investment in capital markets and financial
TRANSCRIPT
i
INVESTMENT IN CAPITAL MARKETS AND FINANCIAL
PERFORMANCE OF BANKING SECTOR IN RWANDA
MUREKATETE Alphonsine
MBA/0303/12
A Research Project Submitted in Partial Fulfillment of Requirement for
the Award in Masters of Business Management (Finance and
Accounting option) Submitted to the School of Business and public
management of Mount Kenya University
APRIL 2015
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DECLARATION
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DEDICATION
I dedicate this work to my husband NDAGIJIMANA Andrew, parents, sisters, brothers,
and all those who struggled to educate me; I will never forget your unlimited support,
love prayer to my favor. I dedicate this book to all of you.
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ACKNOWLEDGEMENTS
I would like to express my immense thankfulness to all those who gave me the possibility
to complete this research project. Especially, I deeply indebted to my supervisor EDI-
JONES NKUBITO whose support, interest, encouragement and stimulating suggestions
which is helping me in this research and writing process of this project proposal.
To my classmates thanks for your endless love, unconditional support and incessant
attention. My entire friends, thanks for all your encouragement, endless love and
consistent emotion support. Also, my most profound gratitude goes to my parents, entire
friends and relatives for their unconditional love and steadfast support always. Above all,
we thank you Almighty God for all your mercies.
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ABSTRACT
Investment in the capital markets has become an important topic for business companies,
especially since the business sector of financial services is related to conditions of
uncertainty. The Turmoil of the financial industry emphasizes the importance of effective
investment procedures. Consequently, this research project studied “investment in the
capital markets and financial performance of banking sector with a case study of Bank of
Kigali Ltd from 2009-2013.” The research objectives were formulated in order to gain a
better understanding of investment in capital markets and its impact on financial
performance of banks. Investment has always been a vicinity of concern not only to
investors but to all in the business world because the risks of a trading partner not
fulfilling his obligations in full on due date can seriously jeopardize the affairs of the
other partner. The objective of this study was to have a clearer picture of how company
manages their investment and its financial performance. In this light, the study in its first
section gave a background and the second part is a detailed literature review on
investment in the capital markets and financial performance and assessment procedures.
Quantitative research design was employed under the quantitative research design survey
method was used. The data were collected by using questionnaires. The forth part of this
study is analysis of primary data by descriptive statistical tools and SPSS. The researcher
concluded in the last section that investment in the capital markets, has influenced, and a
lot contributed on the financial performance of companies in Rwanda, especially in B.K
Ltd as a case study, through the trends existing in the number of shares traded, turnover,
number of transactions done, number of listed companies and the market capitalization
since 2009 up to 2013.
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TABLE OF CONTENT
DECLARATION................................................................................................................ ii
DEDICATION...................................................................................................................iii
ACKNOWLEDGEMENTS ............................................................................................. iv
ABSTRACT ........................................................................................................................ v
TABLE OF CONTENT .................................................................................................... vi
LIST OF TABLES ............................................................................................................ ix
LIST OF FIGURES ........................................................................................................... x
LIST OF ABREVIATIONS AND ACRONYMS ........................................................... xi
OPERATIONAL DEFINITION OF TERMS ............................................................... xii
CHAPTER ONE: INTRODUCTION .............................................................................. 1
1.0 Introduction .................................................................................................................... 1
1.1.Background of the Study ............................................................................................... 1
1.2. Statement of the Problem .............................................................................................. 5
1.3 Objectives of the Study .................................................................................................. 7
1.3.1 General Objective ....................................................................................................... 7
1.3.2 Specific Objectives ..................................................................................................... 7
1.4 Research Questions ........................................................................................................ 7
1.5 Significance of the Study ............................................................................................... 7
1.6 Limitations of the Study................................................................................................. 8
1.7 Scope of the Study ......................................................................................................... 9
1.8 Organization of the Study ............................................................................................ 10
CHAPTER TWO: REVIEW OF RELATED LITERATURE .................................... 11
2.0 Introduction .................................................................................................................. 11
2.1 Theoretical Literature ................................................................................................... 11
2.1.1 Investment ................................................................................................................. 11
2.1.2 Investment Promotion Techniques ........................................................................... 12
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2.1.3 Investment Promotions Efforts in Rwanda ............................................................... 13
2.1.4 Reasons for Investing in Rwanda Stock Exchange ................................................... 14
2.1.5 Characteristics of Investment .................................................................................... 15
2.1.6 Factors Favorable for Investment ............................................................................. 16
2.1.8. Financial Performance ............................................................................................. 21
2.1.9.Tools and Techniques for Financial Statements Analysis ........................................ 23
2.2 Empirical Literature Review ........................................................................................ 25
2.3 Critical Review and Research Gap Identification ........................................................ 29
2.4 Conceptual Frame Work .............................................................................................. 30
CHAPTER THREE: RESEARCH METHODOLOGY .............................................. 31
3.0 Introduction .................................................................................................................. 31
3.1 Research Design........................................................................................................... 31
3.2 Target Population ......................................................................................................... 31
3.3 Sample Design ............................................................................................................. 32
3.3.1 Sample Size ............................................................................................................... 32
3.3.2 Sampling Techniques ................................................................................................ 32
3.4 Data Collection Methods ............................................................................................. 33
3.4.1 Data Collection Instruments ..................................................................................... 34
3.4.2 Administration of Data Collection Instruments ........................................................ 34
3.4.3 Reliability and Validity of Research Instruments ..................................................... 34
3.5 Data Analysis Procedures ............................................................................................ 35
3.5.1 Qualitative Data Analysis ......................................................................................... 35
3.6 Ethical Considerations ................................................................................................. 36
CHAPTER FOUR: RESEARCH FINDINGS AND DISCUSSIONS ......................... 37
4.0 Introduction .................................................................................................................. 37
4.1 Demographics Characteristics of Respondents ............................................................ 37
4.1.1 Profile of Respondents .............................................................................................. 37
4.2. Presentation, Analysis and Interpretation of Findings ................................................ 40
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4.2.1 Objective one was to assess the influence of investment in capital markets on
financial performance of BK ltd ........................................................................................ 40
4.2.2 Objective two was to determine the contribution of investment in capital markets
on financial performance of BK ltd ................................................................................... 42
4.2.3 Objective three was to analyze the relationship between investment in capital
markets and its impact on financial performance of BK ltd .............................................. 45
CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS ... 48
5.0 Introduction .................................................................................................................. 48
5.1 Summary of Findings ................................................................................................... 48
5.1.1 Research objective one was to establish the influence of investment in capital
markets on financial performance of BK ltd ...................................................................... 48
5.1.2 Research objective two was to determine the contribution of investment in capital
markets on financial performance of the BK Ltd .............................................................. 49
5.1.3 Research objective three was to draw the relationship between investment in the
capital markets and financial performance of the BK Ltd ................................................. 49
5.2 Conclusion ................................................................................................................... 49
5.3 Recommendations ........................................................................................................ 50
5.4 Suggest for further study .............................................................................................. 52
REFERENCES ................................................................................................................. 53
APPENDICES .................................................................................................................. 56
Authorization Letter ........................................................................................................ 57
Blank Questionnaire ........................................................................................................ 58
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LIST OF TABLES
Table 3.1 :Showing sample size distribution relative to the target population .................. 32
Table 4.2: Distribution of Respondents by Category of Staff ........................................... 37
Table 4.3: Distribution of Respondents by Age................................................................. 38
Table 4.4: Distribution of Respondents by Gender ........................................................... 38
Table 4.5: Distribution of Respondents by Education Level ............................................. 39
Table 4.6: Experience of Respondents in BK. .................................................................. 39
Table 4.7: There is an Investment in Capital Markets by BK Ltd ..................................... 40
Table 4.8: Investment in the Capital Markets by BK and its analysis ............................... 41
Table 4.9: Responses on whether investment in capital markets influences positively
financial performance of BK ltd ...................................................................... 41
Table 4.10: Responses on existence of enough own capital .............................................. 42
Table 4.11: Responses on whether the level of profitability is high .................................. 43
Table 4.12: Responses on whether the level of liquidity is high ....................................... 43
Table 4.13: Responses on whether investment in capital markets is a relevant tool for
profitability. ..................................................................................................... 44
Table 4.14: Responses on investment in capital markets promote financial performance of
BK ltd ............................................................................................................... 44
Table 4.15: Responses about the benefits of investment in capital markets in BK ltd. ..... 45
Table 4.16: Responses about the tools used for financial performance measurement by
BK .................................................................................................................... 45
Table 4.17: Responses about whether investment in capital markets influences financial
performance of banks ....................................................................................... 46
Table 4.18: Responses on whether there is relationship between investment in capital
markets and financial performance of BK ltd .................................................. 46
Table 19: Trading statistics on RSE(equities) ................................................................... 62
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LIST OF FIGURES
Figure 2.1: Conceptual frame work .................................................................................. 30
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LIST OF ABREVIATIONS AND ACRONYMS
ACCA: Association of Chartered Certified Accountants
BK: Bank of Kigali
CDOs: Collateralized Debt Obligations
CMA: Capital Market Authority
CRM: Credit Risk Management
IAS: International Accounting Standards.
IASB: International Accounting Standard Board
ICPAR: Institute of Certified Public Accountants of Rwanda
IFAC: International Federation of Accountants
IFRS: International Financial Reporting Standard
IMF: International Monetary Fund
MINECOFIN: Ministère des finances et de la Planification Economique( Ministry
of Finanance and Economic Planning)
NPV: Net Present Value
PLC: Public Limited Company
RCRSA: Rwanda Commercial Registration Service Agency.
RDB: Rwanda Development Board
RRA: Rwanda Revenue Authority
SPSS: Statistical Package for Social Scientists
USA: United States of America
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OPERATIONAL DEFINITION OF TERMS
For the purpose of this study the following words should be taken to mean:.
Financial Performance : Financial performance is the company‟s ability to generate
new resources from day to day operations over a given period of time.
Non-Performing Loan: Non-performing loan are loans and advances that are not
earning income, full payment can no longer be expected and total credits to the accounts
are insufficient to cover interest charged and payment that has not been made
Profitability: This refers to the measure of returns on investment.
Liquidity: This relates to the cash level of the organization which describes the
organization to settle indebtedness and satisfying its working capital structure.
Capital market: capital market deals in sale of shares of companies, debentures of
companies, bonds, stocks and long term government shares and treasury bills.
Stock exchange: stock exchange is a market where already issued shares and stocks are
sold and bought.
A broker: a broker is a person who buys or sells shares on behalf of shareholders those
who wish to buy or sell shares approach him for the transaction and is paid a commission
for the service rendered.
Jobbers: jobbers are agenda who buy and sell shares under their under their own name
and account. They normally buy shares when they are cheap and sell when the prices rise
and make profit.
Quoted companies: these are companies whose shares are bought and sold on a stock
exchange market.
Unquoted companies: those are companies whose shares are not traded on a stock
exchange.
Investment is the employment of funds with the aim of achieving additional income or
growth in value.
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CHAPTER ONE: INTRODUCTION
1.0 Introduction
This chapter is an introductory chapter intended to deal with the background of the study,
the statement of the problem, the objectives of the study, the significance of the study, the
research questions, the limitations of the study and the measures to overcome them, and
the scope of the study entitled: “Investment in the Capital Markets and Financial
performance of banking sector in Rwanda with case study of Bank of Kigali (BK)”. This
thesis will be presented for clearance of the final dissertation preparation in partial
fulfillment of requirements for a Master‟s Degree in Business Administration.
