs to:

■ Set up a comprehensive SME development framework that clearly outlines the objective of…