Levels of Lease Awareness among Managers Vis-À-Vis Small ...globalbizresearch.org/economics/images/files/81215_JEIEFB_ID_1106... · of this financing source and whether they involve

Journal of Emerging Issues in Economics, Finance and Banking (JEIEFB)

An Online International Research Journal (ISSN: 2306-367X)

2016 Vol: 5 Issue: 2

1889 www.globalbizresearch.org

Levels of Lease Awareness among Managers Vis-À-Vis Small and

Medium Enterprises (SMEs) Involvement in Lease Financing in

Rwanda- A Survey of Selected SMEs in Kigali

Ndizeye Idrissa,

Department of Management,

College of Business and Economics,

University of Rwanda, Rwanda.

E-mail: [email protected]

Abstract

In Rwanda, SMEs are among the pillars of the economic development. Nevertheless, they are

faced with the challenge of lacking access to finance. However, leasing is considered as an

appropriate source of finance for SMEs that do not have collateral required by banks for

traditional bank lending. It has to be known and used by those SMEs. The purpose of the

present study is to establish the relationship between the levels of lease awareness among

SMEs managers and SMEs involvement in lease financing in Rwanda. The study adopted a

cross sectional design combined with explanatory and survey designs. A sample of 70 SMEs

was selected from a population of 84 SMEs located in Kigali city using stratified random and

convenience sampling techniques. Data were collected using questionnaires and structured

interview schedules and analyzed using of SPSS and excel software. The findings showed that

there are no significant differences in the levels of lease awareness among managers of

selected SMEs across the sectors of activities. The overall level was found moderate. The

findings also showed that there are significant differences in the levels of SMEs involvement

in lease financing. However, even if there are significant differences in those levels, the

overall level was found low across all sectors of activities. It was as well found out that there

is a positive significant relationship between the level of lease awareness among SMEs

managers and the level of SMEs involvement in lease financing. It was recommended, among

others, that a Public Education Program should be put in place to help increase financial

literacy about leasing targeting especially all SMEs, lessors and potential investors. Lessors

and potential investors should sensitize SMEs to leasing. SMEs managers should make

maximum effort to inquire about various aspects of leasing so they can rationally maximise

leasing-created benefits.

___________________________________________________________________________

Key Words: Rwanda, Small and Medium Enterprises, Leasing awareness, Lease financing

mailto:[email protected]





1. Introduction

Small and medium-sized enterprises (SMEs) are the backbone of nations in mustering

economic development. While accounting for between 95% and 99% of total enterprises in

the majority of developing economies, SMEs are responsible for between 60% and 70% net

job creation in OECD countries (OECD, 2006). They are said to be key players in the

European Union economy in terms of their share in employment and value added (EBA,

2016). However, they are perceived to lack adequate financing, which hampers their growth

(Augusto de la Torre, 2009). Because of the high transaction costs and inability of SMEs to

provide collateral banks require, SMEs find themselves starved for funds at all stages of their

development ranging from start-up to expansion and growth (Bayene, 2002). In Rwanda,

SMEs comprise approximately 98% of the total businesses and account for 41% of all private

sector employment (MINICOM, 2012). Nevertheless, they are faced with the challenge of

lacking access to finance (IFC, 2009). This creates a challenge of finding an alternative

source of financing.

In an attempt to respond to the challenge resulting from the lack of access to finance,

lease has been identified as one of alternative solutions. According to International

Accounting Standards (ISA) 17, lease is defined as an agreement whereby a lessor conveys to

the lessee, in return for payment or series of payments, the right to use an asset (property,

plant, equipment, or land) for an agreed-upon period of time (Asif C. et al. 2015). IFC (2005)

stated that in different economies worldwide, leasing provides a means for delivering

increased domestic investment. As per IFC (1996) and Koh (2006), leasing involves a strong

security advantage for the lessor due to the ownership of the asset, security arrangements and

credit history provisions are easily met compared to bank loans. This is especially relevant to

SMEs since they often cannot offer good track records and collateral. They can therefore use

leasing as a substitute to bank credit

Leasing has been embraced different parts of the world. Leaseurope (2016) and Oxford

Economics (2015) said that in Europe, leasing has been a constant and reliable source of

support for millions of European SMEs even during times of economic crisis. In Asia,

according to Asian Development Bank (2007), leasing industry has been making an important

contribution to the economic development of the region by providing a financing tool to both

large enterprises and SMEs. In Africa, as stated by Leny V.O and Jacob L. (1999), leasing

arrangements in the Maghreb region of North Africa have played a significant role in

enabling small firms to equip their businesses when they lacked access to the capital to buy

the equipment they needed. In Rwanda, leasing practices are recent. According to IFC (2007),

leasing operations in Rwanda are regulated by a legal instrument enacted into law in 2005, the

law no. 06/2005 of 03/06/2005. This law established regulations and conditions governing





lease operations. IFC (2009) stated that as an alternative to traditional bank loans, leasing

offers a more flexible form of financing. It added that in many cases leasing is better suited to

the needs of private businesses with limited capital, or to new companies with limited credit

history.

Though leasing has been embraced in different parts of the world, the levels of awareness

among SMEs about leasing in developing countries are generally low and SMEs involvement

in leasing is accordingly affected. For instance, Mohamed A. (2006) noted that SMEs

awareness of leasing activities in Egypt was not very remarkable. The reason was that almost

half of the SME interviewees were not even aware of the existence of leasing companies in

Egypt. In its two surveys conducted in 2007 and 2009 to investigate the leasing market in

Rwanda and the market growth prospects, (IFC 2007, 2009) stated that the majority of

lessors were doing most of their business with large enterprises. These studies recommended,

among others, the adaptation of lessors’ leasing systems to conclude agreements with SMEs.