1.1.Background of the Study
Financial markets are markets for buying and selling of long term debt or equity-backed
securities. These markets channel the wealth of savers to those who can put it to long
term productive use such as companies or government making long term investment.
They are used to match those who want capital to those who have it. Financial markets
create an open and regulated system for companies to obtain large amounts of financial
capital to grow their businesses. This is done through the stock and bond markets.
Markets also allow these businesses to offset risk with commodities and foreign exchange
futures contracts, as well as other derivatives.
Financial markets appear to improve the allocation of capital. Across 65 countries, those
with developed financial sectors increase investment more in their growing industries,
and decrease investment more in their declining industries, than those with undeveloped
financial sectors. As a country becomes more developed, one typically sees the capital
markets playing a greater role in supplying financial products and services relative to that
supplied by the banks.
Financial markets channel savings and investment between suppliers of capital such as
retail investors and institutional investors, and users of capital like businesses,
government and individuals. They do this by selling financial products like equity and
debt securities. Equity securities, also called stocks, are ownership shares in an
organization. Debt securities, such as bonds, are interest-bearing IOUs. Capital markets
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are vital to the functioning of an economy, since capital is a critical component for
generating economic output. Capital markets include primary markets, where new stock
and bond issues are sold to investors, and secondary markets, which trade existing
securities.
Financial markets typically involve issuing instruments such as stocks and bonds for the
medium-term and long-term. In this respect, capital markets are distinct from money
markets, which refer to markets for financial instruments with maturities not exceeding
one year. Capital markets have numerous participants including individual investors,
institutional investors such as pension funds and mutual funds, municipalities and
governments, companies and organizations and banks and financial institutions. Suppliers
of capital generally want the maximum possible return at the lowest possible risk, while
users of capital want to raise capital at the lowest possible cost.
The size of a nation‟s capital markets is directly proportional to the size of its economy.
The United States, the world‟s largest economy, has the biggest and deepest capital
markets. Capital markets are increasingly interconnected in a globalized economy, which
means that ripples in one corner can cause major waves elsewhere. The drawback of this
interconnection is best illustrated by the global credit crisis of 2007-09, which was
triggered by the collapse in U.S. mortgage-backed securities. The effects of this
meltdown were globally transmitted by capital markets since banks and institutions in
Europe and Asia held trillions of dollars of these securities
Capital markets include primary markets and secondary markets. In primary markets, new
stock and bond issues are directly allocated to institutions, businesses or
individual investors. In secondary markets, existing securities are traded in organized and
often regulated markets like the NYSE or NASDAQ. Capital markets are concentrated in
financial centers such as New York, London, Singapore and Hong Kong. Because capital
markets move money from people who have it, to organizations that need it for
productive uses, they are critical to the effective functioning of a modern economy.
Financial markets can be found in nearly every nation in the world. Some are very small,
with only a few participants, while others - like the New York Stock Exchange (NYSE)
and the fore markets - trade trillions of dollars daily. The United States has the largest
capital market of any country in the word.
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Financial institutions and financial markets help firms raise money. They can do this by
taking out a loan from a bank and repaying it with interest, issuing bonds to borrow
money from investors that will be repaid at a fixed interest rate, or offering investors
partial ownership in the company and a claim on its residual cash flows in the form of
stock. A financial market is a broad term describing any marketplace where buyers and
sellers participate in the trade of assets such as equities, bonds, currencies and derivatives.
Financial markets are typically defined by having transparent pricing, basic regulations on
trading, costs and fees, and market forces determining the prices of securities that trade. A
capital market is one in which individuals and institutions trade financial securities.
Organizations and institutions in the public and private sectors also often sell securities on
the capital markets in order to raise funds. Thus, this type of market is composed of both
the primary and secondary markets. Any government or corporation requires capital
(funds) to finance its operations and to engage in its own long-term investments. To do
this, a company raises money through the sale of securities - stocks and bonds in the
company's name.
Financial markets are also another source of capital through buying and selling different
securities traded by listed companies and banks are the most significant players in the
financial market. They are the biggest sources of credit and they attract most of the
savings from population. Dominated by private sector, banking industry so far acted as an
efficient partner in the growth and development of the country, banks played a key role
both at the end of the investment boom and during the bust (Bhala 1997).
Financial markets play an important role in helping drive job creation, innovation and
financial security. They enable people to save for retirement afford to buy homes houses,
finance their educations and grow their business and they enable communities to get
provides necessary services. Financial markets are made up of debt and equity markets.
The purpose of capital markets is to match the demand for funds with the supply of funds.
These markets flue economic growth by allocating capital that used to create jobs, build
infrastructures and finance innovative ideas.
Financial markets facilitate the raising of capital (in capital markets),the transfer of risk in
the derivatives markets ,it facilitate the global transaction within integration of financial
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markets, the transfer of liquidity in the money markets and international trade in the
currency markets.
The Rwanda financial markets are mainly composed with money markets, money
security and exchange markets. Financial markets in Rwanda are the keys contributors to
Rwanda becoming a competitive financial centre trough mobilization of long term-
capital. People and entities can trade financial securities and other fungible items of value
at low transaction costs and at prices that reflect supply and demand. All transactions are
translated to the Rwandan franc at the rate of exchange issued by the National Bank of
Rwanda‟‟BNR‟‟
Rwanda‟s financial sector consists of banks, microfinance institutions, non-bank financial
institutions, pension‟s funds and financial markets. Rwanda‟s financial sector is still
dominated by banking sector which hold around 67.7% of the total financial sectors
assets. They are followed by pension whose capital share increased to 17.3%.
The equity market in Rwanda is young and it is conducted under the auspices of Rwanda
stock exchange that is regulated by the capital markets advisory council (CMAC) of
Rwanda (CMA, 2013). The stock exchange is privately owned by stakeholders with the
Rwanda government owning only 20 percent, stock brokers having 60 percent and 20
percent by other stakeholders (RSE,2013). There are only four firms that have listed on
the equity market in Rwanda : Bank of Kigali(B.K) BRALIRWA, Kenya Commercial
Bank (KCB)and NMG.Since the inception of the Rwanda stock exchange in 2005 and
their performance has not been impressive for some firms like KCB and MNG and
specifically NMG.
During the EDPRS 1, the Capital Market Authority was established and Rwanda Stock
Exchange is vibrant in terms of operation and listings. The following achievements were
registered:
Firstly, the Government issued one Treasury bond worth RwF 5 billion and matured
while one valued at RWF 3.5 billion was listed on Rwanda Stock Exchange (RSE).
Secondly, Treasury Bonds worth RWF 13.5 billion and one Corporate Bond (BCR Bond),
whose face value is RWF 1 billion, were listed on RSE Rwanda Stock Exchange market
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was more active with the listing of BRALIRWA shares and a total turnover of RwF 8
billion recorded from 42 million BRALIRWA shares traded in 702 deals up to July 25th,
2011.
Lastly, the Cabinet approved Bank of Kigali (BK) to go public through an IPO to
recapitalize the bank and as a second IPO in the Rwandan Capital Market. BK launched
its IPO on 14June 30th, 2011. The Government of Rwanda and BK offered to sell 20%
and 25% of their shares respectively, at the offer price of RWF 125 per share.
In terms of Market depth/breadth, the Rwanda capital market offers limited securities and
products compared to other EAC countries, equity investments dominate other asset
classes such as sovereign and municipal bonds, corporate bonds, and other convertible
investments. The listings on RSE are still limited. Since the establishment of the capital
market we have seen issuance of no municipal bonds, infrastructure, commercial paper
and real estate investment trust. Despite of Government effort to the opening of Rwanda
Stock Exchange this is likely to play a minimal role in helping to meet this challenge
what is most needed is to stimulate the securities market towards greater issuance of
government longer maturities. Also, the outstanding stock of treasury bonds is small at
less than 1% of GDP and a larger stock may enable the market to deepen and allow a
fuller yield curve up to 3, 5 and 7 years to develop and serve as benchmark for pricing of
risk.
1.2. Statement of the Problem
For a country to develop rapidly, it has to industrialize. For a country to industrialize
there must be investment. Hence, the industrialized countries appear to be the most
developed country. However, to do this, a country requires substantial capital injection,
which is possible through either earnings of foreign exchange from exports, borrowing in
the international financial market, or allowing foreign businessmen to invest their money
in the capital markets.
In the Rwandan‟s effort to improve foreign investments, substantial achievements have
been recorded in opening capital markets and Rwanda stock exchange many sectors of
the broadly conceived investments process. It is a known fact in Rwanda today that the
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growth and development of the country‟s economic sector was started by foreign
companies and investors who operated through wholly owned subsidiaries.
It must be emphasized that the contributions are not only in the provision of capital but
also more particularly in the transfer of technology and managerial talents. The republic
of Rwanda stance towards the attraction of more investment resources is indicated by its
resolve to expand and consolidate the economic liberation and globalization structures
already on the ground. Renewal of government‟s commitments to the privatization
programmer has opened new opportunities for business.
Investments in capital markets constitute an important aspect of resource mobilization as
well as a way of allocating company funds in different investment avenues
(diversification) in organizations that result in efficient and effective performance and
profitability. Many companies in Rwanda including Bank of Kigali (BK) utilize the
capital markets in their way of investments and mobilizing funds. Since its foundation in
1966, the Bank of Kigali has been working to provide commercial banking services to
individuals, small businesses as well as large corporations and also it has been working
with Capital markets for investing their available sources as well as mobilizing funds in
order to realize its objectives of maximizing wealth.
Despite the existence of people‟s deposits and loans repayments, banks needs more funds
from selling shares. Bank of Kigali being awarded different prizes like in 2012 being
recognized as the best financial reporting company in Rwanda at the annual Financial
Reporting Award (FiRe) held at Nairobi Kenya and recently awarded the 2013 Euro
money Award for Excellence as the best bank in Rwanda. Rwanda has regulated
investment since 1994 when a law was passed to establish Rwanda Development Board.
Secondly, Rwanda, a member of commonwealth, uses English as an official language but
has focused largely on English speaking countries to attract foreign investors to invest
their money in Rwanda stock exchange. Indeed, it has a smaller cultural distance with US
and many European countries. Thirdly, Rwanda is not included in the set of developed
economies. Therefore this current study will assess the impact of investment in the capital
markets on financial performance of the Bank of Kigali.
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1.3 Objectives of the Study
This study has general objective and specific objectives.
1.3.1 General Objective
The general objective of this study is to assess the impact of investment in the capital
markets on financial performance of banking sector in Rwanda..
1.3.2 Specific Objectives
1) To determine the influence of investment in the capital markets and its impact on
financial performance of Bank of Kigali limited.
2) To determine the contribution of investment in capital markets on financial
performance of BK ltd
3) To analyze the relationship between investment in the capital markets and
financial performance of Bank of Kigali Ltd;
1.4 Research Questions
What is the influence of investment in the capital markets on financial
performance of banking sector?
On what extent investment in capital markets contribute on financial performance
of BK ltd?
What is the relationship between investment in the capital markets financial
performance of Bank of Kigali Ltd?
1.5 Significance of the Study
This study is a great relevance to the organization under study as well as other financial
institutions. The non-financial business firms, whether manufacturing or service oriented
also benefit from the research findings. This is because the result of the study enable the
users especially companies to appraise its investment in the capital market policies and to
review its operations critically for more result oriented. This study also is useful to all
business enterprises invest in capital market and other users of the study:
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This thesis gave the opportunity to the researcher to practice research knowledge acquired
in class hence improving knowledge and skills and able to solve practical problems and to
gain knowledge on online transactions. In addition this study is a MBA requirement
(Master`s Degree of Business Administration). This research helps a researcher to have
knowledge on some issues that I have never understood when the researcher was still
studying business administration with specialization of accounting and finance in
Academic way since it has been possible to put them into practice or follow how others
put them into practice at BK.
