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The purpose of this research was to assess the banking sector in Rwanda and its enabling environment to attract other banks within East African community. The research was carried out in Kenya Commercial Bank and Equity bank with the following research objectives; examining the nature of Rwandan banking industry, identifying the environmental factors in Rwanda that are conducive for banking sector and assessing the strategies that Rwanda banking industry has used to attract other banks within East African community. The researcher reviewed literature related to previous studies carried out in areas related to the topic giving emphasis to the nature of banking industry in Rwanda, environmental factors conducive for environment, strategies used to attract foreign banks and the banking sector in Rwanda. The researcher used descriptive and analytical research while the study population was 126 employees and customers of the selected banks. The sample size of the research was 95 employees from the selected banks. The data collection tools were questionnaires and interview guide while analysis and interpretation of data was done using tables and figures. Data collected was analysed based on the frequencies and percentages of respondent’s views. The research found out that the banking sector in Rwanda is very good (60%), and 32% described it as good. Meaning that Rwandan banking sector is good enough to attract other commercial banks within East African community, the factors necessary for the attraction of foreign commercial banks within East African Community are security (20%), stable currency (16%), and nature of the banking industry (29%), a wide market (9%) and conducive environment, there is a relationship between banking environment and attraction of commercial banks in Rwanda (96%) meaning that attraction of commercial banks and banking environment are related. The research concluded that the nature of Rwanda the nature of the banking industry in Rwanda is good enough to attract other commercial banks within East African community and has favoured the foreign commercial banks that opened up in Rwanda from east African region and the environmental factors in Rwanda that are conducive for banking sector in Rwanda included security, stable currency and nature of the banking industry, a wide market and conducive environment. The research recommended that the government of the republic of Rwanda should continue ensuring that the banking environment is conducive by continued supervision and monitoring of the sectors, controlled inflation and stabilising the currency.

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ATM: Automated Teller Machine CAMELS: Capital, Asset Quality, Management, Earnings, Liquidity, and Sensitivity CAR: Capital Adequacy Ratio EAC: East African Community EDPRS: Economic Development and Poverty Reduction Strategy FDI: Foreign Direct Investment FSDP: Financial Sector Development Program GDP: Gross Domestic Product IMF: International Monetary Fund KCB: Kenya Commercial Bank MBA: Master of Business Administration NBR: National Bank of Rwanda RDB: Rwanda Development Board Rwf: Rwandese Franc USA: United States of America



A bank is a financial institution that accepts deposits from and extends credit facilities to customers.

Banking environment

Banking environment refers to the environment in which banks operate in relation to financial policies, security and government laws.

Foreign banks

Foreign banks refers to banks from outside countries.

Attraction of foreign banks

Attraction of foreign banks refers to the strategies and procedures directed towards making foreign banks coming in the country to join the banking sectors.



In this chapter the researcher presents the introduction to banking sector and the enabling environment to attract other banks. The researcher also presents the background to the study, problem statement and the objectives of the study including general and specific. The chapter further presents the research questions, scope of the study, limitations, significance and the conceptual framework. Environmental turbulence in the modern banking business has forced the banks to adopt strategic reactions for survival and continuity. Banks predominantly react by diversifying their loan portfolio or by stepping up their screening and monitoring. During a financial crisis arranging banks retain larger portions of loans and form more concentrated syndicates, reflecting an increased need to screen and monitor borrowers. During a crisis, agency problems are attenuated in syndicates that lend to repeat borrowers and that are composed by experienced arrangers (Taylor, 2008). A liberalized and attractive banking industry especially in developed countries coupled with an increasingly complex and dynamic business environment has created hyper-competition not only in the banking sector but in different industries (Robinson, 1991). With increased labor migration, governments, civil society, and the private sector are now faced with the prospect of attracting more worker remittances, migrant association donations, migrant capital investment, as well as trade opportunities. Governments and businesses need to ask themselves what they can do to help lower the costs of remittances and attract more money. An enabling environment is one that facilitates with ease economic interaction among players. Five factors that enable a particular economic environment are: The presence of a significant number of economic players, communication and networking efforts, readily available information about transactions, policy, business initiatives, and ventures aimed at key economic sectors and resource availability to enhance initiatives and motivate players (Arteaga & Jeffus, 2007). Governments and businesses can promote initiatives that not only address cost reduction in the transfer of remittances, but also enable other elements of an economic environment that is attractive for migrant transfers of various kinds (Watson and Tony, 1998). Attracting foreign investments are one of the driving forces of the process of globalization and are a defining element of the modern-day world economy. Foreign commercial banks promote the restructuring of industry at the regional and global levels and thus ensure the integration of a national economy into the world economy more effectively than trade (Williamson, 1996).

