Human capital management in rwanda: challenges and prospects for microfinance institutions

COPYRIGHT NOTICE

Copy right (c)Maastricht School of Management and the School of Finance and Banking, 2010

All rights reserved. No part of this thesis may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without the prior permission in writing of Maastricht School of Management and / or the School of Finance and Banking, Kigali, Rwanda.

To my wife, with love

ACKNOWLEDGEMENT

All pieces of research are a result of interwoven efforts from various stakeholders. This piece of research would not have been a reality without the support from the following:

The Heavenly Father for undeserved favors given to me;

The School of Finance and Banking and CEDP for sponsoring my studies;

My Pastor Dieudonné VUNINGOMA, for always challenging me to dream big; All professors involved in the SFB - MsM MBA outreach program;

My thanks go particularly to Dr MUSOBO C. Ibrahim for his wise guidance. He was more than a supervisor throughout my career;

My line Manager for understanding my research demands;

The Management of DUTERIMBERE IMF SA, especially the Director of Finance and Administration, and her coworkers for their input in this research;

The Management of IMF UNGUKA SA, especially Justin KAGISHIRO, the Director of Operations and Banking Transactions, and her coworkers for taking time to assist me;

Colleagues in MBA Intake 4 especially MUYANGO, Francis, Elijah and Solange; Jean Pierre BYIRINGIRO for his insight into microfinance business;

My younger siblings for always asking me my next academic step to make; My coworkers for moral support;

To you all, I owe heartfelt and sincere appreciation!

I, SAFARI Jean Paul, hereby declare that this thesis is my original work and has never been submitted to any other University for the award of Masters in Business Administration (MBA) degree or any other degree.

............................................

Jean Paul SAFARI November 2010	Thesis Supervisor:

Dr. MUSOBO C. Ibrahim

ABSTRACT

This study was about challenges and prospects of Micro finance Institutions regarding Human Capital Management. It achieved 3 specific objectives including analysis of MFIs capacity to attract skilful employees, analysis of their capacity to retain skilful employees and analysis of the external factors influencing capacity to attract and capacity to retain.

It was conducted in 2 MFIs whose legal status is public liability companies (out of 96, there are only 11 public limited liability companies and 2 private limited liability companies), owing to insufficiency of resources at the researcher's disposal. In order to meet research objectives, primary and secondary data were collected by various means including literature review, focus group interview, the MFIs' management and employees.

At the end of the research, it was realized that some progress has been realized. However, due to lack of resource people and a weak financial base, MFIs target fresh graduates and senior six leavers. The way they manage training, performance appraisal, promotion, compensation, and career management, quality of supervision and involvement of employees in decision making is still needy. This results in high rates of turnover, both actual and potential. However, organizations which try to be transparent and give to employees opportunities of being shareholders make a difference in actual feeling of employees and the organizational goals.