Suggestions and recommendations were proved and solutions to major problems
encountered in investing in capital markets and financial performance of banking sector.
The management may implement these recommendations and this will improve
performance of the companies as whole.
The research findings is used as reference by School of business and public management
in Mount Kenya University community specifically to the students who is like to venture
in the same field. This research helps students of Mount Kenya University to acquire
knowledge in business administration especially in accounting and finance option.
The findings from this thesis help other businesses to improve their performance through
good analysis and increasing investment in capital markets and this influences greatly
their financial performance as it was discussed in part of case study. The business
performance is improved through much benefiting from capital market and Rwanda stock
exchange.
1.6 Limitations of the Study
The study does not cover all the investors trading on the Rwanda stock exchange but only
those of BK Ltd .Securities traded with Rwanda stock exchange are also not many in
numbers and diversification is also a limitation for us to know the frequency of
transaction and factors affecting investment decisions.
The Capital Market Authority in Rwanda is at its infant stage and there are few players
the exchange and as such, there is limited data available and interaction with the
researcher is also another limitation. This collection of data is done through the
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interaction (Interview) and secondary data which has also its own draw backs. This
research as any other scientific research some limitations was encountered when
collecting data; the following are some of them:
Suspicious respondents: It was not easy to convince all the respondents. Some of them
were suspicious about the study and reluctant to give the needed information and some
completely refused to respond to the questionnaire distributed to them. Subjectivity of the
respondents: Responses without facts and evidence can be given due to the negligence of
respondents; some of them answered questionnaires without taking into consideration
their real perception.
Objectivity of the study: This is common that the respondents answered the questions in
the way they want without putting any emphasis and commitment in mind to the real
question just before answering; so no consideration of objective of questions asked to
them.
Measures taken to overcome those limitations and constraints.
a) Before undertaking the collection of data, the authorization from BK Ltd directorate of
finance and authorization from MKU were provided,
b) On the other hand, the anonymity and confidentiality was ensured to protect the
respondents‟ privacy,
c) Instructions were given as guidance for filling the questionnaires and the explanation
was provided to the respondents to stimulate positive attitude towards the project paper.
1.7 Scope of the Study
Research as any other scientific work is limited in time, space and in the domain. In time,
the study was centered on the impact of investment he capital markets on financial
performance of banking sector and formulation of plans for decision making and the
analysis focused on the period from 2009 to 2013, Kigali capital market up to now
because the period allowed me to search recent data related to our subject. Regarding the
delimitation of space, this study focused on Rwanda territory. In the field my study
10
focused on investment in capital markets and financial performance of companies in
Rwanda with Bank of Kigali Ltd as a case study.
1.8 Organization of the Study
The intention of research was for investigating the role of investment in capital markets
and financial performance of companies, and its report have been presented in chapter
five. Chapter one deals with the general introduction, the second chapter provides the
literature review, the third chapter has to do with the methodology, the fourth chapter
deals with data analysis and interpretation, and the fifth chapter which is the last chapter
of this study deals with the summary, conclusions and general recommendations to the
companies and recommendations to the selected case study.
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CHAPTER TWO: REVIEW OF RELATED LITERATURE
2.0 Introduction
This chapter presents information obtained from existing scholarly literature on the
importance of investment in capital markets and financial performance of a company.
Sources of this information include: professional text books by various authors, scholarly
publications on management accounting, papers presented at various workshops or
forums on the subject matter, Magazines and the internet source. The information
generated is presented in sections in line with the objectives of the study for easy
conceptualization of the ideas as indicated.
2.1 Theoretical Literature
Investment is the employment of funds with the aim of achieving additional income or
growth in value. The essential quality of the investment is that it involves “waiting” for
reward. It involves commitment of resources that have been saved or put away from
current consumption in the hope that some benefit will occur in future.
2.1.1 Investment
At first, defining investment may appear deceptively simple. The term forms part of
everyday usage, which may give the impression that there is a common or shared
understanding of the term. However, investment is a broad term invoking different
meanings in everyday, economic and legal usage. The commonly used terms
investment, investment trends, foreign investment and foreign direct investment (FDI)
entail different meanings, varying in the breadth of assets they cover. According
Rwanda Development Board , Rwanda‟s Investment Code (2005) defines investment as
the creation or acquisition of new business assets or the expansion, restructuring or
rehabilitation of existing business enterprise.
According to International Institute for Sustainable Development (2009) in “Definition
of Investment in Inter investment Agreements”, the term “investments” means every
kind of asset owned or controlled, directly or indirectly, by an investor, including: An
enterprise; Shares, stocks or other forms of equity participation in an enterprise,
12
including rights derived there from; Bonds, debentures, loans and other forms of debt,
including rights derived there from; rights under contracts, including turnkey,
construction, management, production or revenue-sharing contracts; Claims to money
and to any performance under contract having a financial value; Intellectual property
rights, including copy rights and related rights, patent rights and rights relating to
utility models, trademarks, industrial designs, layout-designs of integrated circuits, new
varieties of plants, trade names, indications of source or geographical indications and
undisclosed information; Rights conferred pursuant to laws and regulations or
contracts such as concessions, licenses, authorizations, and permits, including those
for the exploration and exploitation of natural resources; and Any other tangible and
intangible, movable and immovable property and any related property rights, such as
leases, mortgages, liens and pledges.
Francis, (1983) defines investment as “the warehousing of capital or assets in the open
market for a defined period with the intention of declaring a yield at the end of the
defined period.” According to Ernesto Thomas in Managing city Investment promotion
and incentive policy (2006),In the complex world of risk, change, and different tax
regimes, investment managers tend to rely more on the “satisfying behavior” than the
systematic evaluation of investment outcomes, when it comes to a decision to invest .
The open market system comprises mainly the Western hemisphere countries and Asia
where the amount of capital inflows in these economic hubs determines the size and
profitability of investments made. The rate of these capital flows is used as an indicator
of confidence to invest. It is therefore not surprising that the dominant markets are
found in Europe, United States and Asia as compared to the developing economies, of
which South Africa is one. This phenomenon explains the importance of direct foreign
investment for any developing economy.
2.1.2 Investment Promotion Techniques
Conventional wisdom holds that a targeted strategy is the most appropriate approach to
investment promotion. According to Wells and Went (2000), although investment
promotion is ultimately aimed at attracting investors at another level of generalization
promotion activities are designed to accomplish three different objectives:
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To improve a country's image within the investment community as a favorable location
for investment (image-building activities),to generate investment directly (investment-
generating activities); and to provide services to prospective and current investors
(investment- service activities). Image-building and investment-service activities have as
their ultimate objectives the attraction of more investment. But their immediate goals
are different, and, it could be argued, appropriate measures of effectiveness are different.
Wells and Went (2000), identified at least twelve different promotional techniques that
were in use by at least some of the countries that they studied, as follows: Advertising in
general financial media, Participating in investment exhibitions, Advertising in
industry- or sector-specific media, Conducting general investment missions from
source country to host country or from host country to source country, Conducting
general information seminars on investment opportunities, Engaging in direct mail or
telemarketing campaigns, Conducting industry- or sector-specific investment missions
from source country to host country or vice versa, Conducting industry- or sector-
specific information seminars, Engaging in firm-specific research followed by "sales"
presentations, Providing investment counseling services Expediting the processing of
applications and permits, Providing post investment services.
These promotional techniques were typically employed for different purposes. Some,
especially techniques 1 to 5, were usually directed toward building a particular image
for the country; in contrast, techniques 6 to 9 were used to generate investment directly,
and techniques 10 to 12 were investment- service techniques. Although the goals of the
techniques overlapped to some extent, this classification scheme seems to capture
reasonably well the objectives that typically lay behind the use of the various
techniques.
2.1.3 Investment Promotions Efforts in Rwanda
The Government‟s resolve to improve the investment climate and attain desired levels
of both local and foreign investment as a priority. The World Economic
Forum‟s Global Competitiveness Report (2011-2012) ranked Rwanda the 3rd easiest
place to do business in Africa and 2nd five years Top Global Reformer after Georgia
and the first in EAC.
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Rwanda was ranked number eight globally in starting a business with only 2 procedures
in spam of 3 days. Rwanda is considered as the most competitive place to do business in
East Africa and 3rd in Africa. The country is ranked 8th in the World (from 32nd last
year) in getting credit after putting in place a fully functional private credit reference
bureau. Rwanda moved from 43rd last year to 19th easiest place to pay taxes in the
world. For Rwanda‟s development, the emergence of a viable private sector that can
take over as the principle growth engine of the economy is absolutely key.
According to National Bank of Rwanda (2011), although foreign direct investment
will be encouraged, a local-based business class remains a crucial component of
development. The public sector will not be involved in providing services and products
that can be delivered more efficiently by the private sector. The State will only act as a
catalyst; ensuring that infrastructure, human resources and legal frameworks are geared
towards stimulating economic activity and private investment. Martin (2013) in The
new times states that Effective “Branding Rwanda” may at moment be championed by
the Government but in reality is a collective effort by both the public and private sector.
2.1.4 Reasons for Investing in Rwanda Stock Exchange
There are reasons why investors can have confidence in Rwanda and direct their
investments to potential economic sectors with promising returns.
Good macroeconomic environment: Rwanda enjoyed a year-on-year average real GDP
growth rate of 8.5 percent between 2005 – 2011, among the highest in major African
economies and neighboring countries, a moderate inflation of one digit and stable
exchange rate (RDB report, 2011).
Good governance: Politically stable with well-functioning institutions, rule of law and
zero tolerance for corruption, clear vision for growth through private investment Investor
friendly climate: World Bank Doing Business Report 2012 ranked Rwanda the 2nd Five
years top global reformer and 3rd easiest place to do business in Africa. It is among the
best competitive place to do business in Africa and 1st in East African
Community. On credit ranking by Fitch in 2010, Rwanda was upgraded to B. Rwanda is
among top 3 African countries in terms of internet connectivity according to Oracle in
2010. The initiative of new special economic zone was developed and more zones
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planned for the Districts to improve industry and trade.
iv) Access to markets: Rwanda is a Market of over 11 million people with a
rapidly growing middle class. It is located centrally bordering with 3 countries in East
Africa. The country adhered to EAC Common Market and Customs Union with market
potential of over 125 million people.
v) Untapped investments opportunities: Potential investment opportunities abound,
particularly in the following sectors: Infrastructure: Opportunities in rail, air , water
transportation to further develop Rwanda as an EAC hub; Agriculture: Potential for
agriculture productivity growth and value addition; Energy: Power generation, off
grid generation and significant methane gas opportunities; Tourism: Unique
assets creating booming sector, growth potential in birding &
business/conference tourism, Information and Communication Technology: Priority
sector for Vision 2020; Other attractive sectors include real estate and construction,
financial services and mining.
2.1.5 Characteristics of Investment
Safety of principal: The investors must be certain on safety of principal and one should be
carefully to review the economic and industrial trends before choosing the types
investment. Adequate diversification of investment is necessary. Commitments of
industry, geographic diversification, management are other important aspects to be
considered. A proper combination of these factors would reduce losses.
Liquidity: Every investor requires a minimum liquidity in his investment to meet
emergencies. Liquidity will be ensured if the investor buys a proportion of readily salable
securities out his total portfolio. He may there for keep small proportion of cash, fixed
deposits and units which can be immediately liquid.