1.1 Background to the Study

Industry competition involves business firms which compete for the same customers. This means therefore that if new markets are not created the number of customers would decline with the declining profitability of the firms in the same industry. Industry environment factors directly influence a firm’s prospects and they include; entry barriers, competitor rivalry, availability of substitutes and the bargaining power of buyers and supplier, among others. For companies in competition against one another, the external environment constitutes the industry within which the firm operates (Taylor, 2008). Competitive strategies involve the changes in a firm’s strategic behaviours to assure success in transforming the future environment. They therefore, constitute a set of decisions and actions that result in the formulation and implementation plans designed to achieve a firm’s objectives. It is a reaction to what is happening in the environment. Equally they involve the changes in a firm’s strategic behaviours to assure success in transforming the future environment. Ideally, the company gains competitors customers by taking over part of the competitor’s market share attracting non users of the product, at the same time encouraging current customers to consume more of the product and this forms the basis for market penetration strategy (Arteaga & Jeffus, 2007). Rwanda has steadily reformed its commercial laws and institutions since 2001 with support from the World Bank. Rwanda made the biggest-ever improvement in the Doing Business reform category by jumping 76 places in one year, ranking 67 out of 183 countries in the 2010 report. The financial sector is also healthier, and together this progress reflects:A  Reforms have been adoptedA  in 7 of the 10 doing business topics, major laws were prepared and adopted, including a company law, a secured transactions law, an insolvency law, a labor law, a law establishing the commercial courts, and another establishing the commercial registration agency. A Doing Business unit has been set up within the Rwanda Development Board (RDB) and is effectively leading the preparation and implementation of the investment climate reform agenda through enhanced public-private dialogue. The one-stop center in the RDB is also more effective. As a result, it is now easier, faster and less expensive to do business in Rwanda; Time to start a business was cut from 14 days to three days and the number of procedures was cut to two from eight. The cost of starting a business has dropped from 109 percent to 10 percent of income per capita between 2008 and 2009, time to register a property was reduced to 60 days A from 371 days and the cost to register property dropped from 9.6 percent of property value to 0.5 percent between 2007 and 2009, time to import was reduced from 42 to 35 days, and time to export was reduced from 42 to 38 days between 2008 and 2009, fiscal administrative procedures for businesses are being streamlined and the Value Added Tax law amended, resulting in the reduction in the number of tax payments from 34 to 26 and reduction in time to prepare, file tax returns and pay taxes from 160 hours to 148 hours between 2009 and 2010 (NBR, 2011). All banks in Rwanda earned substantial profits in the first quarter of 2011, registering the strongest recovery from a dire 2009, the year that was characterized by high interest expenses and billions of bad debts, followed by a net loss of Rwf 300 million last year. However, things turned around in 2012 with a robust rebound in the financial industry, awarding banks with high profits in contrast to the pain they endured during the financial meltdown. In fact banks should maintain their optimism because Central Bank increases credit designated for the private sector by 20 percent(Independent newspaper, 2nd June 2011). The good performance in the industry is a result of a prudent fiscal policy for the last five years and increasing lending to stimulate economic growth. The current growth has not been hampered by the Central Bank’s tight rules that govern the financial game in Rwanda. Banks work in an austerely monitored environment, but there have been a series of monetary easing measures of late. For example, the Central Bank in 2010 massively slashed its key repo rate the rate at which it lends to commercial banks to a record low of six per cent from nine per cent in 2009. This development came on the heels of a stimulus package of Rwf20.21 billion in the banking system in 2010 in addition to Rwf14.51 billion that was spent a year earlier in form of short and long term deposit liquidity facilities to banks (NBR, 2011) Commercial banks, especially the East African Community banks including Equity and KCB banks from Kenya are fighting for more business case in Rwanda. The competition is more on savings account and credit accounts as these are seen as the main cash cows in the banking industry. The success in the Rwandan business environment is attributed to the conducive banking environment in the banking industry (National Bank of Rwanda [NBR], 2001).

1.2 Statement of the Problem

Competition, both national and international, is increasing in virtually every industry. The key features and the implications of this trend are outlined with specific reference to the banking and financial services industry. The competitive strategy for the banking industry has largely been the identification of potential market niches and segments which could be developed. Due to globalization and liberalization in the world, economies have seen more firms entering into the global markets in general and in the banking industry particularly in upcoming markets. Rwanda government in its process of economic development through conducive climate for investment has attracted many businesses in commercial banks to invest in the country. A liberalized banking sector in Rwanda has witnessed increased competition in the banking industry in Rwanda. More banks especially from foreign countries such as Equity, Kenya Commercial Bank from Kenya, Fina Bank, Access Bank and Eco Bank from Nigeria have invaded Rwanda`s banking sector. In addition to this there are more financial institutions still entering into Rwanda. With the increased competition commercial banks in Rwanda are experiencing a strain on their market share and hence their profitability (NBR, 2009). This means that the banking sector of Rwanda has managed to attract many foreign banks especially from East African community. However the extent to which it has attracted the foreign commercial banks from East African needs to be ascertained. It is therefore, against the above background that the researcher carried out this research and assesses the banking sector in Rwanda and its enabling environment to attract other commercial banks from East Africa.

1.3 Objectives of the study

1.3.1 Main objective

The main objective of this research was to assess the banking sector of Rwanda and its enabling environment to attract other commercial banks within East African Community.

1.3.2 Specific objectives of the study

The specific objectives of this research were the following;- To examine the nature of Rwandan banking sector ant its environment To identify the environmental factors in Rwanda that are conducive for banking sector. To assess the strategies that Rwanda banking industry has used to attract other banks within East African community.

1.4 Research questions

The research question included the following:- What is the nature of Rwanda banking sector and its environment? What are the environmental factors in Rwanda that are conducive for banking sector in Rwanda? What are the strategies that Rwanda banking sector has used to attract other commercial banks from East African community?

1.5 Limitations of the research

To every research, process or activity, there are always challenges along the way that tend to disrupt the process. In as far as this research is concerned, the researcher faced the following challenges but was much prepared to handle them and produced a quality research report. Firstly the researcher faced a situation where some of the respondents took long to believe in the purpose of the research. This made them refuse or hastate to fill the questionnaire or accept the interviews. However the researcher did whatever it needed to convince them beyond doubt that the research was purely academic and they provided the required data. In most cases senior management in banks were so busy with work and therefore had limited time to fill questionnaires. However, considering and knowing their situation, the researcher made all the possible appointments with them until they got time for interviews other than questionnaires which took long. The researcher also faced a situation where it was difficult to assess the required literature for the research. However, the researcher was more prepared to do visit all the possible places like libraries, book centers and internet in order to assess a wide range of data.