They also recommend the simplification of lease enabling environment to expand lease

market. According to OECD (2015), limited awareness and understanding about alternative

financing instruments on the part of startups and SMEs has slowed the development of these

markets.

Regarding SMEs involvement in lease financing in Rwanda, there is a lack of related

information. Atete R. M. (2009) stated that IFC was envisaging to carry out a survey on how

Rwanda’s SMEs had embraced leasing as an alternative source of capital. Such a study would

enable to offer perfect solutions and programmes for supporting SMEs’ growth. But no

related publications were found as a proof that this study was done. The most recent lease

market assessment was done by AFR (2014) and found out that, in general, lease uptake is

low. But, the findings do not single out a particular case of SMEs. This implies that, in

Rwanda, little is known about lease awareness among SMEs managers since SMEs

involvement in lease financing is not known. Hence, there is a gap that has to be bridged. The

contribution of this study is to determine the levels of lease awareness among SMEs

managers and of SMEs involvement in lease financing and to examine the relationship

between them so as to help bridge the gap.

2. Statement of the Problem

SMEs are found in every sector of the economy. They are crucial for sustained, long term

growth and employment (MacDonald, 2007). In Rwanda, SMEs constitute the majority of

entities owned by the private sector. However, they are faced with the lack of access to

finance (IFC, 2009). This obstacle constitutes an indisputable hindrance to the development

and growth of Rwandan economy in general and of SMEs in particulars.





A report published by the Private Sector Federation in Rwanda (PSFR) (2008), citing

previous study by the Center for the Support of Small and Medium Enterprises in Rwanda

(2007), shows that, majority of established SMEs file for bankruptcy. The majority of start-

ups fail in their first two years of operation. Only less than 25% of their businesses expand

their business.

The lack of access to adequate finance may be one of the causes of this considerable

failure of SMEs. However, IFC (2009) and AFR (2014) put it that leasing, as an alternative

to traditional bank loans, offers a more flexible form of financing. It stated further that this

form of financing is, in many cases, better suited to the needs of private businesses with

limited capital especially SMEs. What remains unclear is whether SMEs managers are aware

of this financing source and whether they involve the SMEs they are in charge of in leasing

financing. The current study provides facts regarding such a concern by examining the levels

of lease awareness of SMEs managers and SMEs involvement in lease financing so as to

benefit from this alternative source of financing if need be. This is done considering different

sectors of activities in which considered SMEs operate. In this line, the study pursue as

general objective, to ascertain a relationship between the level of lease awareness among

managers and the level of involvement in lease financing among selected SMEs from the

lessees’ perspective with the following specific objectives:

1. To determine if there are cross-sectoral significant differences in the levels of lease

awareness among managers of selected SMEs.

2. To examine if there are cross-sectoral significant differences in the levels of

involvement in lease financing in selected SMEs.

3. To analyse the relationship between the level of lease awareness among managers and

the level of involvement in lease financing in selected SMEs

3. Literature Review

Leasing is considered as one of asset-based finances and lease financing consequently,

influences the capital structure of a firm that uses it as a source of finance. Therefore, it is

sound to mention certain theories and models of capital structure relevant to the current study

as they have been suggested by various theorists. These theories help to justify the choice of

the study variables. They include pecking order theory and tradeoff theory. Furthermore,

other relevant studies done so far are reviewed in order to highlight the relationship between

variables and existing gaps that is to be filled by the current study.

The pecking order theory, by Myers and Majluf (1984), put it that under asymmetric

information, the firm follows a pecking order in raising money. First of all, a firm raises

finance internally using retained earnings, then finances itself with debt and finally sells stock

to raise money. The need for information had been emphasized on before by Stiglitz (1969)





who argued that when a financial market is not distorted by imperfect information, among

others, or any other friction which limits access to credit, investors will be able to costlessly

replicate a firm’s financial actions. Karolin K. and Lars N. (2010) supported this position by

stating that small businesses can exploit reduced asymmetric information and increased

bargaining power to obtain more favorable loan terms. Therefore, it can be inferred that for

better lease financing decision, SMEs managers must have adequate awareness of various

leasing related aspects such as lease market, lease enabling environment and lease structure.

The tradeoff theory by Modigliani and Miller (1958) supports the opinion that leasing

leads to tax allowable and thus high financial performance. It adds that additional debt

reduces agency cost, frees cash flow for use in making interest payments. The theory is

supplemented by Smith and Wakeman (1995) who stated that as the acquisition of judicial

ownership is optional in leasing contract, the firm can avoid transaction costs due to retrading

the good on the second market. They concluded that small-sized firms would probably use

leasing more frequently. This conclusion does not contradict Krishnan and Moyer (1994) who

put it that firms with real debt capacity should use leasing more frequently. All these facts

justify the need for SMEs to get involved in lease financing. The next three paragraphs focus

on the relationship between the study variables as documented in reviewed sources.

OECD (2015) argued that a lack of awareness and understanding in leasing in particular

and financial instruments in general on the part of SMEs or the public constitute one of the

major barrier to the use or development of leasing and those financing instruments. Whereas

these authors blame the lack of lease awareness, other authors bring in the raising of lease

awareness for SMEs to benefit from lease financing. OECD (2014) and Leaseeurope (2016)

noted that the rise or the raising of lease awareness has led to the significant increase in lease

financing demand by SMEs. All the above views help to relate lease awareness and SME

involvement in lease financing directly. However, the relationship between both variables can

be apprehended by considering such major sub-constructs of lease awareness as market lease

awareness, lease enabling environment awareness and lease structure awareness just it is

highlighted in the next paragraph.