Income stability: Regularity of income at a consistent rate is necessary in any investment
plan. Not only stability it is also important to see that income is adequate after tax. It is
possible to find out some securities, wish practically all their earning in dividends.
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Appropriation and purchasing power stability: Investors should balance their portfolios to
fight against any purchasing power instability. Investors should judge price level
inflation; explore the possibility of again and loss in the investment available to them. A
purchase of property in the right time will lead to appreciation in time growth stock will
also appreciative over time. These should be done thoughtfully.
Legality and freedom from care: Law should approve all investments. Law relating to
minor, estates, trust, shares and insurance should be studied. Illegal securities will bring
out many problems for the investor. The identity of legal securities will help the investor
in solving the problems.
Tangibility: Intangible securities are most costly due to price level inflation and special
collapse. Some investors prefer to keep a part of their wealth invested in tangible
properties like building, land, etc. It may, however be considered the tangible property
does not yield any income apart from direct satisfaction of possession of property.
Existence of financial institution to encourage savings: The presence of financial
institutions which encourage savings and direct them too productive uses, help the
investment market to grow, the presence of a large number of financial institutions under
central government and rural bodies has encouraged growth and saving of investments
they offer a wide variety of schemes for savings and give benefits also.
Form of business organization: The form of business organization, which is permanent in
existence aids saving and investment the public limited companies have been said to be
the best form of organization. The three characteristics of the corporation that have been
very useful for the investors are limited liability of shareholders, perceptual portfolio and
transferability and divisibility of the stocks and shares.
2.1.6 Factors Favorable for Investment
The investment market should have a favorable environment to be able to function
effectively. Generally there are four basic factors, which bring opportunities for
investment.
Legal safeguards: A stable government, which frames adequate legal safeguards,
encourages accumulation of savings and investments. Investors will be willing to invest
their funds if they have assurance of protection of their contractual and property right. In
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India the investors have the dual advantages of free enterprises and government control.
In India the political climate is conducive to investment as government control leads
stability to the capital market.
A stable currency: Most of the investment such as bank deposits, life insurance and
shares are payable in a fixed amount of the currency of the country. A proper monetary
policy will give direction to the investment outlets. As for as possible monetary policy
neither promotes inflation nor prepares for deflation neither condition is satisfactory.
Investor behavior: Investment analysts can fall into several psychological traps (and
should strive to avoid doing so.) Anchoring refers to giving disproportionate weight to the
first information received about a topic. Status quo bias is the tendency to perpetuate
recent observations in forecasts. Confirming evidence is the tendency to give more weight
to information that supports existing or preferred points of view than to information that
contradicts the preferred view. Overconfidence is having too much faith in the accuracy
of one‟s forecasts. Recall ability is when forecasts are overly influenced by events that
left a strong impression on the forecaster‟s memory.
Sentiment Indicators: Sentiment indicators monitor the activity of market participants
such as floor traders, insiders, mutual fund managers, etc. The premise behind such
indicators is that certain types of investors will have similar reactions to future market
events as they have had to past events. These reactions may prove useful for identifying
market turning points.
Escalation Bias: In behavioral finance, escalation bias causes investors to invest more in
money-losing investments for which they feel responsible than they invest in an ongoing
successful investment. The popular concept of “averaging down” to reduce the average
price paid for the investment may be representative of this bias.
2.1.7. Capital Market and Stock Exchange in Rwanda
Definition of a Stock Exchange
A stock exchange is an organized and regulated financial market where securities are
bought and sold at prices governed by the forces of demand and supply. Stock exchanges
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impose stringent rules, listing requirements, and statutory requirements that are binding
on all listed and trading parties.
Establishment of Rwanda Stock Exchange (RSE):
The Rwanda Stock Exchange Limited was incorporated on 7th October 2005 with the
objective of carrying out stock market operations. The Stock Exchange was demutualised
from the start as it was registered as a company limited by shares.
Rwanda stock exchange ownership structure: The ownership structure of Rwanda Stock
Exchange is as follows: - Government of Rwanda :20% , - Fade Securities Rwanda :10%
, - African Alliance Rwanda :10% , - CDH :10% , - Dallas Securities :10% , - MBEA
Brokerage & Financial Services Rwanda :10% , - Dyer & Blair Rwanda :10% , - CSR
:10% , - BRD :2% , - SONARWA :1% , - MAGERWA :6% and - SORAS :1% (RSE
annual report 2013)
RSE board composition & representation: The Rwanda Stock Exchange Board is
comprised of 7 members distributed as follows: Government of Rwanda has one
representative, Members has three representatives, Institutional investors have one
representative, Members of the public and/or professional bodies have one representative
and listed companies have one representative (BK LTD, capital market authority annual
report 2013).
Role of a Stock Exchange in an Economy
Stock exchanges have multiple roles in the economy. This may include the following:
Raising capital for businesses: The Stock Exchange provides companies with the facility
to raise capital for expansion through selling shares to the investing public.
Mobilizing savings for investment : When people draw their savings and invest in shares,
it leads to a more rational allocation of resources because funds, which could have been
consumed, or kept in idle deposits with banks, are mobilized and redirected to promote
business activity resulting in stronger economic growth and higher productivity levels of
firms. ( capital market authority annual report 2013)
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Corporate governance: By having a wide and varied scope of owners, companies
generally tend to improve management standards and efficiency to satisfy the demands of
the stakeholders. Creating investment opportunities for small investors: As opposed to
other businesses that require huge capital outlay, investing in shares is open to both the
large and small stock investors because a person buys the number of shares they can
afford. ( capital market authority annual report 2013)
Government capital-raising for development projects: Governments at various levels
may decide to borrow money to finance infrastructure projects by selling bonds. The
issuance of such bonds can obviate the need, in the short term, to directly tax citizens to
finance development.
Barometer of the economy: At the stock exchange, share prices rise and fall depending,
largely, on market forces. Therefore the movement of share prices and in general of the
stock indexes can be an indicator of the general trend in the economy.
Regulatory framework: The Central Depository Law Governing the Holding and
Circulation of Securities was gazette in May 2010. The following laws have been
adopted by Parliament they are have been gazette: Law establishing the Capital Markets
Authority. Law regulating the Capital Markets Industry, Law regulating the Collective
Investment Scheme, Accompanying regulations
Existing incentives in the Capital markets: Income tax exemption: -Income accruing to
registered collective investment schemes and employees‟ shares scheme are exempted
from income tax”. Venture capital companies registered with the capital markets
Authority in Rwanda benefit from a corporate income tax of zero percent (0%) for a
period of five (5) years from the date the decision has been taken. Capital gain tax:
Capital gain on secondary market transaction on listed Securities shall be exempted from
capital gains tax».
Corporate income tax: Newly listed companies on capital market shall be taxed for a
period of 5 years on the following rates: 20% if those companies they sell at least 40% of
their shares to the public; 25% if those companies sell at least 30% of their shares to the
public; 28% if those companies sell at least 20% of their shares to the public.
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Withholding tax on dividend and interest: the withholding tax on dividends and interest
income on securities listed on capital markets and interest arising from investments in
listed bonds with a maturity of 3 years and above has been reduced to 5% when the
person who withhold is a resident taxpayer of Rwanda or of the East African Community.
Value Added Tax (VAT) exemption: The following are exempted from VAT: transfer of
shares and capital market transactions for listed securities .
RSE membership : Any person can apply for membership, dealership or to become a
sponsor of RSE provided they meet and adhere to the prescribed conditions. The financial
system is the system that allows the transfer of money between savers and borrowers. It
comprises a set of complex and closely interconnected financial institutions, markets,
instruments, services, practices, and transactions.
A financial market is a mechanism that allows people to buy and sell (trade) financial
securities (such as stocks and bonds), commodities (such as precious metals or
agricultural goods), and other fungible items of value. A financial market is generally
comprised of the money market and the capital market. The money market is the market
for short dated financial products whereas the capital market is meant for long-term
securities.
The capital market is further divided into primary and secondary market. The primary
market is the market for securities sold for the first time. Primary Market Transaction
Process: The issuer decides to raise capital through the stock exchange, Issuer appoints
advisors sponsors/co. registrar/fiscal agents/sponsoring brokers , Issuer prepares draft
prospectus or information memorandum , Issuer discusses the offer document with RSE
and finalizes the prospectus or information memorandum, The issuer applies to RSE to
list its securities on the market , The issuer states the offer period and offers securities to
the public investors subscribe to securities during the offer period , Offer closes and
publication of allotment results and Issuer is admitted to list on RSE.
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2.1.8. Financial Performance
Financial statements are prepared primarily of decision making. They play a dominant
role in setting the framework of managerial decisions. But the information provided in the
financial statements is not an end in itself as no meaningful conclusions can be drawn
from those statements alone. However, the information provided in the financial
statements is of immense use in making decisions through analysis and interpretation of
financial statements.
Financial statement analysis is the process of identifying financial strengths and
weaknesses of the firm by properly establishing relationship between the items of the
balance sheet and the profit and loss account. There are various methods or techniques
that are used in analyzing financial statements, such as comparative statements, schedule
of changes in working capital, common size percentages, funds analysis, trend analysis,
and ratios analysis (simon,2000)
Meaning and Concept of Financial Analysis
The term „financial analysis‟, also known as analysis and interpretation of financial
statements, refers to the process of determining financial strengths and weaknesses of the
firm by establishing strategic relationship between the items of the balance sheet and the
profit and loss account and other operative data. „Analyzing financial statements‟, accord
to Adam „is a process of evaluating the relationship between components parts of a
financial statement to obtain a better understanding of a firm‟s position and performance.‟
The purpose of financial analysis is to diagnose the information contained in financial
statements so as to judge the profitability and financial performance of the firm.
(McAdam, 2002)
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Types of Financial Analysis
Financial analysis is classified into different categories depending up on:
(i) The material used, and
(ii) The method of operation followed in the analysis or the modus operandi of analysis.
On the basis of material used, financial analysis is of two types: external analysis and
internal analysis.
External analysis: This analysis is done by the outsiders who do not have access to the
detailed internal accounting record of the business firm. These outsiders include
investors, creditors, government agencies, credit agencies, and the general public. For
financial analysis, these external parties to the firm depend almost entirely on the
published financial statements.
Internal analysis: The analysis conducted by persons who have access to the internal
accounting records of business firm is known as internal analysis. Such an analysis can,
therefore, be performed by executives and employees of the organization as well as the
government agencies which have the statutory power vested in them. Financial analysis
for managerial purposes is the internal type of analysis that can be affected depending on
the purpose to be achieved. On the basis of modus operandi, according to the method of
operation followed in the analysis, financial analysis can also be of two types: horizontal
analysis and vertical analysis.
Horizontal analysis. It refers to the comparison of financial data of a company for
several years. The figures for this type of analysis are presented horizontally over a
number of columns. The figures of various years are compared with standard or base
year. A base year is a year chosen as beginning point. This type of analysis is also called
„Dynamic Analysis‟ as it is based on the data from year to year rather than on the data of
any one year. The horizontal analysis makes it possible to focus attention on items that
have changed significantly during the period under review. Comparison of the item over
several periods with a base year may show a trend developing. Comparative statements
and trend percentage are two tools employed in horizontal analysis.
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Vertical analysis. It refers to the study of relationship of the various items in the financial
statements of one accounting period. In this type of analysis the figures from financial
statement of a year are compared with a base selected from the same year‟s statement. It
is also known as „Static Analysis‟. Common size financial statements and financial ratios
are the two tools employed in vertical analysis. Since vertical analysis considers data for
one time period only, it is not very conductive to a proper analysis of financial statements.