1.6 Scope of the research

1.6.1 Content scope

In carrying out this research, the researcher ensured that the original purpose of the research is not diverted and therefore focused on the Rwandan banking sector and its enabling environment to attract other banks within East African community.

1.6.2 Geographical scope

The research was carried out in Equity bank and Kenya Commercial Bank as some of the two foreign banks from East African community. The researcher concentrated on the main branches of the selected banks located in the centre of Kigali City.

1.6.3 Time scope

The element of time is very important in the research process because it makes the research more clear and specific. This researcher therefore considered the period from 2009 to 2012.

1.7 Significance of the research

The research into Rwandan banking sector and its enabling environment to attract other commercial banks within East African Community will be significant to various sections of people and institutions in various ways among which the following will be included; Submission of the research report is a requirement of Mount Kenya University. Therefore upon its submission the researcher will be allowed to graduate with a Masters Degree in Business Administration Accounting and Finance option. The researcher will also be able to widen understanding in the field of banking and the environmental factors necessary to attract foreign banks. Future researchers in the field of banking will use the knowledge of this research when carrying out research in the related areas. They will be able to widen their understating and make themselves familiar with the banking sector. Equity and KCB Banks will use this research to identify the necessary environmental factors for attracting foreign banks and be able see which one they have exploited so far. They will also be able to know far they can fully exhaust the opportunities in Rwanda banking sector. Other foreign banks in Rwanda will also use the knowledge from this research to fully understand the Rwandan banking sector and how they can best exploit it in order to outwit their competitors. The government of Rwanda will use this research to know how far foreign banks understand and appreciate the opportunities in the Rwandan banking sector. This will help the government in providing areas where to base in making future policies related to the industry. Last but not least future investors in banking industry will benefit from this research by knowing the opportunities in Rwanda banking environment that can be exploited to their best advantage.



2.1 Introduction

In this chapter, the researcher reviews literature related to the banking sector, environmental factors that are conducive for banking sector and the strategies that are used to attract foreign banks. The chapter finally presents the summary of the chapter.

2.2 Review of past studies

The global financial crisis of 2009 has had a profound impact on banks of all sizes. Institutions grapple with reduced public confidence, heightened shareholder scrutiny and increased regulatory oversight. Troubled banks have been in need of government assistance, intervention and various stimulus packages. Many institutions need to divest certain businesses, while others struggle to fully integrate recent acquisitions (Foley, 2000). Throughout the financial crisis, troubled banks have been in need of government assistance. Intervention and various stimulus packages included everything from the full nationalization of banks in certain countries to modest capital infusions. Other intervention measures incorporated asset purchases as well as liquidity support and guarantee programs. Many institutions need to divest certain businesses, while others struggle to fully integrate recent acquisitions (Gordon, 2011). Banks hit hardest are cleaning their balance sheets and protecting assets. Those who fared relatively well are reshaping their business and governance models. The current market turmoil will likely yield positive outcomes as banks reassess the way they do business and learn from these lessons the crisis brought to bear: Improve the way risk is managed across the enterprise, recognize that liquidity is crucial, commanding center stage, look at streamlining businesses by returning to core competencies and seize opportunities through strategic acquisitions, when possible (Emerson, 2007). To effectively manage risk across the enterprise, organizations must define their risk appetite, embed a risk-aware culture and institute more robust risk forecasting and stress-testing. In addition to risk management, liquidity is the focus of attention among executives, boards and regulators. Failing to manage liquidity properly can result in significant reputational damage or worse, insolvency. The fallout from the economic downturn has left banks struggling with other issues key to recovery, including tax and expense management; data quality in risk and finance; and greater regulation and government intervention. The industry response varies by institution. One thing is clear: the financial services industry is in a state of constant flux. Forward-looking institutions understand that formalizing processes and systems whether for risk management, liquidity risk or performance improvement is necessary to support strategic decision-making and prepare for the unexpected (Aslett, 2003).

2.2.1 The nature of the banking sector

A bank is an institution which deals in money and credit. It accepts deposits from the public and grants loans and advances to those who are in need of funds for various purposes. A bank is a financial organization where people deposit their money to keep it safe. A bank is a financial institution and a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly or through capital markets (Glover, 1986). Banking is an activity which involves acceptance of deposits for the purpose of lending or investing. In addition to accepting deposits and lending funds, banking also involves providing various other services along with its main banking activity. These are mainly agency services, but include several general services as well (Casu & Girardone, 2009). A banker is one who undertakes banking activities, accepting deposits and lending money for different purposes. Banking is an activity of accepting funds from the public for the purpose of lending or investment. The essential features of banking activities are as follows:- accepting deposits from public, lending or investment of such deposits, incidental to the activities of accepting deposits for lending or investing, banks undertake activities like promoting and mobilizing savings of the public, providing funds to trade and industry by way of discounting bills, overdraft, cash credit facility, and transfer of funds from one place to another, Providing agency services to customers, such as collection of bills, payment of insurance premium, purchase and sale of securities and other general services, such as issue of travelers’ cheques, credit cards, locker facility (Gordon, 2011). Money deposited with the bank is assured as far as its safety is concerned. Further the depositor is allowed to withdraw it whenever required. Banks allow interest on deposits. Such interest helps in the growth of funds deposited with the bank. Thus the rate of interest provided on deposits acts as an incentive to the depositors. Banking activities are considered to be the life blood of the national economy. Without banking services, trading and business activities cannot be carried on smoothly. Banks are the distributors and protectors of liquid capital which is of vital significance to a developing country (Arteaga & Jeffus, 2007). Efficient administration of the banking system helps in the economic growth of the nation. Banking is useful to trade and commerce. Banking activities are useful to trade and industry in the following ways. Money deposited in a bank remains safe. Precious articles too can be kept in the safe custody of banks in lockers, banks provide credit facilities to their customers. Customers with bank accounts also enjoy better credit in the business world, banks encourage the habit of saving and thrift among people, and they mobilize savings and invest them in productive activities. Thus, they help in increasing the rate of savings and investment in the country. Banks provide a convenient and safe means of transferring money from one place to another and facilitate business dealings/ transactions. Banks collect and realize bills, cheques, interest and dividend warrants etc. on behalf of their customers and foreign trade is facilitated considerably with the help of banks (Aslett, 2003). There are several types of banks, which differ in the number of services they provide and the clientele they serve. Although some of the differences between these types of banks have lessened as they begin to expand the range of products and services they offer, there are still key distinguishing traits. Commercial banks, which dominate this industry, offer a full range of services for individuals, businesses, and governments. These banks come in a wide range of sizes, from large global banks to regional and community banks.