IFC (2005) and IFC (2009) pointed out that the development of leasing market has had

strong positive impacts on private sector development particularly in the SME. AfDB (2013),

IFC (2014), Stewart K. P. (2015) and ED White (2016) argued that a sound legal framework,

which is an aspect of lease enabling environment, is a must to attract SMEs to leasing

industry. Oxford Economics (2015) put it that the price of financing an asset, which is an

aspect of lease structure, via leasing relative to other forms of finance remains the most

popular reason for SMEs to lease. In general, OCC (2014) highlighted that, to ensure a safe

and sound leasing business, a strong leasing department should exhibit the expert knowledge





about various aspects of market, expertise and experience with lease structure and lease

enabling environment aspects.

All the above statements help confirm the existence of a relationship between such sub-

constructs lease as lease market, lease enabling environment and lease structure and SMEs

involvement in lease financing. This constitutes a strong argument confirming the existence

of relationship between the levels of lease awareness and SMEs involvement in lease

financing. However, the above-mention authors’ statements do not give a statistically

measured relationship between these levels. The current study is intended to tackle this

aspect. Despite that, it is a must to review different studies done previously so as to highlight

the gap in them and prove the relevance of the current study. This task is done in the details

bellow.

IFC (2007 and 2009) conducted two surveys to investigate the leasing market and the

market growth prospects in Rwanda in 2007 and 2009. They also examined the then

prevailing lease enabling environments. Both surveys were sourced from available

publications, desk research, and interviews with public and private sector industry

stakeholders. The findings indicated leasing activities started in 2006. Financial institutions

that were providing leasing products rose from 3 in 2006 to 7 in 2009. The leasing volume

worth shifted from slightly over $12 million in 2007 to slightly over $20 million in 2009. The

construction and plant and equipment sectors attract leasing most. The lease enabling was not

conducive. It recommends, among others, the simplification of lease enabling environment to

expand lease market. These findings agree with Ed White (2016) who argues that leasing is

still at its infant stage in Africa except in South Africa.

In both surveys above, it can the research methodologies used were not clearly explained.

More precisely, the population, sampling techniques, sample size and data analysis techniques

are not clearly indicated. This renders their findings and conclusions scientifically

questionable. Added to that, they consider lessor’s perspective. Moreover, they fail to

address the level of awareness among SMEs managers concerning lease market and lease

enabling environment and the level of SMEs involvement in lease financing. They also fail to

establish the relationship between both aspects. This study is intended, based on clearly

explained scientific methodology, to bridge the gap by investigating those ignored aspects

with an emphasis on the particular case of SMEs reflecting the lessees’ perspective.

The most recent study available about lease market in Rwanda was conducted by AFR

(2014) to assess market and review the legal environment for the leasing products in Rwanda

in 2014. Interviews with relevant different stakeholders were conducted. The study found out

that the leasing market in Rwanda is still young, the current uptake of leasing products is at

low level and the enabling environment is not yet adapted to the sector’s requirements. These





concur with IFC (2007 and 2009). The study concluded that there is a potential leasing market

and recommended active lobbying for an enabling legal environment so as to pave the way

for leasing products. The report does not indicate clearly the methodology used. The findings

reflect a general overview regarding involvement in lease financing whereas there is need to

discriminate from stakeholders. The study does not statistically tackle lease awareness aspect

or its relationship with involvement in leasing. The present study handles these lacunas

focusing of SMEs.

A study was conducted by World Bank and IFC (2010) to provide a preliminary analysis

of leasing markets in the Middle East and Northern Africa (MENA) region. The study

revealed that the average size of leasing markets in MENA is small, but there are significant

differences across countries. It also pointed out that leasing has a great potential in MENA

since it can complement and even replace bank financing, especially for SMEs. This agrees

with Deloof et al. (2007) (Elidiana B. and Fatbardha M., 2013) who argued the leasing is a

substitute for bank loans for SMEs. The study concludes that despite the larger than reported

size, leasing markets in MENA remain relatively undeveloped. This study neither explains its

methodology and nor addresses the issue of lease awareness in relation to SMEs involvement

in lease financing. The current study intends to address those deficiencies.

David J. O. (2014) analyzed public awareness and perceptions on foreign land leases of

200 randomly selected respondents residing in Tana Delta, Kenya. He used binomial logit

model and descriptive measures. The results showed that there was low awareness on specific

types of lease investments. This is in line with Kemal (2012) who pointed out that lack of

public awareness in leasing is one of the constraints that led to the underdevelopment of

leasing. The study recommends publicity and promotion of literacy and modern Information

Communication Technologies as strategies that enhance awareness. This study tackles the

aspect of lease awareness but it does discriminate among respondents and it is limited to one

category of leases. The current study focuses on SMEs and the whole leasing sector.

To investigate the relationship between lease structure and perceived performance of

SMEs in Uganda, Kampumure J.(2009) conducted a cross sectional study on 132 SMEs

selected using convenience sampling in Kampala District. The results of the study indicate

that there is a significant positive relationship between leasing structure and perceived

performance. This was considered as convincing empirical evidence that developing leasing

structure impacts on the bottom and top-line of a firm which leads to improved performance

of SMEs. This is in line with EBRD (2011), Md. Abdus Salam (2013), and Oxford

Economics (2015) argued that leasing has a positive impact on SMEs performance in

different ways. However, for a certain level of lease structure to be achieved, a certain level

SMEs involvement in lease financing is necessary. Without lease awareness among SMEs





managers, involvement in leasing may not probably take place. These aspects of lease

awareness and involvement in lease financing are not taped by this researcher. They

constitute the concern of the current study.