However, it may be used along with horizontal analysis to make it more effective and
meaningful (Carey, 2001)
2.1.9.Tools and Techniques for Financial Statements Analysis
The following are some of the tools and techniques used by the companies for measuring
their financial performance and they will be used in this study for the same:
Trend analysis: Trend analysis is very helpful in making a comparative study of the
financial statements of several years. Under this technique, information for a number of
years is taken up and one year (usually the first year) is taken as the base year. Each item
of the base year is taken as 100 and on that basis, the percentage for other year are
calculated. For example, if sales in the base year is Rs.10, 000 and in the next year it is
20,000 the trend percentage will be 100 and 200 respectively. Substitution of percentage
for large amounts makes the statements brief and easily understandable.
Ratio analysis: Ratio analysis is a powerful tool of financial analysis. A ratio is defined
as the indicated quotient of two mathematical expressions and as the relationship between
two or more things. In financial analysis, a ratio is used as a benchmark for evaluating the
financial position and performance of a firm. It is done to develop meaningful
relationship between individual items or group of items usually shown in the periodical
financial statements published by the concern. Ratios should not be calculated between
the two unrelated figures as sales and discount on issue of shares, operating cost and
equity capital etc. as it will not serve any useful purpose.
Accounting ratios show inter-relationships which exist among various accounting data.
When relationships among various accounting data supplied by financial statements are
worked out, they are known as accounting ratios. Ratio analysis stands for the process of
determining and presenting the relationship of items and groups of items in the financial
24
statements. The following are the ratios which will serve the purpose of our research and
they will be explained in the fourth chapter: Profitability ratios, Liquidity ratio, Long-
term solvency ratios and Activity ratios (Bhala 1997)
Comparative Statements Analysis
Financial statements are presented as on a particular date or for a particular period. For
example, balance sheet indicates the financial position as at the end of the period ( usually
a year) and the income statement shows the operating results for a period ( usually a
year). But financial analyst interested in knowing whether the business is moving in a
favorable or unfavorable direction. For this purpose, figure of the current year have to be
compared with those of the previous year(s).comparative financial statements provide
information to assess the direction of change business. It can be prepared for both income
statement as well as balance sheet (Merchant 1984)
Comparative Income Statement.
This statement disclosures the net profit or net loss resulting from the operations of the
business, such statement shows the operating results for a number of accounting periods
so that changes in absolute data from one period to another period may be stated in terms
of absolute change or in terms of percentage. This statement helps in deriving meaningful
conclusions as it is very easy to ascertain the changes in sales volume, administrative
expenses, selling and distribution expenses, cost of sales, Comparative income statement
has two columns for the figures of current year and the previous year. A third column is
used to show the increase of decrease in figures. A fourth column may be added for
giving percentage of increase or decrease.
Comparative Balance Sheet
The single balance sheet shows assets and liabilities as on a particular date or for a
particular period. But a comparative balance sheet is prepared on two or more different
dates, this statement can be used for comparing assets and liabilities and to find out any
increase or decrease in these items.
25
Thus, while in the balance sheet the emphasis is on status, in the comparative balance
sheet it is on change. Comparative balance sheet indicates whether the business is moving
in a favorable or unfavorable direction. It is very useful for studying the trends in a
company.
2.2 Empirical Literature Review
Countries striving to develop their economies must seek to put emphasis on the
development of their equity markets as this provided short- to medium term funds
required by businesses (Beaker et al., 2003, 2005). The argument should be that when
equity markets are not liberalized to allow their access without any impediments by both
local and foreign investors, then, equity markets may not develop and this will affect
economic development of a country as investors may opt to go and seek for funds from
economies that have grown equity markets that are fully liberalized (Kaminski and
Schuler, 2003). Sly (2012) argues that countries in the sub Saharan Africa that have had
tremendous economic development had their equity markets liberalized sometime back
and their economies have continued to develop very well, these countries include Kenya
that liberalized its equity market in 1995, Nigeria in 1995,South Africa in 1996,
Botswana in 1990 and others. On the centrally countries like Rwanda, Togo, Zambia,
Malawi, Niger and others in the Sub Saharan Africa that still have un liberalized equity
markets are still facing challenges of low economic development in their respective
economies according to (Beakers et al., 2003,2005 and Sly, 2012).
There is a also a concern of equity markets segmentation in African economies and such
markets cannot be able to provide enough liquidity required by investors and this
definitely hampers economic growth potential (Agyei-Ampomah, 2011). Rwanda as one
the countries with segmented equity market may need to start thinking on the direction of
integrating its equity market with the east African partner states so as to increase its
potential.
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Profit is the ultimate goal of commercial banks. All the strategies designed and activities
performed thereof are meant to realize this grand objective.
To measure the profitability of commercial banks there are variety of ratios used of which
Return on Asset, Return on Equity and Net Interest Margin are the major ones (Murthy
and Spree, 2003; Alexander et al. 2008
Straub (1998) argues that, a country cannot develop the industrial sector without a well as
established financial sector in giving loans to back it through capital formal. Capital refers
to the total of tools, equipment, machinery, and buildings used to produce goods and
services. I n this case, capital does not refer simply to money. Money by itself is not
productive but when it purchases machines, type writers, and buildings it become
productive. Every business or industry needs capital in order to begin and maintain
financial performance.
Robinson (1952) &Aristis (2001)through quartely times-series data, examine the
relationship between capital market development and financial performance of companies
from five developed economies while controling for the effect of banking system and
market volality.These country are : U.S.A,U.K,France,Germany,and Japon. The period
covered 1968-1998 although the data span is different countries in the sample. The
results reveal that in Germany, there is bidirectional cousality between banking system
development in giving loans and economic growth.
Treynor (1985) in his paper entitled "how to rate management of investment fund" studies
the performance of mutual funds. In the study, he devises a satisfactory way to measure
the performance of the fund with the help of characteristic line and portfolio possibility
line.
Treynor and Mazur (1966) conduct a joint study on "can mutual fund outguess the
market" to study the ability of mutual fund managers to outguess the market by taking a
sample of fifty seven open-ended fund for a period of ten years beginning in 1953. The
study found out that there was evidence of mutual fund manager‟s outguessing the
market.
27
According Al Saad and Moosa, ( 2005) Capital markets can be a good source of liquidity
for firms that qualify to list their stocks on a country‟s stock exchange. Some evidence
exists that qualifies the issue of efficient market operations being dependant on how
freely information is available in the market for investors
Rwanda still faces a challenge of low economic development though with great potential,
and its stock market is still underdeveloped with equity market having only four
companies listed with their securities listed and fewer realizations (RSE, 2013) .
Generally, the financial performance of banks and other financial institutions has been
measured using a combination of financial ratios analysis, benchmarking, measuring
performance against budget or a mix of these methodologies (Aviary, 1995). Simply
stated much of the current bank performance literature describes the objective of financial
organizations as that of earning acceptable returns and minimizing the risks taken to earn
this return (Hempen et al., 1996). Chine and Dawn (2004) showed in their study that most
previous studies concerning company performance evaluation focus merely on
operational efficiency and operational effectiveness, which might directly Influence the
survival of a company.
Elizabeth and Elliot (2004) indicated that all financial performance measure as interest
margin, return on assets, and capital adequacy are positively correlated with customer
service quality.
Several studies have been conducted worldwide investigating the relationship between
capital structure and profitability in banks. Velnampy and Niles (2012) conducted a study
assessing the Relationship between capital structure and profitability of ten (10) listed
Srilankan banks for the period (2002 to 2009). The results showed that there is a negative
association between capital structure and profitability. Furthermore, the results also
suggest that 89% of total assets in the banking sector of Sri Lanka are represented by
debt, confirming the fact that banks are highly geared institutions. The findings of this
study support the findings from the previously conducted studies. Titman and Weasels
(1988) evaluated the relationship between capital structure and profitability and found out
that firms with high profit levels usually maintain relatively lower debt levels since they
can realize such funds from internal sources. A study by (Away and Badin, 2012)
evaluating capital structure and performance of listed Banks in Ghana in the period
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(2000-2010) discovered that banks listed on the Ghana Stock Exchange are highly geared.
This can be attributed to their over dependency on short term debt as a result relatively
high Bank of Ghana Lending rate and low level of bond market activities and there is a
negative relationship between gearing and the banks performance.
Erotic et al (2002) discovered that those entities that prefer to finance their investment
activities using equity capital are more profitable than firms who finance by using
borrowed capital. Berger et al (2008) conducted an analysis of capital structure and
profitability in 666 listed commercial banks in USA in the period (1992-2006). It was
observed that despite the abnormal volume of profits cumulated within this period, the
banks were seeking for increasing more and more their percentage of own capital by
issuing new stocks. This means that the higher is the profitability of banks the higher will
be their capability to increase the own capital by accumulation. Hence there is a negative
relationship between the bank profitability level and their indebtedness level.
Droplets and Fix (2003) examined the leverage predictions of the trade off and pecking
order models using data from Switzerland firms. It was observed that more profitable
Swiss firms useless leverage. Firms with more investment opportunities use less leverage,
which supports the pecking order model. Leverage is very closely related to the
tangibility of assets and the volatility of a firm‟s earnings.
Leverage has a negative effect on bank profits in Palestine (Aladdin and Ab-Rudi,
2012).The study established a model to measure the effect of capital structure on the bank
efficiency measured by ROE, ROA, Total deposit to assets, total loans to assets and total
loans to deposits were used to measure capital structure. A study by (Pratomo and
Ismail,2006) investigating the performance and capital structure of 15 Malaysian Islamic
banks in the period(1997-2004) found out that the higher leverage or a lower equity
capital ratio is associated with higher profit efficiency. Their findings were consistent
with the agency hypothesis which proposes that, a high leverage tends to have an optimal
capital structure and therefore it leads to producing a good performance.. A study by
Salted (2013) which assessed sthe impact of capital structure on the performance of banks
n Pakistani for the period (2007-2011) found a positive relationship between determinants
of capital structure and performance of banking industry. The Performance was measured
by return on assets (ROA), return on equity (ROE) and earnings per share (EPS).
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According to the wise GEEK “ in advantages of capital markets” Capital markets provide
both new and existing businesses with access to cash or capital. Businesses use this
capital to cover day-to-day operating costs and to finance expansions. The advantages of
capital markets include job creation, economic growth and technological innovation.
Companies directly benefit from the capital markets because many firms would become
insolvent in the absence of formal or informal investment marketplaces. The advantages
of capital markets are also realized by employees of firms that grow and expand as a
result of capital infusions. These individuals have more opportunity for career
advancement and job promotion. Additionally, expanding firms open new plants and
offices and along with new work venues, these firms also create new jobs. As firms grow,
new technologies are developed and researchers and marketing agents are employed to
create and develop these products.
2.3 Critical Review and Research Gap Identification
Much investment research has lost its way by paying too much attention on “investment”
and “financial performance”, but not enough on “investment trends” and “financial
performance of companies” (Outlay 2003) in his study titled” management control and
performance management.”
Although there are numerous investment in capital markets and decisions taken by
investors, we will work on to provide insights and explanations to the general idea of the
investment decision-making process, whereby there is a need for reviewing the existing
literature revealing that very little attention is being given to the behavioral aspects
influencing the entire process. The classical finance school of thought seeks in portraying
investment decision-making processes as processes which can be studied and applied
properly in real life. With investors bearing this in mind, they will be allowed to be able
to predict as well as beat the market hence the issue of human error and irrationality will
not arise (Bhili 1997).The main reason of the research is filling that gap left by the
financial researchers by way of critically analyzing the process of investment in the
capital markets. This therefore leaves with the question of determining the extent to
which investors makes the investment decisions thereby giving room to actually
understand the domain of finance and investment and how the investment process in
capital markets works as a whole .