2.2.2 Environmental factors conducive for the banking sector

In recent years, potential environmental liability has had a growing influence in the banking industry. Many banking institutions have adopted environmental risk management programs through the assistance, guidance, and/or requirements provided by various organizations. However, while environmental factors are growing in importance, the systematic use of environmental information throughout the banking industry is still not widespread. One possible cause of this is the lack of widely available, accurate, and comparable information that can be used by the banking industry (Cameron, 1995). Vigorous and sustained economic growth, fuelled by investment and entrepreneurship, is needed for the private sector to create more jobs and increase incomes of the poor. In turn, this will generate the revenues that governments need to expand access to health, education and infrastructure services and so help improve productivity. Various governments need to put in place measures that can attract foreign investment. Security should be improved, taxes and foreign policies streamlined in order to assure investors that their money will be put to effective use. But in many developing countries, investment rates are too low, productivity gains are insufficient, incentives for innovation are inadequate, returns on investment are not sufficiently predictable, and not enough secure, safe and adequately paid jobs are being created in the formal economy (Radelet & Bhavnani, 2004). Developing countries and their donor partners consequently need to do much more to address the market failures and structural impediments that are holding back productive investment (both domestic and foreign), and to do it better, for longer periods and in a more strategic way. This will instill confidence in the minds of international investors who will then realize a need for enjoying such opportunities. Various countries in Africa have adopted privatization policy and are now encouraging foreign investment including banks (Arteaga & Jeffus, 2007). Developing countries can help foster an investment climate that enables the private sector to flourish and fulfill its role as the main engine of growth. To do so, they can pursue macro-economic stability, improve the functioning of market-regulating institutions and strengthen procedures for contract enforcement and dispute settlement. Developing country governments can also improve the coherence of their policies in a range of areas – such as trade, tax, competition and investment promotion that affect the volume of investment and its development impact. In Africa and East Africa in particular their many international banks that have opened doors, signifying that there is enabling climate that is attracting foreign commercial banks (Migliorisi & Galmarini, 2004). Reforming the investment climate requires political will, drive and leadership to take on entrenched interests and inertia. Development agencies need to stay the course and support “change agents” within the public and private sectors and civil society. Development agencies also need to change the way they do business. They need to have access, individually or collectively, to an appropriate range of aid instruments. Their internal systems should not work against staff pursuing longer-term and riskier interventions. Staff working on the range of subjects relevant for promoting investment should be well co-ordinated. More of the goods and services that development agencies procure can be sourced on competitive terms in developing countries, to support local private sector development. Finally, public sector partners in developing countries can be encouraged to engage more with the private sector, such as through public-private partnerships (Radelet & Bhavnani, 2004).

The Government of Rwanda with the technical and financial support of its partners each year undertakes to develop an economic and financial program to ensure the short term implementation of the medium term program stated in the Economic Development and Poverty Reduction Strategy (EDPRS) is translated into tangible outcomes within the economy. Within the banking industry the National Bank of Rwanda (NBR) has ensured that financial institutions operating within the industry are on track as far as ensuring the smooth running of the economy is concerned. In this regard has been restructured the management of banks operating in Rwanda for the purpose of ensuring the sustainability of the industry. As a result of this restructuring the country is confident that the practice of banking in Rwanda is now conducted in a more professional way.A A The new monetary policy reform which is one of the key components of the macroeconomic reform program falls within the responsibilities of the National Bank of Rwanda. It aims at creating an environment that is conducive to fostering production and investment within the entire economy through ensuring macroeconomic stability. The National Bank’s action is thus geared towards building financial stability within the national economy while deepening the financial system. “I take the opportunity to request the media and other stakeholders to work on encouraging Rwandans to use banking services by creating awareness about the importance of banking. A “We will keep the banking system growing and contributing to the sustained economic growth of the country.” Said the governor of National Bank of Rwanda. Exchange Rate Policy, NBR has continued to sell foreign exchange to the market in order to smoothen Rwandan Franc exchange rate fluctuations and to ensure that Rwanda’s exports remain competitive. The daily reference rate is more market driven as the interbank foreign exchange market develop. A code of conduct was shortly be in place after ratification by all banks as well as formation of a dealers association; this will guide banks in day to day interbank operations. It is recommended to all commercial banks to acquire a Reuters dealing platform in the near future and post their daily exchange rates to their websites where possible. Banking Licenses, According to the Governor, NBR has set a new licensing policy.A  NBR encourages regional Banks to come to Rwanda looking to merge with the small local banks in Rwanda instead of starting a fresh. They are also encouraging them to open new branches in rural areas instead crowding Kigali City which has enough banks already. “The major requirements in starting a bank are a minimum of Rwf 5 billion and a business plan.” The governor added. Financial sector deepening, the ongoing programs to implement the Financial Sector Development Program (FSDP) will be accelerated and most of them completed this year. This system will cover the banking system and MFI sector reforms, the capital market development, the non- bank financial service regulation and the modernization of the payments system (Aslett, 2003). Banking sector Reforms, The main priorities this year will include the full application of Risk Based Supervision and improved use of CAMELS “benchmarks” continued on site review of banks’ risk management processes and practices (Risk Management Program for Banks), the inclusion of the market risk component in the solvency ratio. Non banking financial sector, this year NBR continued to intensively draft laws so as to establish a more complete legal and regulatory framework for the supervision of the insurance sector, pension industry and other collective investment schemes. The legal instrument to be put in place include ; Regulations and Directives provided within the Insurance law, Insurance contract law, Mandatory insurance law, law regulating pension funds (public and private) and a law governing collective investment schemes, mainly mutual funds, unit trusts and investment companies (Independent news paper, 2nd June 2011).