TABLE OF CONTENTS

COPYRIGHT NOTICE i

DEDICATION ii

ACKNOWLEDGEMENT iii

DECLARATION iv

ABSTRACT v

TABLE OF CONTENTS vi

ABBREVIATIONS xii

CHAPTER ONE: INTRODUCTION 1

1.1. AN OVERVIEW 1

1.2. PROBLEM DEFINITION 3

1.3. RESEARCH OBJECTIVES 4

1.4. RESEARCH QUESTIONS 4

1.5. SCOPE OF THE STUDY 5

1.6. RESEARCH SIGNIFICANCE 6

1.7. THEORETICAL FRAMEWORK 6

1.8. RESEARCH DESIGN AND METHODOLOGY 7

1.9. LIMITATIONS 9

1. 10. STRUCTURE OF THE STUDY 10

CHAPTER TWO: LITERATURE REVIEW 11

2.1. INTRODUCTION 11

2.2. HUMAN CAPITAL 11

2.2.1. Definition 11

2.2.2. Origin of concept 13

2.2.3. Human capital Management 14

2.2.4. Human Capital in Africa: Focus on Rwanda 28

2.3. WHAT IS MICROFINANCE? / MICROFINANCE INSTITUTION? 30

2.3.1. Principles of Microfinance 31

2.3.2. Advantages of Microfinance Institutions 32

2.3.3. Who Are the Clients of Microfinance Institutions? 34

2.3.4 Types of microfinance institutions 35

2.3.5. Microfinance in Rwanda 35

2.4. RESEARCH GAP: WHY THIS RESEARCH? 38

CHAPTER THREE: RESEARCH DESIGN AND METHODOLOGY 39

3.1. INTRODUCTION 39

3.2. PROBLEM STATEMENT 39

3.3. RESEARCH OBJECTIVES 40

3.4. THEORETICAL FRAMEWORK 40

3.4.1. Research variables 40

3.4.2. Research Assumptions 41

3.4.3. Research limitations 41

3.5. RESEARCH METHODOLOGY 42

3.5.1. Research type 42

3.5.2. Target population and sampling methods 42

3.5.3. Data collection instruments 43

3.5.4. Data presentation and analysis tools 44

3.5.5. Validity and Reliability 46

CHAPTER FOUR: DATA ANALYSIS, FINDINGS AND DISCUSSION 47

4.1. INTRODUCTION 47

4.2. DATA FROM EMPLOYEES 47

4.2.1. Response rate 47

4.2.2. Gender of respondents 47

4.3.2. Total length of professional experience 48

4.3.3. Education level 49

4.3.4. Age of respondents 50

4.3.5. Area of specialization 51

4.3.6. Date of employment (with current employer) 51

4.3.7. Number of posts occupied 52

4.3.7. How do MFIs recruit employees? 53

4.3.8. How employees like their employer 54

4.3.8. 2. Employees perception of supervision 55

4.3.8.4. Satisfaction of employees with training 57

4.3.8.5. Employees perception of promotion fairness 58

4.3.8.6. How employees perceive performance evaluation 59

4.3.8.7. Existence of teamwork in MFIs 60

4.3.8.8. Perception of salary and benefits 62

4.3.8.9. Probability of resigning after gaining enough experience 63

4.3. DATA FROM MANAGERS' 65

4.3.1. Some management Practices 65

4.3.2. Why employees resign from MFIs 70

4.3.3. Strategic planning in MFIs 71

4.4. EXISTENCE OF EXTERNAL FACTORS 72

4.5. SUMMARY OF FINDINGS AND DISCUSSION 74

CHAPTER FIVE: CONCLUSIONS, RECOMMENDATIONS AND FURTHER RESEARCH 76

5.1. INTRODUCTION 76

5.2. CONCLUSION 76

5.3. RECOMMENDATIONS 77

5.3.1 Recommendations to DUTERIMBERE IMF SA 77

5.3.2. Recommendations to IMF UNGUKA SA 79

5.3.3. Investors in microfinance sector 80

5.3.4. The GoR and public / private institutions 80

5.4. FUTURE RESEARCH 80

BIBLIOGRAPHY 81

APPENDICES 88

LIST OF TABLES AND FIGURES

Tables

4.2.1. Response rate 47

Table 4.1: Response rate 47

Table 4.2.2. Gender of respondents 47

Table 4.2: Gender of respondents 47

Table 4.3: Total length of professional experience 48

Table 4.4: Education level of respondents 49

Table 4.5: Age of respondents 50

Table 4.6: Area of specialization 51

Table 4.7: Date of employment with current employer 51

Table 4.8: Number of posts occupied by respondents 52

Table 4.9. How employees like / dislike their employer 54

Table 4.10: Employees perception of supervision 55

Table 4.11: Had you ever dreamt to work with a MFI? 56

Table 4.12: Satisfaction of employees with training 57

Table 4.13. Employees perception of promotion fairness 58

Table 4.14: DUTERIMBERE IMF SA Employees perception of performance evaluation 59

Table 4.29: IMF UNGUKA SA perception of performance evaluation 60

Table 4.30: DUTERIMBERE IMF SA employees' perception of teamwork 61

Table 4.31: IMF UNGUKA SA employees' perception of teamwork 61

Table 4.32: DUTERIMBERE IMF SA employees' perception of their salaries and benefits 62

Table 4.33: IMF UNGUKA SA employees' perception of their salaries and benefits 62