Ms. Mandeep K. and Pooja O. (2016) analyzed the financial statements of a company

with the objective of ascertaining the effect of lease structure on the profitability of the

company as well as study the effect of lease on financial statements of company. Ratio

analysis technique was used. The study found out that the current ratio is higher in operating

lease than finance lease. This is in conformity with IASB (2016) who put it that the size of the

increase in operating profit, and finance costs, depends on the significance of leasing to the

company and the length of its leases. The study concluded firms using operating lease are

generally having good short term financial strength. This study somehow highlights the need

for business entities to get involved in lease financing by showing the effect of lease structure

on the performance of an entity. However, it does not specify whether the company is an

SMEs or a large enterprise and it relies on secondary data only. The current study focuses on

SMEs and relies on both primary and secondary data.

A study on a sample of 53 SMEs selected randomly and purposively from 106 SMEs

located on Munshiganj and Kushtia in Bangladesh was conducted by Md. Abdus Salam

(2013). The study was intended to study the relationship between lease finance and firm

performance in selected SMEs. Through simple regression statistics, the study revealed a

significant positive linear correlation between lease finance and ROA for SMEs. This

confirms the view Smith and Wakeman (1995), Sharpe and Nguyen (1995), EBRD (2011),

and Oxford Economics (2015) who argued that leasing has a positive impact on SMEs’

performance in different ways. The study recommends SMEs to get consistently involved in

the lease financing practices. Even though the study highlights the need for SMEs

involvement in lease financing by revealing a positive effect of leasing on their performance,

it neither tackles the aspect of lease awareness among the SMEs under study nor relates it to

their involvement in lease financing. The current study deals with this aspect.

To get a better understanding of how European SMEs use leasing, Oxford Economics

(2011&2015) conducted 2 surveys. One was conducted in 2010 and another in 2013, with

estimates for 2014, which was conducted throughout August-September 2014. By means of

telephones, 3,000 SMEs were interviewed across 9 industrial sectors and 8 countries. The

reports pointed out that leasing was more used by European SMEs than any individual form

of bank lending. Of the SMEs surveyed, 40.3% in 2010 and 42.5% in 2013 used leasing. In

2014, the proportion was estimated to have risen further to 50.7%. This level, compared to the

level of lease in Africa as per Ed White (2016), is by far higher. The surveys concluded that

leasing is a vital source of finance for SMEs. They recommended ensuring that European





SMEs can invest and expand in the future. Although both surveys highlight the levels of

SMEs involvement in lease financing in different periods in Europe, they do not show how

these levels are related to the lease awareness amongst those SMEs. This aspect is tackled in

the current study

A study conducted by Md. Mosharref H. (2013) was intended to investigate how as an

alternative financing mechanism, leasing can be the useful tool in facilitating greater access to

finance for SMEs. 60 SMEs purposively selected from five Districts in Bangladesh as a

sample were interviewed. The results of the study showed that out of 46.67% of SMEs that

got access into formal financial institutions, only 7.14 per cent of the enterprises obtained the

lease facilities. In comparison to European country where, according to Oxford Economics

(2015), SMEs using leasing reached 42.5% in 2013, the results prove that the level of SMEs

involvement in lease financing is low in the 5 Districts of Bangladesh under study. The study

recommended the development leasing sector as a means of delivering financial products and

providing SMEs with access to finance that would otherwise be impossible. The study does

not tackle the either the level of lease awareness or related it to that level of SMEs

involvement in leasing. This is the concern of the current study.

Elisabeth K. and Peter H. (2008) conducted a study to analyse the relevance of leasing in

Central Eastern Europe (CEE) and South Eastern Europe (SEE) in comparison to bank loans

and give an overview of the industry structure of leasing providers. The study revealed that

leasing was seen to be a good substitute to credit taking, especially for SMEs, leading to

higher financing rates. This agrees with Deloof et al. (2007) (Elidiana B. and Fatbardha M.,

2013) and (EBA: 2016) who consider leasing as a substitute for bank loans. The study

concludes that leasing provides a viable alternative to bank loans and therefore, deserves

more attention by market participants, supervisors and researchers. This study fail to give the

methodology followed. It recognizes the need for SMEs involvement in leasing but it does

deal with how SMEs have embraced lease financing. These lacunas are dealt with in the

current study.

All in all, the reviewed existent literature shows that leasing proved to be especially an

important source of finance for SMEs worldwide. However, researches conducted particularly

in Rwanda were limited to the investigation of leasing market, market growth prospects and

lease enabling environment from the lessors’ perspective. Though this review is not

exhaustive, it can be concluded that there is no prior comprehensive research that has been

conducted in Rwanda to examine the level of lease awareness among managers and the level

of SMEs involvement in lease financing and established the relationship between both levels.

This constitutes a gap that this study is intended to fill in.





4. Methodology

4.1 Research Questions and Hypotheses

(i) Awareness among managers across the sectors of activities in which SMEs under

study operate.

(ii) There are no significant differences in the levels of involvement in lease financing

across the sectors of activities in which SMEs under study operate.

(iii) There is no significant relationship between the level of lease awareness among

managers and the level of involvement in lease financing among SMEs under study.

4.2 Research Design

A cross sectional design was used together with the explanatory research design to

answer the research questions. It also employed a survey design mainly having managers of

SMEs as the primary respondents.