2.2.3 Strategies used to attract foreign banks

Many governments have tried to attract and encourage foreign investment through tax subsidies and tax holidays. Over the past few decades time-series econometric analysis and numerous surveys of international investors have shown that tax incentives are not the most influential factor for multinationals in selecting investment locations. More important are such factors as basic infrastructure, political stability, and the cost and availability of labor. The openness or internationalization of financial services is a complex issue as it is closely related to structural reforms in domestic financial sector with some perceived implications to macroeconomic stability (Migliorisi & Galmarini, 2004). Foreign bank entry increases the efficiency of the domestic banking sector. Increased competition tends to reduce costs and to increase profits. The allocation of credits to the private sector may be improved since it is expected the evaluation and pricing of Credit risks to be more sophisticated this may help foster higher. The presence of foreign banks helps build a domestic banking supervisory and legal framework, and enhance the overall transparency. In order for most governments to attract commercial banks from other countries to come and enjoy business, they improve security and equal investment opportunities. Independent institutions to regulate investments are set up in various countries for example the Rwanda Development Board. Such institutions provide relevant information regarding investing in the countries to prospective investors from other countries. It is through these institutions that foreign investors develop trust and confidence to do business in the country (Gordon, 2011). It is expected foreign banks to provide more stable sources of credit since they may refer to their parents for additional funding and they have easier access to international markets. Thus, domestic financial markets will be less vulnerable to domestic. Foreign banks may reduce the costs associated with recapitalizing and restructuring banks in the post-crisis period. Most of the investors need to know the steadiness and stability of the country’s currency in relation to the dollar. This assures investors that investing in such a country an activity worth a business and that their business will yield some profits and justify participation in such a sector (Galmarini, 2004). In most cases when decisions related to foreign investments are being made concern is given to Liquidity, that is, how liquid is the investment. Exchange rates and leverage of exchange rates, Tax implications – tax havens or rates of tax in foreign country, Political stability how stable is the political front for example Zimbabwe is very unstable and therefore few commercial banks would go to there for business. Therefore for governments to attract commercial banks they need to put them in place and satisfy the foreign investors that the market is safe (Chowdhury, 2009).

2.3 Critical review (Gap analysis)

The study will seek to identify how the banking sector in Rwanda and its environment as independent variable have been able to attract other commercial banks in East African region (Aslett, 2003). How the policies of the National Bank in Rwanda have favored and pulled other commercial banks from the region to come and participate in the banking industry. The researcher will further asses the gap between the two variables and cover the gap between the variables and the impact that analyses out the penetration of other banks in the banking sector of Rwanda. Foreign bank penetration can have several positive as well as negative implications for emerging and transition countries. On the positive side, foreign bank management practices and information technology may improve the efficiency of the domestic banking system, both directly and indirectly by competing with domestic financial institutions. Also, foreign banks may start to offer new financial services, may stimulate better regulation, accounting standards and the financial and legal structure more broadly, and may also attract (other) foreign direct investments (FDI). Additionally, a growing supply of foreign bank credit can reduce the costs of obtaining loans for domestic firms. Importantly, foreign banks will be more independent of the local government and may have less incestuous relations with domestic firms. Lastly, well-capitalized foreign banks may be able and willing to keep lending to domestic firms during adverse economic conditions, as opposed to domestic banks which will possibly lower their credit supply (Gordon, 2011). On the negative side, foreign banks might just as well be less inclined to keep up their credit supply in the host country, for instance when the economic environment in their home country deteriorates. Another source of concern is that foreign banks may only provide credit to the large and often foreign owned (multinational) firms, leaving the bad corporate credit risks as well as the retail market and the related payment services to domestic banks (“cherry picking”). Lastly, foreign bank penetration, whether cross-border or by means of local subsidiaries, may weaken the position of the (less sophisticated) domestic banking system. Domestic banks that are not able to cope with the increased competitive pressures may for instance fail and lead to periods of severe financial instability (Taylor, 2008). Some pros and cons are exclusively related to a specific form of entry: through local subsidiaries or cross-border. Only by buying a subsidiary can a foreign bank provide new funds to recapitalize a troubled banking sector. Additionally, such subsidiaries can in times of crisis operate as a “safe haven”, and thus reduce the flow of domestic funds abroad as residents can now “do their capital flight at home”. Finally, cross border credit by foreign banks may lead to specific problems of financial instability.