Table 4.34: DUTERIMBERE IMF SA Employees leaving probability 63

Table 4.35: UNGUKA IMF SA Employees leaving probability 63

Table 4.36: Some management Practices in MFIs 65

Table 4.37: Why do MFI employees resign? 70

Table 4.38: Strategic planning in MFIs 71

Figures

Figure 2.1. What is human capital? 12

Figure 2.2: Five levers of human capital development 21

Figure 2.3. Human Capital measurement 23

Figure 2.4: The human capital Development framework 24

ABBREVIATIONS

AMA: American management association

AMIR: Association of Micro finance Institutions in Rwanda ASBL: Association sans but Lucratif

BPR: Banque Populaire du Rwanda

CGAP: Consultative Group to Assist the Poor

CEDP: Competitiveness and Enterprise Development Project COOPEC: Coopérative d'Epargne et de Crédit

CEO: Chief Executive Officer

DC: District of Columbia

DAF: Director of Finance and Administration

EDPRS: Economic Development and Poverty Reduction Strategy EVA: economic value added

GoR: Government of Rwanda

GAAP: Generally Accepted Accounting Principles

HPWS: High Performance Working System HR: Human Resources

HRM: Human Resources Management

HCDF: Human Capital Development Framework.

ICT: Information Communication Technologies

IMF: Institution de Micro finance

IT: Information Technology

GIRAFE: Governance, Information, Risk Management, Activities and Services, Financing and

Liquidity, and Efficiency and Profitability. LDCs: Least Developed Countries

MBA: Master of Business Administration

MFIs: Microfinance Institutions

MsM: Maastricht School of Management MD: Managing Director

MINALOC: Ministry of Local Government MIFOTRA: Ministry of labor

NBA: National Basketball Association

NBR: National Bank of Rwanda

NGOs: Non Government Organization

PAMIGA: Participative Micro finance Group for Africa RAMA: La Rwandaise d'Assurance Maladie

RDB: Rwanda Development Board

ROI: Return on investment

Human capital management in Rwanda: Challenges and prospects for Microfinance Institutions ROIC: Return on Invested Capital

SA: Société Anonyme

SACCO: Savings and Credit Cooperatives SARL: Société à responsabilité limité SME: Small and Medium Entreprises SFB: School of Finance and Banking

SWOT: Strengths, Weaknesses, Opportunities and Threats

SPSS: Statistics Package for Social Sciences SHRM: Society for Human Resource Management

TRS: Total Return to Shareholders

UNCDF: United Nations Capital Development Fund

UK: United Kingdom

UN: United Nations

UNESCO: United Nations Educational, Scientific and Cultural Organization WACC: Weighted Average Cost of Capital

WOCCU: World Council of Credit Unions

CHAPTER ONE: INTRODUCTION 1.1. AN OVERVIEW

According to the Consultative Group to Assist the Poor (CGAP), microfinance is defined as «a facility that offers poor people access to basic financial services such as loans, savings, money transfer services and micro insurance» ( http://www.cgap.org/p/site/c/about/).

Indeed, microfinance serves the un - bankable, bringing credit, savings and other essential financial services within the reach of millions of people who are too poor to be served by regular banks, in most cases because they are unable to offer sufficient collateral. In general, banks are for people with money, not for people without ( http://www.microfinanceinfo.com/the-definitionof-microfinance/).

It is indeed estimated that more than 16 million people are served by some 7000 microfinance institutions all over the world and that about 500 million families benefits from these small loans making new business possible. There is even the goal to reach more than 100 million of the world's poorest people by credits from the world leaders and major financial institutions ( http://www.microfinanceinfo.com/history-of-microfinance/).

The year 2005 was proclaimed as the International year of Microcredit by The Economic and Social Council of the United Nations in a call for the financial and building sector to «fuel» the strong entrepreneurial spirit of the poor people around the world ( http://www.microfinanceinfo.com/history-of-microfinance/).

In Rwanda, the microfinance sector is relatively young. Although small self-help peasant organizations have existed for some time, the sector formalization process started with the creation of the first Banque Populaire in 1975. The rate of bank utilization at the national level is still low, with only around 10% of the population owning an account with a formal financial institution in June 2006. On the other hand, MFIs including Banques Populaires, have created a large network. By June 2006, 93% of all branches opened by the credit institutions in the country were MFIs (rather than commercial banks) and these served more than one million customers. It

is clear, therefore, that MFIs have a very significant role to play in enabling the majority (The Republic of Rwanda, 2007).

