Financial services consumption constraints: Empirical evidence from Rwandan rural households

Abstract

The concentration of banking and financial institutions in the city and/or urban in any developing countries in general, Rwanda in particular creates various constraints in availing and consuming different financial products and services by the rural households. The article examines the forms and determinants of credit constraint status of rural households of Rwanda and the impact of constraints variables on availing and using the range of financial products and services. The study concludes that 42.5 per cent of the Rwandan rural households surveyed face triple forms of credit constraints including self-imposed constraints, quantity rationing and risk rationing by formal financial institutions. However, quantity rationing is perhaps not as pervasive as self-imposed rationing and risk rationing by the lenders. The results from the empirically tested model revealed that in addition to demographic and socioeconomic characteristics of households, the variables constraining demand and/or supply of financial services with reference to accessibility were significant predictors of households' credit constraints. The study informs on the needs for innovative systems, products and services that would increase access relax credit constraints and improve rural consumers' welfare. The authors conclude that establishing an enabling legal and regulatory environment, providing adequate public goods and physical infrastructure, designing capacity building and technical assistance programs and maintaining political and macroeconomic stability are perhaps major public and policy issues needed for a robust rural financial market.