2.4 Conceptual framework

Global banks are involved in international lending and foreign currency trading, in addition to the more typical banking services. Regional banks have numerous branches and automated teller machine (ATM) locations throughout a multi-state area that provide banking services to individuals. Banks have become more oriented toward marketing and sales. As a result, employees need to know about all types of products and services offered by banks. Community banks are based locally and offer more personal attention, which many individuals and small businesses prefer. In recent years, online banks which provide all services entirely over the Internet have entered the market, with some success. However, many traditional banks have also expanded to offer online banking, and some formerly Internet-only banks are opting to open branches (Chowdhury, 2009). Globalization has rendered international expanding activities increasingly important for the survival, growth and success of modern firms. Simultaneously, the banking industry has been undergoing major consolidation in recent years, with a number of global players emerging through successive mergers and acquisitions and going international to look for further investment opportunities (Drogendijk & Hadjikhani, 2008). Competition is generally considered a positive force in most industries, it is supposed to have a positive impact on an industry’s efficiency, quality of provision, innovation and international competitiveness. However, this issue has always been controversial in banking, as the perceived benefits derived from increased competition have to be weighed against the risks of potential instability. Within this fluid business environment, which is characterized by international mergers and acquisitions and extreme competition between the enterprises, the internationalization of banking work is a subject of major importance for researchers and economists (Germanidi, 1982). The financial crisis and the subsequent distrust of the existing banks have created an opportunity for new competitors to enter the market for financial services. An international bank is able to adopt for its presence in a country various forms. More specifically the Creation of representative office is the simplest form of extension, as it formed for an initial investigation of the foreigner banking market. The bank’s branches of this form do not handle any funds neither they execute financier transactions, while the bank that they represent, is not considered present in the foreigner country, either legally or for tax reasons (Glover, 1986). Globalization is the universal trend in economic markets and the focal point in the twenty-first century. Banking organizations shifted from highly centralized domestic organizations to dispersed global organizations. The main profit of the internationalization of banking work is the increase of the surplus of consumers. For the banking services the surplus of consumer is increased when the interest rate of sponsoring is decreased, while the interest-rate of deposits increases. More specifically, for a healthy competition, the profit in question is maximized, after it increases the interest-rates of deposits by decreasing the interest-rates of sponsoring and the cost of supplies (Gordon, 2011).

A second profit from the internationalization of banking work is that the international banking extension increases the effectiveness of international capital by improving and their flow. This means that, the effectiveness of distribution of capital brings in economic contact lenders and borrowers from different countries. Another profit from the internationalization of financier markets, is the increasing degree of convergence of interest-rates of domestic market with those that exist in the Euromarkets. At the same time, the internationalization of financier markets leads to the weakening of the phenomenon of deportation of private investment in the public sector, as in an environment of free market of capital, the prevention of the private investments from the state, is compensated, relatively easily, with the foreigner saving capital (Aslett, 2003). The cost from the internationalization of banking activities is found in the loss of income for the countries, as the internationalization of work leads to the escape of capital to countries where the committed deposits have higher interest or still, the central bank of that country keeps smaller compulsory percentage of capital from the commercial banks. Banks have an important role in an economy: they are intermediaries between people with shortages and surpluses of capital. Their products include savings, lending, investment, mediation and advice, payments, guarantees, and ownership and trust of real estate. These core activities generate two principal sources of income: interest earnings and provision earnings. In the first case, a bank is working on its own behalf and risk; and in the second case on behalf of and at the risk of its clients. It is usual to distinguish between different banking departments such as investment banking, commercial banking, corporate banking, private banking, trade finance, electronic banking, securities, financing and loans, savings and so on. Some banks specialize in one or more of these areas. Universal banks usually cover all activities (Glover, 1986). As one of the world’s largest economic sectors, and as one that reaches virtually every consumer and business, the financial services industry must be involved in mitigating climate change and its impacts. At the same time, banks face an immense but yet largely untapped opportunity to enter new markets and develop more efficient and environmentally sound industries that will benefit generations to come, while preserving their longstanding leadership role in wealth and capital formation. Banks have the reach, influence and access to capital required to lead the changes needed to transform the industry (Arteaga & Jeffus, 2007).

Figure: Conceptual framework

Independent variable Dependent variable

Enabling environment

Political stability Macro economic policies Infrastructural developments.

Attraction of commercial banks

Business opportunities Secure environment Market availability.


Bank rate Financial exchange platform Controlled inflation Legal reserve.