4.3 Variables and their Measurement

Those variables included the levels of lease awareness among managers and the levels of

SMEs involvement in lease financing. They were measured using a 4-point Likert scales of

strongly agree (4), agree (3), disagree (2) and strongly disagree (1). The level of lease The

research questions for which the study will seek to answer are as under:

1. Are there any significant differences in the levels of lease awareness of managers

among sectors of activities where the SMEs under study operate?

2. Are there any significant differences in the levels of involvement in lease among

sectors of activities where the SMEs under study operate?

3. What is the relationship between the level of lease awareness of managers and the

level of involvement in lease among selected SMEs?

The corresponding hypotheses that have been tested in this research are as follows:

There are no significant differences in the levels of lease awareness among managers was

measured considering lease market awareness, lease enabling environment awareness and

lease structure awareness. The level of SMEs involvement in lease financing was measured

considering lease financing level, lease inquiry level, lease requirement fulfillment level and

information dissemination level.

4.4 Scope of the Study

The study focused on lease awareness and SMEs involvement in lease financing. Lease

awareness was examined considering lease market awareness, lease enabling environment

awareness and lease structure awareness. SMEs involvement in lease financing was examined

considering lease financing, lease inquiry, lease requirements fulfillment and lease related

information dissemination. Geographically, the study was carried out on Rwandan territory





specifically in Kigali because the majority of SMEs operate in Kigali and the highest

percentage of lease volumes (90%) country wide was found there.

4.5 Data Reliability

The researcher performed Cronbach’s alpha tests reference on the Likert scales that was

used in the instrument. This was intended to ensure reliability of the instrument and build

confidence that the instrument yielded good results. The table below shows the findings.

Table 1: Reliability Co-efficients

Variables Cronbach’s alpha coefficients

Levels of lease awareness among managers 0.9206

Levels of SMEs involvement in lease financing 0.8547

Source: Primary data

The table 1 shows that Cronbach’s alpha coefficients are above the acceptance standards.

This based on Sekaran (2006) who indicated an acceptance standard of 0.5. Therefore, the

Likert scales used to measure the variables were consistent and reliable.

4.6 Data and Population and Sampling

The study relied on both secondary and primary data. Secondary data were collected from

different books, internet, reports, journals and government publications depending on their

relevance to the research topic. Primary data were obtained using self- administered

questionnaires and interview schedules from respondents constituting a sample of 70 SMEs

managers selected from a population of 84 SMEs located in Kigali city. The sample size

determination followed the Sloven’s formula of sample size determination. The formula is

n=

)(2

1 eN

N

where the sample size (n) was determined from a given population (N) at a

95% confidence level and 5% margin of error (e) by means of related statistical table. The

sample size then was calculated as follows: 4.69)05.0(841

842

n . This figure was

rounded to 70 since respondents cannot be expressed by means decimals. This was as

suggested by Krejcie, R. V., & Morgan, D.W. (1970) who suggested a sampled size of 70

respondents for a population ranging from 80 to 85.

The sample was selected using a combination of purposive, convenience and stratified

random sampling techniques. Purposive sampling was used to select managers from other

employees because the former were most taught to detain information relevant to the study.

Stratified random sampling made it possible to select randomly respondents who had been

proportionally grouped into strata based on SMEs’ sectors of activities. From these strata,

respondents had equal chance to be selected. Since the researcher had gotten telephone

contacts of SMEs’ managers obtained from Private sector Federation in Rwanda, convenient

sampling techniques required to call SMEs managers so as to arrange conveniently an





appointment in advance. Although the respondents in the strata had equal chance be selected,

only those who gave the appointment were considered.

4.7 Statistical Tools

Mean was applied as statistical tool to describe data. The one way ANOVA test and

multiple comparison analysis were used to determine whether there are any significant

differences in levels of lease awareness among managers and the levels of SMEs involvement

in lease financing across the sectors of activities. The correlation analysis and regression

analysis were also used to measure the relationship between two variables.

5. Results and Discussion

5.1 Levels of Lease Awareness among SMEs Manager

The first objective seeks to determine if there are cross-sectoral significant differences in

levels of lease awareness among managers of selected SMEs. The table bellow shows those

levels as they are determined with the help of mean interpretation. It also shows the ANOVA

test for measuring the level of differences across the sectors. Depending on the responses

given by the respondents as to the extent of their agreement or disagreement with the

statements, the levels are identified as whether very high, high, moderate or low. The interval

for each range is 0.75 calculated as (4-1)/4. The interpretation of the responses given is as

follows:

Range Responses given Interpretation

3.26 - 400 Strongly Agree Very high

2.51- 3.25 Agree High

1.76 - 2.50 Disagree Moderate

1.00 – 1.75 Strongly Disagree Low

The following table contains the indicators and related statistics and interpretations

corresponding to the levels of lease awareness among managers.

Table 2: Difference in the levels of Lease Awareness across the Sectors

Sectors of activities Mean F Significance Interpretation

Agro Industry and Food Processing 1.85

Construction, Building materials, manufacturing

and Property Developer 2.40

Energy, Water and Environment 2.17 .794 .634

No significant

differences

Handicraft 1.56

Hides and Skins 1.50

Hotels and Guest Houses 2.50

Information Communication Technology 1.75

Transport and Logistics 2.00

Mining 2.00

Financial Institutions 2.25

Other Manufacturing Units 1.50






From the table 2 it can be noted that the levels of lease awareness among managers of

SMEs across the indicated sectors are on one hand moderate and low on the other hand since

no mean is above 2.50. Nowhere the levels are high or very high. Therefore, it can be

inferred that SMEs managers do not have enough information about lease. These findings are

line with the findings in Egypt, an African country like Rwanda, where M. Mohamed A.