30
2.4 Conceptual Frame Work
Investment in the capital markets stimulates efficient financial performance of a company
as well as it is analyzed by a company's business model. Investment in the capital markets
is considered to be the independent variable or the cause variable. The elements under the
dependent variable (financial performance of organizations) include: Capital adequacy,
Asset quality, profitability and Liquidity. The moderating variables that affect the
relationship between the investment in capital market and financial performance of
organizations include: Policy frame work, levels of decision making.
Figure 2.1: Conceptual Frame Work
Independent Variables Dependent Variables
Source: researcher 2014
Intervening
Variables
Investment in the
capital markets:
Bonds and shares
Players in capital
market
Management decision making
Government policy
• Investment policy
• Levels of decision making
Financial
Performance
• Capital Adequacy
• Asset Quality
• Profitability and
Liquidity
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CHAPTER THREE: RESEARCH METHODOLOGY
3.0 Introduction
Chapter three highlights the difference methods and techniques used for gathering and
analyzing data. Research methodology is scientific techniques used to collect data either
from field (primary data) or from other resources (secondary data) the research explained
how the required information was obtained from where and how to analyze those data.
This methodology deal with techniques, sources of information and methods. The
methods used to gather information in this exercise involved designing questionnaires,
interviewing and analysis of relevant literature.
3.1 Research Design
This research be carried out at BK and it involved a case study of BK from 2009-2013
research design in which respondents from key departments of the company were
selected. The researcher used both quantitative and qualitative methods of data collection
and analysis; this is involving the collection of data from the respondents and analyzes
their response with the relation to the topic and area of the study (Cassell & Symon,
1994).
Under the quantitative research design survey method was employed. The survey is a
non-experimental, descriptive research method. Survey can be useful when a researcher
wants to collect data on phenomena that cannot be directly observed. Cross-sectional
survey used to gather information on a population at a single point in time. An example of
a cross sectional survey would be questionnaires that collect data. A different cross-
sectional survey questionnaire might try to determine the relationship between two factors
(Cassell & Symon, 1994).
3.2 Target Population
The study targets the management and senior staff of BK Ltd, The staff population at BK
Ltd is 200 employees of all categories such as low level staff and senior level managers
inclusive.
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3.3 Sample Design
The researcher used purposive sampling method to maintain a high level of accuracy.
Respondents were identified from different departments of BK ltd depending on their
willingness and availability to take part in the exercise of study, because the study
covered different departments where activities/duties are related.
3.3.1 Sample Size
The study targeted a sample size of 67 employees out of 200 employees of BK ltd. A
sample, according to Kaplan (1994), is any number of things, people or events less than
the total population, which is selected for inclusion in the study. The same author argued
that the result obtained from this sample is considered to be the same as those that would
have been obtained if the survey had been administered to the total population.
Table 3.1 :Showing sample size distribution relative to the target population
Departments Population Sample size
Finance 60 25
Human Resource 40 15
Administration 40 10
Drivers 30 10
Cleaners 30 7
TOTAL 200 67
Sample size from each department using solving Yamane formula (1967) as shown
below:
n = N/ 1+NE²Where: n = sample size (67), N = population size (200)
E = margin of error * desired
200/ 1+ [(200 x (10%) 2] = 67
3.3.2 Sampling Techniques
The technique used is purposive sample technique, where the sample size of this study
includes 67 respondents selected from a whole population of employees engaged in the
departments interested of BK Ltd.
33
It was not easy to study every individual in the target population. A purposive sampling
procedure has been applied to select the participants that are representatives of the
population. The researcher want to gather information about the population by observing
a part of population (sample size) and findings from sample size are generalized back to
the population.
3.4 Data Collection Methods
There are several ways of collecting data. The methods for data collection were
influenced by the research objectives, research design, research procedures and responses
expected from respondents. During this study, the researcher used two sources of data
namely primary and secondary data. Primary Data also called First hand refers to the
information the researcher obtained from the field that is from the subject in the sample
for the first time and fresh. It is original in nature.
The researcher to do the primary data collection, he contacted and observed the
respondents right in the field by using at least three methods of data collection, namely
through observing relevant respondents, interviewing respondents and using survey which
usually involves use of self-administered questionnaires on account of a large sample.
For primary data, qualitative data was collected using in depth-interview and key
informant interview; while for quantitative data, on the other hand, was collected using
structured questionnaires administered to the target population
Secondary Data also known as Desk Documents/ Library Data collection refers to the
information the researcher obtained by consulting already existing resources that is from
library resources and documents, research articles, internet, news papers ,BK ltd annual
reports, journals and government annual reports. It involves all information specifically
for this purpose. For secondary data, reviewing the existing literature on the subject
helped to answer questions of the study.
34
3.4.1 Data Collection Instruments
The data collection instruments were basically self-administered questionnaire, which
comprised of open and close ended questions that required respondents to answer
according to the best of their knowledge. Interviews were also be used in data collection
from departments.
3.4.1.1 Questionnaires
The researcher designed both open and close ended questions where open ended
questions had no predetermined responses, while close ended ones had predetermined
responses.
3.4.1.2 Interview Guide
This is one of the techniques that were employed while in the field. It involved short and
precise open and closed questions directed to the respondents at BK Ltd.
3.4.2 Administration of Data Collection Instruments
The questionnaires were administered by the researcher and directed at the staff of BK
Ltd especially staff of BK Ltd in stock exchange service department.
3.4.3 Reliability and Validity of Research Instruments
It is the extent to which results are consistent over time. On the other hand Brailey (1987),
said that validity determines whether the research truly measures that which it was
intended to measure .to ensure that data from respondents is reliable and validity. The
researcher encouraged respondents to ask any question about the questionnaire for
clarification. The researcher explained the questionnaire or he/she rephrased the
questions to ensure relative and consistent data is obtained.
Reliability of a research instrument refers to the degree to which the instrument
consistently measures whatever it is intended to measure (Amin, 2005). In order to assess
the consistence of the instrument, the researcher was able to use Cranach‟s Alpha
coefficient (α). Using the following formula:
35
α= K [1-∑SDi2]
K- 1 SDt2
Where K= Number of items in the questionnaire
SD2
i = Standard deviation squared (variance for each individual item)
SD2
t = Variance for total items in the questionnaire
The α should be within the statistical accepted range of > 0.7≤ 1.
3.5 Data Analysis Procedures
Data analysis is the process of bringing to order, structure and meaning to the mass of
information gathered. Data analysis was done using the Statistical Package for Social
Scientists (SPSS), which helped to summarize the coded data and this facilitated quick
interpretation of the results. Descriptive statistics instruments include use of frequency
tables, percentages, means, standard deviation, maximum and minimum values, averages
and measures of variation of the data about the average.
3.5.1 Qualitative Data Analysis
In qualitative data, analysis an objective coding scheme was applied to data in the process
commonly known as Content Analysis.
Potential themes, categories and trends were closely examined to see how they actually
emerge from the data in relation to the objectives of the study. Qualitative data analysis
utilized words to make narrative statements on how categories or themes of data are
related. After establishing the themes and categories, data were evaluated and analyzed to
determine its adequacy, credibility, usefulness and consistency.
36
3.6 Ethical Considerations
The researcher will maintain a high degree of academic ethical values and ensure that
measures are put in place to guard against and protect the research process to ensure it is
successful. Such measures include: obtaining a letter of introduction from Mount Kenya
University seeking consent from management to carry out the research, ensuring
confidentiality of data and data sources, nondisclosure and exposing the interviewees and
to avoid plagiarism, all sources of information were revealed as per references.
37
CHAPTER FOUR: RESEARCH FINDINGS AND DISCUSSIONS
4.0 Introduction
This chapter presents results of the study and gives the description of the background of
respondents, the dependent variable (DV) and verification of research questions. The
findings were presented, analyzed and interpreted as per the set research questions in this
study.
4.1 Demographics Characteristics of Respondents
This section describes the background of respondents, according to Category of staff, age
group, gender, level of education and number of years in business.
4.1.1 Profile of Respondents
Table 4.2: Distribution of Respondents by Category of Staff
Category of staff Frequency Percentage
Senior Management 8 12
Lower level Staff 59 88
Total 67 100.0
Source: primary data, 2014
The Table 4.2 shows the category of respondents who participated in the study. As
shown, 12% (8 respondents) of all respondents who participated in the study were in the
category Senior Management while 88% (59 respondents) of all respondents were in
category of Lower level Staff. This indicates that both lower level staff and senior
management participate in this study. However the bank engages more of the lower level
staff workforce than their senior management.
38
Table 4.3: Distribution of Respondents by Age
Age Frequency Percentage
20- 30 10 15
30- 40 25 37.3
40- 50 15 22.3
50- 60 9 13.4
Above 60 8 12
Total 67 100
Source: primary data, 2014
Table 4.3 shows the age of respondents. As it is shown in this table, 15% (10
respondents) of all respondents were aged between 20 and 30 years old while 37.3%
corresponding to 25 respondents were aged between 30 and 40 years old. This is the
category having a lot of respondents in the study. The respondents aged between 40 and
50 were 9 respondents (22.3%) and 9 respondents (13.4%) were aged between50 and 60
while the respondents aged above 60 years old were 8 (12% of all respondents). This
indicates that the most respondents were young and this is due to the fact that young
people are more enthusiastic.
Table 4.4: Distribution of Respondents by Gender
Gender Frequency Percentage
Male 39 58.2
Female 28 41.8
Total 67 100
Source: primary data, 2014
39
Table 4.4 shows the gender of respondents in the study. As shown in that table, great
portion of the respondents in the study were male representing 58.2% of all respondents
(39 respondents) while 41.8% of all respondents (28 respondents) were female. This
indicates that both females and males participates in this study.
Table 4.5: Distribution of Respondents by Education Level
Education level Frequency Percentage
Primary 0 0
Secondary 20 29.9
University 47 70.1
Total 67 100
Source: primary data, 2014
Table 4.5 shows the level of education of respondents in the study. As shown in that
table, great portion of the respondents in the study had the university education level and
they represented 70.1% of all respondents (47 respondents) while 29.9% of all
respondents (20 respondents) had only the secondary education level. This means that
the staff of the bank is educated and this gives them the competence to execute their
duties diligently.
Table 4.6: Experience of Respondents in BK.
Experience Frequency Percentage
Less than one year 5 7.5
One year 21 31.4
More than one year 41 61.1
Total 67 100
Source: primary data, 2014
The Table 4.6 shows the experience of respondents in BK. As shown in that Table, 61.1%
of all respondents (41 respondents) passed in BK a period of more than one year while
40
31.4 % of all respondents (21 respondents) passed one year in BK. A small percentage of
respondents (7.5%) corresponding to 5 respondents passed a period less than one year in
BK. These findings indicate that there is labor stability and this can affect the progress of
the bank operations if adequately addressed.
4.2. Presentation, Analysis and Interpretation of Findings
4.2.1 Objective one was to assess the influence of investment in capital markets on
financial performance of BK ltd
Table 4.7: There is an Investment in Capital Markets by BK Ltd
Item Frequency Percentage
Strongly disagree 0 0
Disagree 2 3.0
Not sure 5 7.4
Agree 43 64.2
Strongly agree 17 25.4
Total 67 100
Source: primary data, 2014
The Table 4.7 shows that BK ltd as a leading bank in Rwanda with full awareness of the
importance of investment in capital markets in growing its financial performance as
shown by 60 respondents representing 89.6% of all respondents and this is agreed also by
Rwanda stock exchange hand book (2013) on role of capital market; this hand book also
says that capital market or stock exchange raise capital for business company. This means
that Investment in capital markets in B.K is made and practiced regularly as it shown in
B.K annual report, 2013, B.K is the second domestic company to be listed on the Rwanda
stock exchange in an IPO which was recognized at the best Africa listing by Africa
investor.