Source: Researcher 2012

2.5 The Banking Sector in Rwanda

The Government of Rwanda with the technical and financial support of its partners each year undertakes to develop an economic and financial program to ensure the short term implementation of the medium term program stated in the Economic Development and Poverty Reduction Strategy (EDPRS) is translated into tangible outcomes within the economy. Within the banking industry the National Bank of Rwanda (NBR) has ensured that financial institutions operating within the industry are on track as far as ensuring the smooth running of the economy is concerned. In this regard has been restructured the management of banks operating in Rwanda for the purpose of ensuring the sustainability of the industry. Recent developments in the financial sector highlight the importance of implementing bold strategies to mobilize domestic saving to increase the capacity of the domestic financial system to be in a position to meet the increasing demand of credit to finance big investment projects in the pipeline (IMF, 2005). The government of Rwanda has tried as much as possible to improve security, stabilize the currency, and creating a conducive climate for foreign investor. Many banks have opened doors in Rwanda and are appreciation the industry. The country is looking forward to receive more foreign banks from East African community and beyond. In 2011, Rwanda’s economy evolved in a challenging international and regional economic environment. The world economy was marked by high oil and food prices, a sovereign debt crisis in the Euro zone and a debt ceiling crisis in the USA, while in the East Africa sub-region, inflationary pressures have been increasing at a very high pace, never recorded in the last decade. In the EAC region, inflation continued to rise in 2011 mainly owing to the increase in oil and food prices. In December 2011, on annual basis, inflation hit 27.0 percent in Uganda, 18.9 percent in Kenya from respectively 3.1 percent and 4.5 percent in December 2010. During the same period, headline inflation reached 19.8 percent in Tanzania and 14.9 percent in Burundi from 5.6 percent and 4.9 percent in December 2010 respectively (NBR, 2001). Similarly, inflation in Rwanda has been increasing as well but maintained at moderate levels. The annual headline inflation reached 8.3 percent in December 2011 from 0.23 percent in December 2010. Moderate inflation has been achieved due mainly to good harvest that kept domestic food markets stable, a relatively stable exchange rate, as well as well coordinated Government policies to mitigate the exogenous inflationary pressures. Despite the challenging international and regional economic environment, Rwanda managed to sustain dynamic economic activities in 2011, recording high performance in all sectors. Real GDP growth is estimated at 8.8 percent higher than 7.0 percent initially projected and 7.5 percent achieved in 2010. This growth was driven by agriculture sector (+8.2 percent) reflecting the impact of ongoing Government reforms and favorable climatic conditions. It was also pushed by the industry sector (+15.1 percent) and services sector (+8.5 percent) both boosted by significant improvement in credit market conditions. The dynamism in the Rwandan economic activities was also marked by a strong improvement in the external sector. The export sector in 2011 continued to perform better, sustained by traditional exports; where formal exports of goods covered 23.8 percent of imports in 2011, from 18.3 percent in the previous year, as a result of more rapid increase in exports. Indeed, exports value increased by 52.8 percent against 17.3 percent for imports. The National Bank of Rwanda has continued to maintain a prudent monetary policy and exchange rare in the economy that has continued to put confidence in the minds of the business community. The banking sector demonstrated positive stance with an increase in the balance sheet of 24.5 percent. The sector has been profitable, liquid and well capitalized to sustain growth but also resilient to external shocks as a result of strengthened legal, regulatory and supervisory framework. For instance, the Capital Adequacy Ratio (CAR) increased to 27.2 percent in 2011 from 24.4 percent 2010.This is well above the minimum required Capital Adequacy ratio of 15%, which shows the stability of the financial sector (NBR, 2001).

2.6 Summary

In this chapter, the researcher presented literature related to banking sector, environmental factors necessary for attracting foreign commercial banks in the country, the researcher gave emphasis to the nature of banking sector and the strategies that are used to attract foreign banks in the country. The researcher through theoretical review of literature identified the areas related to attraction of foreign commercial banks in Rwanda that other researchers never covered. The researcher also identified the areas the through which the central bank of Rwanda has been instrumental in the attraction of foreign commercial banks through provision of a stable, free and secure banking environment in Rwanda. The relationship between the research variables and how they relate was also reviewed through the conceptual fragment and the reluctant effect was presented.



3.1 Introduction

This chapter discusses the different methods that the researcher used in carrying out the research. It presents the type of research design that was adopted by the researcher, the population of the research, sample size and sampling techniques. The chapter also presents data collection tools like the questionnaires and interviews together with the sources from where data was got. The chapter further gives the methods of data presentation, analysis and interpretation, the ethical considerations of the research together with validity and reliability.

3.2 Research Design

A research design is the arrangement of conditions for collection and analysis of data in a manner that aims to combine relevance to the research purpose with economy in procedure or a conceptual structure within which research conducted (Kothari, 2011). The researcher adopted descriptive and analytical research designs in order to ensure sufficient information and clarity of the research. The researcher based the research on both numerical and non numerical data meaning that it was both qualitative and quantitative.

3.3 Population

According to Kothari (2001), the population in a research refers to all items in a unit of inquiry. The population of the research was 151 including 68 employees of KCB and 58 employees of Equity bank main branches located in the centre of Kigali city, 25 senior employees from National Bank of Rwanda were also be considered. Respondents were selected using purposive sampling technique to ensure that respondents with relevant data are contacted.

3.4 Sampling and Sample Size

Sample size refers to the number of items to be selected from the population to constitute a sample (Kothari, 2011) The sample size of the study was selected using the Slovin’s fomula n AªÅ¾Å  N/ (1+Ne2 ), where n is the sample size, N the population and e is the sampling error. (Adanza, 1995). Therefore, the sample size was 126/(1+126(0.005×0.005) meaning that the sample size was 95 employees from Kenya Commercial Bank (50) and Equity bank (45) main branches. A sample size of 25 employees from National Bank of Rwanda was also considered. Purposive sampling technique was employed to select relevant respondents.

3.5 Data collection

This refers to the instruments, tools or techniques that are used to collect data from different sources both primary and secondary (Kothari, 2011). This refers to the tools and instruments that the researcher used to collect the data for the research. These included questionnaires, interview guide and documentary review. To ensure validity and reliability of the data collected, data collection tools were clear, reliable, accurate and measurable. The researcher made sure that the instruments were free from bias.

3.5.1 Questionnaire

The researcher designed clear questionnaire containing closed and open ended questions which were given to respondents to give their views about the study topic. The procedure for administering questionnaires included introduction, telling respondents the purpose of the study and requesting them to express their views about the study topic.

3.5.2 Interview Guide

As earlier said, the researcher expects to hold short interviews with respondents who were not having enough time to fill questionnaires. The researcher did this with the help of interview guide.

3.5.3 Documentary Review

This included reviewing written documents from different libraries, book centers and internet.

3.6 Sources of Data

The researcher collected data from both primary and secondary sources. The researcher considered both sources as necessary to make the researcher clearer.

3.6.1 Primary Data

This refers to data collected a fresh and for the first time and thus happens to original in character (Kothari, 2011) Primary data is data collected directly from the source; it is normally referred to as the original data. The researcher used questionnaire and interviews to get this data directly from respondents.

3.6.2 Secondary Data

This refers to data that has already been collected by someone else and which has already been passed through the statistical process (Kothari, 2011) Secondary data is data that is got from written documents like text books, internet, journals and reports. The researcher got this data through the process of documentary review.