(2006) found out that SMEs awareness of leasing activities was not very remarkable. They

also concur with OECD (2015), who pointed out limited awareness and understanding about

alternative financing instruments on the part of startups and SMEs.

Apart from showing the levels lease awareness among SMEs managers, the findings also

prove that those managers are somehow faced with information asymmetry regarding finance

sources. This should not be considered as hindrance to the concerned managers since,

according to, Vasantha R.C. and Shantaram P.H. (2010), the lessee firms with higher

information asymmetry can employ more leasing. However, Karolin K. and Lars N. (2010)

are of the view that small businesses can exploit reduced asymmetric information and

increased bargaining power to obtain more favorable loan terms. This implies that, in any

case, information about various leasing aspects is needed for relevant financing decision.

Concerning the testing of the hypothesis, the ANOVA test, as shown in the very same

table, indicates a level of significance of 0.634. This level means that, according to Gerard

Keller (2015), there are no significant differences in the levels of lease awareness among

managers of selected SMEs across the sectors of activities. Therefore, the hypothesis stating

that there are no significant differences in the levels of lease awareness among managers

across the sectors of activities where SMEs under study operate is confirmed. This conveys

that the level of lease awareness is, in general, the same among SMEs managers across the

sectors of activities.

Although there are no significant differences in the levels of lease awareness among

managers across the sectors of activities, it worth noting that the corresponding levels are not

the same. Hotels and guest houses sector shows the highest level with a mean of 2.50. It is

followed by construction, building materials, manufacturing and property development

sectors with a mean of 2.40. The lowest levels are found in hides and skins and other

manufacturing units where the level of each sector has a mean of 1.50. The interview with

respondents revealed that the absence of sameness in the awareness levels is mainly due to the

educational back ground and personal ability of SMEs managers to enquire themselves about

finance instruments and not necessarily to their experience with involvement in lease

financing. Had the respondents been involved in lease financing, their awareness level might

probably have been better. The next section enabling to apprehend the levels of SMEs

involvement in lease financing helps to back this argument.





5.2 About the Levels of SMEs Involvement in Lease Financing

As the second objective seeks to examine if there are cross-sectoral significant differences

in levels of SMEs involvement in lease financing, the following table shows those levels as

they are determined using the mean interpretation. The ANOVA test for measuring the level

of differences across the sectors is also shown it the very same table. The levels are identified

as whether very high, high, moderate or low depending on the responses given by the

respondents as to the extent of their agreement or disagreement with the statements. The

interval for each range and interpretation of the responses given are as explained in the

previous section.

Table 3: Differences in the Levels of SMEs Involvement in Lease Financing across the Sectors

Sectors of activities Mean F Significance Interpretation

Agro Industry and Food Processing 1.00

Construction, Building materials

manufacturing and Property Developer 1.00

Energy, Water and Environment 1.00

Handicraft 1.00

Hides and Skins 1.00

Hotels and Guest Houses 2.00 5.433 .000

Significant

differences

Information Communication

Technology 1.00

Transport and Logistics 1.00

Mining 1.00

Financial Institutions 1.00

Other Manufacturing Units 1.00 Source: Primary data

The findings in table 3 show that the levels of SMEs involvement in lease financing are

low across all the indicated sectors of activities since each of them has a mean equal to 1. The

only exception is for Hotels and Guest Houses having moderate level with a mean equal to 2.

High and very high levels are found nowhere. Therefore, it can be deducted that SMEs

involvement in lease financing generally low. These findings concur with AFR (2014) which

indicated, in general, that lease leasing uptake is low in Rwanda. The only difference is that

the findings of the current study particularly focus on SMEs. Furthermore, the findings do not

contradict that, according to (IFC 2007 & 2009), the majority of lessors were doing most of

their business with large enterprises. Examined in the lens of the tradeoff theory suggested by

Modigliani and Miller (1958), the findings enable to note that by failing to get involved in

lease financing, SMEs loose advantages arising from leasing-related tax allowable and that

would thus lead to better financial performance.

In addition, the foregoing findings prove that though IFC (1996) and Koh (2006)

considers leasing as especially relevant to SMEs while Leaseurope (2016) considers it a

reliable and vital source of support for SMEs, it has not yet become either especially relevant





or vital for SMEs in Rwanda. The findings also help to note that leasing industry in Rwandan

SMEs’ sector is contrary to that of Europe where, as per Oxford Economics (2015), leasing

has been a constant and reliable source of support for millions of European SMEs even during

times of economic crisis. This raises a challenge to be addressed by the Government of

Rwanda since SMEs play, as per MINICOM (2012), an important role in Rwandan economy.

Regarding the testing of the hypothesis, the ANOVA test, as it can be noted in the table ,

shows the level of significance equal to 0.000. According to Gerard Keller (2015), this level

of significance implies that there are significant differences in the levels of SMEs

involvement in lease financing across the sectors of activities. The hypothesis stating that

there are no significant differences in the levels of SMEs involvement in lease financing

across the sectors of activities where SMEs under study operate therefore, is rejected.