Brigitte, (2007) maintains that MFIs served 88% of depositors and 90% of borrowers. This is really a good instrument to transform Rwanda from a low income country to a medium income one with a dynamic, diversified, integrated and competitive economy.

Despite this hope, however, the year 2006 saw closure of many MFIs. In Kagishiro (2007), he underlined lack of professionalism as one major cause of the 2006 Rwandan microfinance crisis. This led many people to questioning the sustainability of microfinance institutions (MFIs).

In the same footing, the Vision 2020 notes, that «the severe shortage of professional personnel constitutes an obstacle to the development of all sectors» (Republic of Rwanda, 2000). In the same footing, the National Skills Audit Report (2009) highlights deficits in various sectors of the country; with 97% in the finance sector and 57% in Capacity Building & Employment Promotion Sector is at 57%.

The most urgent question raised by the skills audit report (2009) is what the skills gaps (deficits) mean for the economy and especially on the performance of key sectors of the economy and the attainment of targets in the Economic Development and Poverty Reduction Strategy (EDPRS) and of the goals in vision 2020.

Rwanda being one of the developing countries, she has a lot to benefit from microfinance. According to MINECOFIN (2007), 60% of the population is below the poverty line, 87% are in rural areas and survive on traditional farming, 48% are illiterate, and life expectancy is 49 years. This justifies the need for microfinance to bridge the gap between the status quo and promises made by Vision 2020 and microfinance, a vision which views human resource development, knowledge based economy and private sector led economy as ones of its pillars.

Ten years down the load the Vision 2020 was conceived and started being implemented, four
years since Rwanda experienced erosion of microfinance confidence among clients, still the GoR
believes microfinance is a strategy that will bring about radical changes in the national economy.

Indeed, the National Bank of Rwanda claims to have microfinance under control to avoid the same mistake. Bearing in mind that human capital management makes a difference in whatever sort of trade, how far have MFIs gone in their human capital management to ensure clients deposits security and the sector's sustainability? This is what is at the heart of this research.

1.2. PROBLEM DEFINITION

Rwanda's vision 2020 is an ambitious document by which the government expresses its intention to be a middle income country by 2020. According to the vision, if family planning services improve, the population is still projected to reach 13 million by 2020, of which 7 million people will be earning a living on off-farm activities. Therefore, it will be necessary to create 1.4 million jobs outside agriculture. Given the trends of the Rwandan economy over the past decades, this is clearly a huge challenge, in which the private sector needs to play a pivotal role. This is a challenge in a country where only 200,000 jobs outside agriculture were created since 1960 (The Republic of Rwanda, 2000).

One of ways to achieve this is to support the development and sustainability of small and medium enterprises (SMEs). However, experience shows that these need not big loans, they rather need micro funds, which calls for the need of serious microfinance institutions. According to WOCCU's technical guide to rural finance, the latter have capacity to contribute to employment creation, economic growth and income generations. It has indeed been observed that SMEs all not equipped to satisfy the requirements of classic banking institutions when it comes to loans requirements, i.e, collateral, etc. (Janet , 2002).

In Rwanda, however, the microfinance movement was crowned with a bad reputation because clients' deposits proved to be insecure in the 2006 microfinance crisis. In an effort to enforce Rwanda's law regarding microfinance institutions, NBR closed down eight Micro-Finance Institutions (MFIs) over alleged gross mismanagement of funds and significant losses incurred due to poor credit management practices. Thousands of clients and several MFI partners were also affected by the closure ( www.un.org/esa/socdev/egms/docs/2009/.../Kantengwa.pdf ).

Just to name a few, consequences where employees had to be asked to go home, companies that had given services to them lost, investors' money was lost, the National Bank of Rwanda lost because it had to refund depositors, above all, the consumer confidence in microfinance eroded ( www.un.org/esa/socdev/egms/docs/2009/.../Kantengwa.pdf).

Research conducted attributed this crisis to, among other things, lack of appropriate technical and managerial skills. Human capital management was a core issue. (Justin, 2007; Angelique , 2009).

It is against this backdrop that the study on «Human Capital Management in Rwanda: Challenges and Prospects for Microfinance Institutions» was done in a bid to map progress made so far, challenges encountered and the envisaged future.