3.7 Data Analysis and Interpretation

The researcher presented the collected data extracted from questionnaire and interview guide using table and various figures including graphs and pie charts. The presented data was later analysed and interpreted based on the frequencies and percentages of respondent’s views.

3.8 Ethical Considerations

In the process of carrying out the researcher, the researcher maintained a cordial relationship with respondents, remained honest, genuine and focused to the research objectives. As a person of integrity, the researcher did not undertake research for personal gain, nor did the research have effect on others. Information from respondents was treated with confidentiality.



4.1 Introduction

This chapter deals with presentation, analysis and interpretation of the information given by respondents into more useful form that can facilitate decision making. The researcher presents the data by the help of tables and figures. The frequencies and percentages of respondents’ views were used to analyse and interpret collected data.

4.2 Social demographic characteristics of respondents

The researcher analysed the age, education and experience of respondents in order to find out whether data was corrected from knowledgeable, mature and experienced respondents and can be trusted or not.

Figure: Age of respondents

Figure 2 presents the range of respondents’ age, in order to determine how old respondents were since are and maturity are related and views normally correspondent with respondent’s age Source: Primary data 2012 From figure 2, 75% of contacted respondents were above the age of 35. The researcher in interpreted respondent’s age as enough to make respondents give constructive views since they are all old enough to understand reasons why banks come to Rwanda and conditions that attracted them. Therefore the views given in this research are significant enough to be trusted and relied on in making further conclusions. Table : Gender of respondents

Male 50 42 Female 70 58 Total 120 100 Source: Primary data 2012 In table1, most of the contacted respondents were found to be female (58%) while their male counter parts were 42%. This according to the researcher meant that the contacted respondents were mainly female which could be the policies of contacted institutions in recruiting employees. Therefore, the views gives were from both male and female and therefore there is gender representation and can therefore be trusted.

Figure: Respondents level of education

Source: Primary data 2012 According to figure 3, 91% of the contacted respondents hold a university degree. With this image the researcher realise that the contacted respondents were qualified enough to understand the issues under study and their views are significant in making reliable conclusions about the banking sector of Rwanda and its enabling environment to attract other foreign banks in East African community. Table: Length of time respondents have worked in banks

Less than 1 year 33 28 1 – 3years 65 54 Above 3 years 22 18 Total 120 100 Source: Primary data 2012 According to table 2, 72% of the contacted respondents had spent a period above 1 year. This according the researcher signified that respondent’s views given were out of experience and should therefore be trusted in making decisions.

4.3 Nature of Rwanda banking sector

In this section, the researcher presents views of the respondents related to the nature of Rwanda banking sector so that a conclusion can be made upon them on the nature of the banking sector in Rwanda.

Figure: Respondents description of Rwanda banking sector

Source: Primary data 2012 According to figure 4, 92% of the contacted respondents described the banking sector in Rwanda as good. This led the researcher to the understanding that Rwandan banking sector is good enough to attract other commercial banks within East African community. Table : Respondents views on whether their expectations from Rwanda banking sector have been met

Have been met 81 85 Have not been met 0 0 Not sure 14 15 Total 95 100 Source: Primary data 2012 According to table 3, 81% of the contacted respondents said their expectations from the banking sector have been met. None of the contacted respondents said expectations have not been met. This made the researcher realise that Rwandan banking sector is good enough to satisfy expectations of the attracted banks because of the environmental factors and policies. When asked to give reasons for their answers, contacted respondents said that the business moves on smoothly and uninterruptedly(40%) while others said high profitability levels (38%) and 22% said the government policies are favourable to the banks. This served to make the researcher confirm that Rwandan baking sector has satisfied interests of the attracted banks because of it nature.

Figure: How respondents consider Rwandan banking sector in relation to that of other countries

Source: Primary data 2012 According to figure 5, 89% of the contacted respondents said the banking environment of Rwanda is much better. However, none of the contacted respondents said it is worse. This made the researcher confirm that Rwandan banking sector is better than in other countries and has capacity to attract foreign banks from East African community. When asked to give reasons for their answers contacted respondents revealed that the country has managed to control inflation compared to other countries (41%) while 29% said the national bank of Rwanda has effective monitoring of commercial banks. 27% of respondents said security in the country is paramount while 3% said there is free competition. This further justified the fact that Rwandan banking sector is attractive and sufficient enough to facilitate attraction of foreign banks from East African region. Table : What the National Bank of Rwanda has done to improve the banking sector

What has been done?



Controlling inflation 32 34 Stability of the Rwanda franc 28 29 Training 20 21 Liberalisation 10 11 Monitoring 5 5

Source: Primary data 2012 According to table 4, respondents contacted revealed that the National Bank of Rwanda has controlled inflation (34%), stabled the Rwanda Franc against the dollar (29%), and offered banking trainings (21%), liberalisation of the economy (11%) and monitoring of the banking environment. This made the researcher realise that the national bank of Rwanda has been very significant in creating enabling environment that has attracted foreign commercial banks from East African community.

Figure: What officials from National Bank of Rwanda consider special on Rwanda banking sector than that of other banks

Source: Primary data 2012 According to figure 6, it was revealed by the respondents that free completion in Rwanda banking sector makes it special (28%), low levels of inflation (20%) and that the sector is well organised (36%). Respondents also said that the Rwandan banking sector is properly monitored by the National Bank of Rwanda (16%). This means that with no doubt there are enabling factors that have made the Rwandan banking sector special compared to those of other countries. Table : Views of respondents from NBR on whether they think bank policies have favoured commercial banks in Rwanda.

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Enabling Environment Of Banking Essay Online For Free. (2017, Jun 26). Retrieved January 31, 2023 , from

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