All the previous findings being well considered, MINICOM (2012) indicated that SMEs

in Rwanda comprise approximately 98% of the total businesses and account for 41% of all

private sector employment in Rwanda. Yet, IFC (2009) said that they are faced with the

challenge of lacking access to finance whereas leasing is said to be a particularly suitable

source of funds for SMEs. Therefore, the low level of SMEs involvement in lease financing

constitutes a handicap to the economic growth and development in Rwanda. Unless the

causes of this low level are known, nothing can be done to address such a concern. The

current study intends to show if the low levels of lease awareness are among the causes of the

low level of SMEs involvement in lease financing in the next section. This is done by

establishing the relationship between the variables involved.

5.3 Relationship between Lease Awareness and SMEs Involvement in Lease Financing

This relationship is analysed using Correlation analysis and regression analysis and

analysis of variances because combining them enables to have a deeper understanding of the

findings.

5.3.1 Correlation Analysis

The third objective is concerned with the analysis of the relationship between the levels of

lease awareness among managers and involvement in lease financing in selected SMEs. The

next table contains related details.

Table 4: Pearson’s Correlation Analysis of Independent Variable Vs Dependent Variable

Variables correlated Level of Lease Awareness

among managers

Level of SMEs

Involvement

Level of Lease Awareness

among managers Pearson Correlation 1.00 .325**

.007

Level of SMEs involvement Pearson Correlation .325** 1.00

.007

**. Correlation is significant at the 0.01 level (2-tailed) Source: Primary data





The table 4 shows the Pearson’s correlation coefficient of 0.325 at the level of

significance of 0.007. Based on Gerard Keller (2015)’s interpretation, this coefficient found

means that the relationship between the two variables is significant. The level of significance

of 0.007, which is less than 0.01, implies that the hypothesis stating that there is no significant

relationship between the level of lease awareness among managers and the level of

involvement in lease financing among SMEs under study is rejected. Instead, there exists a

significant relationship between both variables. Then, the implication this relationship is that

the raising the level of SMEs involvement in leasing requires to raise the level of lease

awareness among managers of SMEs.

On one hand, the findings agree with OECD (2015) and Kemal (2012)’s arguments that a

lack of awareness and understanding in leasing on the part of SMEs or the public constitute

one of the major barrier to the use or development of leasing. This implies that the use of

leasing by SMEs in limited by leasing-related level of awareness and understanding. The

findings also are in line with OECD (2014) and Leaseeurope (2016)’s words that the rise or

the raising of lease awareness has led to the significant increase in lease financing demand by

SMEs. The findings also permit to value the relevance of information as highlighted by Myers

and Majluf (1984) in his pecking order theory who argued that the financing decision depends

on how asymmetric the information for the firm.

On the other hand, the findings enable to infer that the low level of awareness about such

major attributes of leasing as lease structure, lease market and lease enabling environment can

lead to lower level of SMEs involvement in lease financing that in end undermines their

performances. This is true because Kampumure J. (2009) found out a significant positive

relationship between leasing structure and perceived performance of SMEs. Even IASB

(2016) put it that the size of the increase in operating profit depends on the significance of

leasing to the company and the length of its leases while Md. Abdus Salam (2013) pointed out

a significant positive linear correlation between lease finance and ROA for SMEs.

Furthermore, Office of the Comptroller of the Currency (2014) highlighted that, to ensure a

safe and sound leasing business, a strong leasing department should exhibit the expert

knowledge about various aspects of market, expertise and experience with lease structure and

lease enabling environment aspects.

5.3.2 Regression Analysis

Regression analysis helps to find out the extent to which lease awareness among managers

predict SMEs involvement in lease financing. The results are presented below.





Table 5: Regression of Lease Awareness on SMEs Involvement in Lease Financing

Model R R Square

Adjusted R

Square Std. Error of the Estimate

1 .325 .106 .092 .233


The results in table 5 provide a summary model in which the R square for the regression

model is 0.106. According to Andy Field (2005), R square shows the amount of variation in

one variable that is accounted for by another variable. Under the current study, it means that

the level of lease awareness among managers account for 10.6 percent of the total variation in

SMEs involvement in lease financing. The table indicates an adjusted R squared of 9.2 per

cent constituting a more rigorous test of total variation. It also shows the coefficient of

correlation R of 0.325 indicating the strength of relationship between the variables. This R

implies medium positive correlation between the levels of lease aware among managers and

SMEs involvement in lease financing. This corroborates the results of correlation analysis

where the same coefficient is determined at 0.007 level of significance.

5.3.3 Analysis of Variances

The ANOVA applied here, according to Andy Field (2005), helps to assess the statistical

significance of the overall regression models. The table below provides related results

Table 6: ANOVAb

Model Sum of

Squares

df Mean

Square

F Sig.

1 Regression .417 1 .417 7.702 .007a

Residual 3.523 65 .054

Total 3.940 66

a. Predictors: (Constant), Level of lease awareness among managers

b. Dependent Variable: Level of SMEs involvement in lease financing


The table 6 shows the ANOVA where F ratio for the regression models is 7.702. F ratio

helps to assess the statistical significance of the overall regression models. The larger the

ratio, the more the variance in the dependent variable is explained by the independent

variable. The ratio found in this study indicates a medium model significant at 0.007 levels.

This level means that the chances that the results of regression model are due to random

events instead of true relationship between variables are 0.7%. This level is by far lower than

the standard level of 5%. The overall regression results are shown in the ANOVA table.

These findings confirm what has been determined previously by means of Pearson’s

correlation analysis.





5.4 Reasons for Non Involvement of SMEs in Lease Financing

There are certain reasons that hamper SMEs involvement in lease financing. The

following table recapitulates the reasons, among others, indicated by the respondents through

the interview schedule.