41
Table 4.8: Investment in the Capital Markets by BK and its analysis
Item Frequency Percentage
Strongly disagree 0 0
Disagree 0 0
Not sure 2 3.0
Agree 47 70.2
Strongly agree 18 26.8
Total 67 100
Source: primary data, 2014
The Table 4.8 shows that BK ltd practices the analysis and management of its investment
as shown by 47 respondents corresponding to70.2% of all respondents with agree and 18
respondents corresponding to 26.8% of all respondents with strongly agree. This is
confirmed also by capital markets annual reports 2012-2013 (in appendix). Capital
markets analysis in B.K is done and measured by increase in debt and equity issuance and
increase in volume of capital market transactions done in B.K. where the turnover was
20.2 billion in 2010-2011 respectively to 39.2 billion in 2012-2013 with an increase of
94%, the shares were 122.1billion shares in 2010-2011 respectively to 124.2 billion
shares in 2012-2013 with an increase of 2% and capitalization was 846.8 billion in 2010-
2011 respectively to 1,261 billion in 2012-2013 with an increase of 49%.
Table 4.9: Responses on whether investment in capital markets influences positively
financial performance of BK ltd
Item Frequency Percentage
Strongly disagree 0 0
Disagree 0 0
Not sure 2 3.0
Agree 49 73.1
Strongly agree 16 23.9
Total 67 100
Source: primary data, 2014
Table 4.9 shows that investment in capital markets influence positively financial
performance of BK ltd as shown by 49 respondents (73.1%) of all respondents. This is
42
also shown by the good performance of BK ltd from 2009 up to 2013 whereby the value
of share increased the same as performance has been increased. According to the National
Bank of Rwanda, Capital markets influence the performance of bank in mobilizing
savings, in capital formation, in Investment Avenue, provision, in fund mobilization and
regulation and continuous availability of funds.
4.2.2 Objective two was to determine the contribution of investment in capital
markets on financial performance of BK ltd
Table 4.10: Responses on existence of enough own capital
Item Frequency Percentage
Strongly disagree 20 29.8
Disagree 35 52.2
Not sure 12 18.0
Agree 0 0
Strongly agree 0 0
Total 67 100
Source: primary data, 2014
The Table 4.10 shows that BK ltd does not have enough own capital as it has been shown
by 55 respondents representing 82% of all respondents (52.2% with agree and 29.8% with
strongly agree). This is shown in B.K annual reports of each year ,where BK invest in
capital markets in order to raise capital to finance its activities and to achieve its
objectives as any other listed company on RSE thus capital markets raise capital for cross
listed business company by selling and buying securities.
43
Table 4.11: Responses on whether the level of profitability is high
Item Frequency Percentage
Strongly disagree 0 0
Disagree 0 0
Not sure 4 6.0
Agree 25 37.3
Strongly agree 38 56.7
Total 67 100
Source: primary data, 2014
The Table 4.11 shows that the level of profitability of BK ltd is high as revealed by 38
respondents representing 56.7% of all respondents with strongly agree and 25 respondents
representing 37.3% of all respondents with agree. Berger et al (2008) in his analysis of
capital structure and profitability, agree that the higher is the profitability of banks, the
higher will be their capacity to increase the own capital by accumulation. Erotic et all
(2002) also discover that these entities that prefer to finance their investment using equity
capital are more profitable that firms who finance using borrowed capital.
Table 4.12: Responses on whether the level of liquidity is high
Item Frequency Percentage
Strongly disagree 0 0
Disagree 0 0
Not sure 4 6
Agree 27 40.3
Strongly agree 36 53.7
Total 67 100
Source: primary data, 2014
Table 4.12 shows the state of liquidity of BK. The results shows that respondents in the
“Strongly agree” category took the largest portion, with 36 respondents representing
53.7%, of all respondents, While on the other hand the, “Strongly disagree and disagree”
category took the least portion with zero respondents .This is clear that BK as a leading
banking company is able to invest in capital markets and get liquidity to meet its current
obligations.
44
Liquidity for a bank means the ability to meet its financial obligations as they come due.
Al Said and Moose (1970) agree this; that capital markets can be a good source of
liquidity of firms that qualified to list their stocks on country‟ stock exchange and on the
other hand Agyei-Ampomah (2011) says that a country that its equity market is
segmented can‟t be able to provide enough liquidity required by investors.
Table 4.13: Responses on whether investment in capital markets is a relevant tool for
profitability.
Item Frequency Percentage
Yes 53 79.1
No 0 0
Not sure 14 20.9
Total 67 100
Source: primary data, 2014
Results from Table 4.13 shows that over 79.1% of respondents were of the view that
investment in capital markets are a relevant tool for profitability of BK ltd. However, few
respondents were not sure on whether investment in capital markets is a relevant tool for
profitability of BK ltd as revealed by 14 respondents representing 20.9% of all
respondents Thus investment in capital markets is a relevant tool for profitability of BK
Ltd. According to the Rwanda Financial sector development Program II I, 2012 , capital
markets are a source of financing for companies around the world.
Table 4.14: Responses on investment in capital markets promote financial performance of
BK ltd
Item Frequency Percentage
Yes 59 88
Not sure 8 12
Indifferently 0 0
Total 67 100
Source: primary data, 2014
The Table 4.14 revealed that BK use investment in capital markets to promote financial
performance as shown by 59 respondents representing 88% of all respondents. Capital
markets promote the financial performance of B.K because B.K is productive and
maintain its financial performance .Straub (1998) agree that a company is productive
when its money is used to purchase machines, buildings, equipment and tools to produce
45
goods and services. Capital markets promote the financial performance of a bank because
it is a vehicle for capital mobilization, it affect the DDP and GROSS fixed capital
formation and increase the economic growth.
4.2.3 Objective three was to analyze the relationship between investment in capital
markets and its impact on financial performance of BK ltd
Table 4.15: Responses about the benefits of investment in capital markets in BK ltd.
Item Frequency Percentage
Yes 54 80.6
No 2 3
Not sure 11 16.4
Total 67 100
Source: primary data, 2014
The Table 4.15 shows that BK gets benefits from investment in capital markets of
Rwanda as shown by 54 respondents representing 80.6% of all respondents, while the
least portion of 11 respondents representing 16.4% were not sure of the benefits that BK
gets from investment in capital markets of Rwanda .
According the wise GEK, Capital markets provide both new and existing businesses with
access to cash or capital. Businesses use this capital to cover day-to-day operating costs
and to finance expansions. The advantages of capital markets include job creation,
economic growth and technological innovation
Table 4.16: Responses about the tools used for financial performance measurement by BK
Item Frequency Percentage
Ratios 35 52
Trends 6 9
Comprehensive
income statement
26 39
Total 67 100
Source: primary data, 2014
The Table 4.16 revealed that BK uses ratios to measure the financial performance at great
extent as shown by 35 respondents representing 52% of all respondents; this is due to the
fact that ratios measure a lot of things concerning financial performance including
46
profitability, liquidity and capital return. Other great portion of 26 respondents
representing 39% stated that BK use comprehensive income statement to measure the
financial performance (profitability).This is approved by BNR annual report (2013-
2014),that state the keys performance ratios such as profitability ratios, liquidity ratios
and efficiency ratios as it is seen these ratios are appreciated in bank of Kigali‟s financial
performance measurement.
Table 4.17: Responses about whether investment in capital markets influences financial
performance of banks
Item Frequency Percentage
Yes 62 92.5
No 0 0
Not sure 5 7.5
Total 67 100
Source: primary data, 2014
The Table 4.17 shows the influence of investment in capital markets on financial
performance of banks as shown by 62 respondents representing 92.5% of all respondents,
investment in capital markets influence financial performance of BK ltd whereby profit
banks gained from investment in capital markets help BK ltd to finance its various
activities and thus improve its performance through increase of productivity and
expansion of the business by opening new branches. B.K annual report shows that 65 new
branches still expending and 1029 agents of agent network.
Table 4.18: Responses on whether there is relationship between investment in capital
markets and financial performance of BK ltd
Item Frequency Percentage
Yes 59 88
No 3 4.5
Not sure 5 7.5
Total 67 100
Source: primary data, 2014
The Table 4.18 shows that there is a big relationship between investment in the capital
markets and financial performance of BK ltd as shown by 59 respondents representing
47
88% of all respondents. Investment in capital markets and financial performance are
likely to improve and vice –versa .One affect another, there is a big improvement at all
levels in capital markets in bank of Kigali since the beginning up to now. This is
supported by Salted (2013) who assessed the impact of capital structure on performance
of banks and found a positive relationship between determinants of capital structure and
performance of banking industry, and that performance is measured by the return on
assets (ROA) return on equity(ROE) and earnings by share (EPS).
CMA annual report 2013 shows that the bank of Kigali remain the best capitalized bank
in the market with the ability to single hand eddy finance projects that would take a
syndicate of at least six other local banks to finance.; and it is committed to bringing its
banking services closer to business community in the East Africa region.
48
CHAPTER FIVE: SUMMARY, CONCLUSION AND
RECOMMENDATIONS
5.0 Introduction
In this chapter, the findings from chapter four are discussed; it comprises also conclusions
drawn and recommendations made in line with the research objectives. The purpose of
this study was to investigate the impact of investment in capital markets on financial
performance of organizations.
5.1 Summary of Findings
The study was conducted to establish the relationship between investment in capital
markets and financial performance of BK limited, and was based on a) to determine the
profile of respondents in terms of gender, marital status, education, position and
experience b) the amount of capital invested in capital markets c) the level of financial
performance in terms of profitability, level of liquidity, quality of assets d) relationship
between investment in capital markets and its impact on financial performance of BK
limited. In this section, findings about the research objectives are presented.
5.1.1 Research objective one was to establish the influence of investment in capital
markets on financial performance of BK ltd
The research question one was to establish the influence of investment in the capital
markets on financial performance of BK ltd. In testing this research objective, the results
revealed that the BK ltd uses profit gained from capital markets of Rwanda to finance its
activities as shown by 89.6% of all respondents (table 4.7). Consequently, that investment
in capital markets being invested by BK ltd has positively influenced its financial
performance as indicated by 97% of all respondents in the study (table 4.9).
49
5.1.2 Research objective two was to determine the contribution of investment in
capital markets on financial performance of the BK Ltd
The research objective two was to determine the contribution of investment in capital
markets on financial performance of the BK Ltd. It has been also revealed that the level
of profitability of BK ltd is high as shown by 100% of all respondents (table 4.11) and its
level of liquidity is also high because BK ltd is able to meet all of its obligations as shown
by 100% of all respondents (table 4.12). From the above, it is meaningful to note that the
investment in capital markets is a relevant tool for profitability of BK ltd as shown by
79.1% of all respondents (table 4.13) and contribute a lot (positively) to the profitability
(financial performance) of BK ltd as shown by 88% of all respondents (table 4.14).
5.1.3 Research objective three was to draw the relationship between investment in
the capital markets and financial performance of the BK Ltd
The research question three was to draw the relationship between investment in capital
markets and financial performance of the BK Ltd. In testing this research question, the
results revealed that there is a big positive relationship between investment in capital
markets and financial performance of BK ltd as shown by 88% of all respondents (table
4.18) and BK Ltd‟s annual financial reports because the gain from capital markets helped
the BK ltd to open new branches which helped BK to increase its productivity hence
improving profitability. BK Ltd has opened 65 new branches and 1029 agents of agent
network.
