The relationship between Lease financing by Banque Commerciale du Rwanda (BCR) and the growth of Small and Medium Enterprises (SMEs) in Rwanda.

Abstract

The development of competitive and resilient SMEs forms an integral component of the initiatives for Rwanda to achieve sustainable economic growth and middle income country status by 2020. Indeed, the strength of the Rwandan economy will largely depend on a strong SME sector due to the rapid impact that can be made by these SMEs in terms of value addition and employment creation. Despite this fact, SMEs of developing and economies in transition, including Rwanda, representing the overwhelming part of their productive capacity face a severe lack of access to finance mainly due to lack of credit history and collateral. Lease financing, which was introduced in Rwanda in 2006, is based on the premise that the asset financed is both the security and source of cash flow for repayment. The product targeted SMEs which had been alienated by existing bank products. The main purpose of the study was to find out the relationship between lease financing and the growth of SMEs. The study adopted a case study approach. Both primary and secondary data were collected and analyzed. Primary data was collected from a sample of SMEs that were financed through leasing and from staff in the leasing department of BCR. Simple random sampling was used to select a sample of SMEs, whereas universal sampling was applied on the staff of BCR‟s leasing department. Self-administered questionnaires were used to collect data. Secondary data was collected from financial statements of BCR and of the sample of SMEs. The study found out that leasing has a strong relationship with the growth of SMEs, including increase in sales, profitability, employment creation, enhancement of return on equity as well as return on assets. Leasing enabled some enterprises to migrate from the SME category to the large enterprise category. The study also found out that leasing is the ultimate solution for access to equipment financing for SMEs.

Despite the commendable contribution of leasing on SMEs, challenges still remain. Among other research recommendations, the establishment by the government of a guarantee fund to enable SMEs access working capital finance and to cover risky sectors like agriculture is highly required. However, it is to be noted that lessors are also facing challenges and will want to complicate their choice of who qualifies for the product because of increase in the levels of default seen lately. The increase in the levels of default has led to a continuous reduction in the leasing portfolio. The problem of defaults is complicated further by lack of a developed secondary market for most of these assets. The research concluded that leasing has had tremendous impact on SMEs by opening opportunities for financing.