Table 7: Respondents’ Reasons for Non Involvement of SMEs in Lease Financing

Reasons Frequencies Percentages

Lack of sufficient credible lease market information 66 94.3

Absence of close collaboration with lessors with regard to leasing

product

66 94.3

Our low level of commitment to get leasing related information 54 77.1

Use of bank loans 53 75.7

Lack of conducive lease enabling environment 40 57.1

Inadequate knowledge about leasing in general 26 37.1

The nature of our activities not requiring expensive equipments 19 27.1

Reliance on our own equity (financial self-reliance) 12 17.1

Security enjoyed from owning our own assets 4 5.7


The table 7 shows the reasons behind SMEs non involvement in lease financing. It

indicates that the lack of sufficient credible lease market related information and the absence

of close collaboration between SMEs and banks with regard to leasing product were

confirmed by the highest number of respondents. This number represents 94.3% for each

reason. The reasons confirmed by the lowest number of respondents include the reliance on

owners’ equity and security enjoyed from using one’s own assets with 17.1% and 5.7%

respectively.

The findings above indicate that the non involvement of SMEs in lease financing is

mainly caused by the lack of information. This information can be obtained from the lease

market and through lessors themselves, increased level of respondents’ inquiry and training

for those who lack adequate knowledge about leasing in general. They also indicate that

SMEs resorted to the use of bank loans instead of using leasing.

It is worth noting that the resort to the use of bank loans instead of leasing contradicts

what happens in Europe where, as per Oxford Economics (2011&2015), the reports points out

that leasing was more used by European SMEs than any individual form of bank lending. It

also makes it obvious that though Deloof et al. (2007) and (EBA: 2016) consider leasing as a

good substitute for bank loans in SMEs, it has not yet been so for SMEs in Rwanda. Raising

lease awareness needs to do done in Rwanda so as to put leasing at use among SMEs and

experience a situation where, according to Copeland and Weston (1988) increases in lease

financing decrease debt financing.

6. Summary and Conclusion

This study not only examined the levels of lease awareness among SMEs managers and

SMEs involvement in lease financing across their sectors of activities but also analyzed the





relationship between level of lease awareness among managers and the level of involvement

in lease financing in selected SMEs variables from the lessees’ perspective. The levels of

lease awareness among SMEs managers ranging from low to moderate levels do not differ

significantly across the sectors of activities in which SMEs under study operate. However,

though the levels of SMEs involvement in lease financing range from low to moderate levels

as well, significant differences in those levels across the sectors of activities of considered

SMEs exist. Such levels prove to be unsatisfactory. It has been said that SMEs are considered

as the cornerstone for economic growth and development but they lack the required collateral

to secure traditional loan financing from banks whereas leasing constitutes a particularly

appropriate source of financing for SMEs. Therefore, the low level of SMEs involvement in

lease financing implies a handicap to Rwandan economic growth and development in general

and the development of SMEs in particular, that require undivided attention and commitment

from concerned stakeholders such as government and its sponsors, lessors and potential

investors

A significant positive relationship between the level of lease awareness among managers

and the level of involvement in lease financing in selected SMEs was found existing. This

implies that level of lease awareness among SMEs managers influences positively the level of

SMEs involvement in lease financing. Therefore, increases in the level of lease awareness

increase the level of SMEs involvement in lease financing. In other words, the higher the

level of lease awareness among managers, the higher the level of SMEs involvement in lease

financing. As some studies have revealed a positive impact of leasing on the performance of

firm in different ways, improving the level of SMEs involvement in lease financing though

the raising of the level of lease awareness among SMEs managers can lead to better SMEs’

financial performance and growth. This, in turn, can result into more tax, investment,

employment and other social contributions, that help the government in achieving its the

socio-economic objectives, among others. Therefore, there is need to make some relevant

recommendations directed to specific stakeholders.

7. Recommendations

The study indicated that low and moderate levels of lease awareness among SMEs

managers and SMEs involvement in lease financing are not satisfactory. Added to that, the

significant positive relationship found between the variables proves that SMEs involvement in

lease financing depend on lease awareness among SMEs managers. Hence there is need to

improve the current scenario as the findings impose. In this regard therefore, the Government

of Rwanda should put in place Public Education Programs and adequate communication

channels that can help increase financial literacy about leasing and build capacities targeting

all SMEs, lessors and potential investors particularly and other stakeholders in general.





Through the Ministry of Finance and its other institutions such as National Bank of Rwanda

(BNR) and Rwanda Revenue Authority (RRA), the Government of Rwanda should work

together with Institute of Chattered Public Accountants in Rwanda (ICPAR) and Private

Sector Federation (PSF) to harness lease enabling environment. Emphasis should be put on

up-to-date suitable laws, rules and regulations and policies governing lease transactions since

leasing is said to be particularly an appropriate source of financing for SMEs.

Apart from the big role that the government should play in different ways, current and

prospective lessors too should seriously their market leasing products using appropriate

channels of communication to inform and sensitize SMEs managers to the use of lease

financing. Moreover, SMEs managers should make concerted effort to inquire about various

aspects of leasing so they can afford to effectively and efficiently involve in lease financing

the enterprises they manage since multitude of choices are available in leasing field. This

would require close collaboration with other stakeholders especially the government, lessors

and other potential investors.

Since SMEs involvement in lease financing depends on the level of lease awareness

among managers at 10.6%, further research should be done to study other factors which

account for 89.4%. Such factor may include bank loans, enabling environment, internal

sources of finance, to name just a few. In addition, as the study has its scope limited to Kigali

and SMEs, the same study can also be conducted countrywide as well as in other countries

especially developing ones. It can also be done considering large enterprises.

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