5.2 Conclusion
Investment in capital markets affect financial performance of BK Ltd thus it uses them to
finance its activities as shown by 89.6% of all respondents (table 4.7). Consequently, that
investment in capital markets being invested by BK ltd has positively influenced its
financial performance as shown by 97% of all respondents in the study (table 4.9). In
respect to the contribution of investment in capital markets on financial performance of
BK Ltd the investment in capital markets is a relevant tool for profitability of BK ltd as
shown by 79.1% of all respondents (table 4.13) and contribute a lot (positively) to the
profitability (financial performance) of BK ltd as shown by 88% of all respondents (table
4.14)..
50
In respect to relationship between investment in capital markets and financial
performance of BK Ltd there is a significant positive relationship between the two
variables because the results revealed that there is a big relationship between investment
in capital markets and financial performance of BK ltd as shown by 88% of all
respondents (table 4.18) and BK Ltd‟s annual financial reports because the profit gain
form capital markets helped the BK ltd to open new branches and agents of agent network
which helped it to increase productivity hence improving profitability. However,
investment in capital markets appeared positively to affect financial performance of BK
Ltd suggesting that investment in capital markets, financial performance is likely to
improve and vice versa.
5.3 Recommendations
In line with the findings and the main emerging issues from the study, the following
recommendations are hereby suggested: For effective financial performance, management
at BK Limited and other organizations should embrace effective use of investment in
capital markets to increase organizational resources.
To overcome the problem of the use of investment in capital markets, business
organizations should employ management methods such as internal controls and
investment analysis which would monitor systems and information flow in the
organization; thus making it easy to control organizational operations.
To overcome the problem of lack of adherence towards investment in capital markets,
management should spell out clearly the organizations objectives as enshrined in their
mission and vision statements and should integrate informal support into the formal
management system so that the less experienced personnel could be equipped with
investment in capital markets risk management skills. Support and investment in human
resource development is important for the acquisition of new skills.
Companies which have business of investing in capital markets like BK Ltd, should
introduce a new website related with capital market in order to facilitate everyone who
want to know any information related with capital markets.
51
For developing the business, BK Ltd have to encourage private sector to invest in capital
markets as an option for raising capital and to continue conducting trainings and
workshops on the existing laws and regulations of investing in capital markets.
The equity market in Rwanda is young and it is conducted under the auspices of Rwanda
stock exchange that is regulated by the capital markets advisory council (CMAC) of
Rwanda (CMA, 2013). Only four firms that have listed on the equity market in Rwanda
since the inception of the Rwanda stock exchange in 2005 and their performance has not
been impressive for some firms like KCB and MNG and specifically NMG.
One of the key challenges facing Rwanda‟s economy is the mobilization of long term
stable financing Rwanda‟s capital market is small and underdeveloped to enable public
and private sector accessing long term financing. In terms of Market depth/breadth, the
Rwanda capital market offers limited securities and products compared to other EAC
countries, equity investments dominate other asset classes such as sovereign and
municipal bonds, corporate bonds, and other convertible investments. The listings on RSE
are still limited. Also, the outstanding stock of treasury bonds is small at less than 1% of
GDP and a larger stock may enable the market to deepen and allow a fuller yield curve up
to 3, 5 and 7 years to develop and serve as benchmark for pricing of risk.
Rwanda still faces a challenge of low economic development though with great potential,
and its stock market is still underdeveloped with equity market having only four
companies listed with their securities listed and fewer realizations (RSE, 2013).
Investors in Rwanda are not comfortable for investing their funds in foreign companies
for issues like lack of assurance that their funds would be safe. The country‟s stock
exchange and the other stakeholders have to step up education of the investors and give
them assurance of the safety of their funds in case, they invest in foreign firms. This
should come with government policy that stipulates heavy penalties for firms that tries
not to safeguard investor‟s interests.
52
5.4 Suggest for further study
Due to constraints like suspicious respondent, objectivity of the study, subjectivity of the
respondent and financial resources, the study focused on the investment in capital markets
and financial performance of BK Limited.
Further research is thus recommended on the replica of this thesis to be conducted in
other areas and countries like Rwanda. This will help in establishing the general trend of
the investigated variables to improve on financial performance in business organizations
in East Africa.
Research should be conducted on other variables that may affect financial performance in
business organizations in East Africa and even beyond.
53
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56
APPENDICES
57
Authorization Letter
58
Blank Questionnaire
MOUNT KENYA UNIVERSITY
SCHOOL OF BUSINESS AND PUBLIC MANAGEMENT
DEPARTMENT OF BUSINESS ADMINISTRATION
Dear respondents:
This is a questionnaire designed to collect data on the investment in the capital markets
and financial performance of banking sector with BK LTD as a case study which was
used as an input for a thesis in a partial fulfillment of Masters Degree in business
administration with specialization of Accounting and Finance. Your genuine response is
solely used for academic purpose and the data will be treated utmost confidentiality.
Therefore, your kindly cooperation is appreciated in advance.
SECTION A: Profile of respondents
Tick the correct Answer
Qn1 Category of staff
1. Senior management
2. Lower level staff
Qn2 Your age group (in Years)
1. 20-30
2. 31-40
3. 41-50
4. 51-60
5. Above 60
Qn3 Your Gender
6. Male
7. Female
59
Qn4 Your education level
Primary
Secondary
University
Qn5 How long have you been a member of staff in BK ltd Capital markets?
a) Less than one year
b) One year
c) More than one year
SECTION B: Independent variable (investment in capital markets)
Tick the correct answer
1= Strongly Disagree 2= Disagree 3= Not sure 4 = Agree 5= Strongly Agree
B1.1 Investment in capital markets is made regularly 1 2 3 4 5
B1.2 Investment in capital markets is regularly
practiced in BK Ltd
1 2 3 4 5
B1.3 Investment in capital market‟s analysis is in
place
1 2 3 4 5
B2 Investment in capital markets is adhered to 1 2 3 4 5
60
SECTIONC: Dependent variable (financial performance)
C1.1 Enough capital exists 1 2 3 4 5
C1.2 Level of profitability is high 1 2 3 4 5
C1.3 Level of liquidity is high 1 2 3 4 5
C1.4 Level of profitability has been improved 1 2 3 4 5
Qn3 Do you think that investment in capital markets is a relevant tool for profitability? If
Yes, how?
………………………………………………………………………………………………
………………………………………………………………………………………………
……
Qn4 Do you think that financial performance has been improved for the last three years?
Briefly, justify your answer
………………………………………………………………………………………………
………………………………………………………………………………………………
……
Qn5 Do you think that investment in capital markets is promoting financial performance
of BK ltd?
-Yes
-No
-Indifferently
Qn6 Briefly explain the benefits of investment in capital markets on financial
performance.………………………………………………………………………………
………………………………………………………………………………………………
……………………
Qn7. What are the financial performance tools?
………………………………………………………………………………………………
………………………………………………………………………………………………
……
Qn8. Do you think that investment in capital markets influence the financial performance
of your organization? If yes in which ways
61
………………………………………………………………………………………………
………………………………………………………………………………………………
……
Qn9. Do you think that the BK Ltd financial performance is due to the practice of
investment in capital markets?
………………………………………………………………………………………………
………………………………………………………………………………………………
…..
Qn10. Is there any relationship between financial performance and investment in capital
markets used in BK Ltd?
………………………………………………………………………………………………
………………………………………………………………………………………………
…………………………………………………………………….
Qn11. What is the relationship between investment in capital markets and their
profitability companies cross listed on RSE?
………………………………………………………………………………………………
…………………………………………………………………………….
Qn12 .Is there any improvement of profitability due to the investment in the capital
markets by BK Ltd?
Thank you for your cooperation.
62
Table 19:
Trading
statistics on
RSE(equities)
Jun.09 -
Janv.010 Feb.010-june.010 Jul.-10-oct.-10 Nov.2010 Dec.2010 Jan.-11 Fev.-11 Mar.-11
Volume(No of shares) 76,300 22,000 14,000 45,500 2,000 13,300 13,520,700 10,884,900
traded
Turnover(Frw)or value 12,522,500 3,511,500 2,063,800 8,862,600 34,800 247,100 2,322,132 1,854,083,300
of transaction in money
terms
Numbers of Transactions 49 17 13 18 2 5 171 118
Numbers of Listed 1 1 1 2 2 3 3 3
companies
Apr.-11 May.-11 Jun.-11 Jul.-11 Aug.-11 Sept.11 Oct.-11 Nov.-11
Volume(No of shares) 5,060,700 4649900 6,879,900 1,860,200 564,000 19,699,800 8,839,400 33,873,700
traded
Turnover(Frw)or value 926,733,200 953,005,900 1,642,091,200 433,983,500 138,389,100 3,072,355,400 1,501,632,600 4,754,682,100
of transaction in money
terms
Numbers of Transactions 90 122 112 111 86 373 329 171
Numbers of Listed
companies 3 3 3 3 3 4 4 4
Dec.-11 Jan.-12 Feb.-12 Mar.-12 Apr.-12 May.-12 Jun.-12 July.-12
Volume(No of shares) 12,288,400 3,965,600 1,346,500 2,351,400 4,605,600 13,902,300 18,839,200 20,715,100
traded
Turnover(Frw)or value 3,195,172,500 614,038,900 290,070,900 420,193,100 702,571,000 1,896,914,300 3,135,180,600 3,350,898,400
of transaction in money terms
63
Source: CMA-annual report 2009-2013
Numbers of Transactions 106 130 109 88 151 171 158 138
Numbers of Listed 4 4 4 4 4 4 4 4
companies
Aug.-12 Sept.-12 Oct.-12 Nov.-12 Dec.-12 Jan.-13 Feb.-13 Mar.13
Volume(No of shares) 14,045,400 1,794,100 3,234,700 4,043,600 14,208,200 4,164,300 19,946,300 11,639,500
traded
Turnover(Frw)or value 2,661,142,400 325,792,300 602,530,700 917,310,400 3,159,063,100 1,499,671,400 3,796,280,500 8,343,444,700
of transaction in money
terms
Numbers of Transactions 173 106 154 134 124 189 187 197
Numbers of Listed 4 4 4 4 4 4 4 4
companies
Apr.-13 May.-13 Jun.-13 Jul.-13 Aug.-13 Sept.-13 Oct.-13 Nov.-13
Volume(No of shares) 3,346,800 23,651,500 3,438,900 1,946,300 5,130,800 10,082,400 14,409,800 4,787,400
traded
Turnover(Frw)or value 2,182,662,400 9,668,461,900 2,650,575,800 1,861,914,300 3,690,462,700 6,787,006,300 9,726,350,100 2,053,642,400
of transaction in money
terms
Numbers of Transactions 178 144 149 124 118 92 117 130
Numbers of Listed 4 4 4 4 4 4 5 5
companies
64
Financial highlights in BK ( B.K ,annual report 2013)
Financial highlights
In billion( in Rwf bn)
2009 2010 2011 2012 2013
1 Total assets (in b.n) 151.9 197.7 287.9 322.8 422.4
2 Customer deposits(in b.n) 109.5 135.7 181.1 211.9 280.5
3 Net interest income( in
b.n)
9.8 11.7 16.6 23.7 35.2
4 Gross loans (in b.n) 80.9 105.5 130.7 194.0 211.9
5 Shareholders‟ equity (in
b.n)
18.5 31.9 61.6 63.1 70.8
6 Operating income(in b.n) 16 21.2 29.5 38.3 53.8
7 Net profit 5.3 6.2 8.7 11.8 14.8