Dr RUSIBANA, Claude, PhD

Mount Kenya, University-Rwanda

crusibana10663@gmail.com, +(250)788353239
The integration of financial literacy, a tool of financial assets’ investment decision in
Rwanda

ABSTRACT

The paper aimed to establish the relationship between financial literacy and financial asset
investment decision in Rwanda stock exchange of investors and community in Kigali City. The
study used a correlation research design that was used to establish the relationship between
financial literacy and investment decision making. The target population for this study was all
the listed firms in the Rwanda Stock Exchange market to date. Therefore when the community,
society, investors have financial knowledge, aware and communicated financially, know how and
when to spend the money that they have, when they know the investment vehicle around the
market and the related risks, and they don’t have fear to invest in asset confidently, and interact
with other as social interaction, there is no doubt that they increase the stock market
participation. This is indicated by the level of significant of the predictors. The research revealed
that Financial use, financial knowledge, financial awareness, behavior finance, finance
confidence and social interaction is positive and significant on the stock market participation,
savings, retirement planning, and private investment funds in Rwanda, where p=0.20<p=0.05.
Social interaction is also positive and significant to stock market participation p=0.00<p=0.05.
Behavior finance and financial awareness and financial confidence is positively and significant
to the stock market participation p=0.00<p=0.05, p=0.037<p=0.00<0.02; p>0.05
Index Terms. Financial literacy, financial asset, investment decision,

INTRODUCTION

During the last two decades, many African countries have put in place stock exchanges as a
prerequisite for the introduction of market economies under the structural adjustment programs
circulated by the international monetary institutions and to facilitate the privatization of
government owned businesses (Norvilitis, 2006). In almost all developing countries financial
markets play an important role in the process of their economic growth and development
through; facilitating savings, distribution and channelling funds from savers to investors,
retirement planning, and private pension funds investment to create the future wealth. (Remund,
2010).

Recently, individuals have become progressively active in financial markets; financial market
investment has been accompanied and promoted by the advent of new financial products and
services. However, some of these products and goods are complex and difficult to hold,

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especially for the financially inexperienced investors and society. At the same time, market
liberalization and operational reforms in social security and pensions have caused an ongoing
shift in decision making power, away from the government and employers toward private sector.
Thus, individuals must assume more accountability for their own financial well-being (Hilgert,
2003).

Existing studies and researches indicate that financial illiteracy is widespread and individual
Investors lack knowledge, information, communication, use, and social interaction of even the
most basic economic principles (Lusardi and Mitchell, 2006). Many researchers have found that
many families, investors, and society wary from the stock market because they have little
knowledge of stocks and the stock market and cannot take any stock investment decision for
future returns (Van, 2011).

Financial literacy has been an issue in many countries in either developed or developing
countries. The cost of low financial literacy is significant for the society and has been clearly
identified by researchers (Joo & Garman 1998, Cuter & Delvin 2000). It helps to make informed
decisions and well-being of an individual. Policy-makers in both developed and developing
countries are increasingly recognizing the importance of financial literacy and investing
resources in financial education curricula (Gallery, 2010).

The term financial literacy can incorporate concepts ranging from financial awareness, skills and
knowledge, including of financial products, institutions, and concepts; financial skills, such as
the aptitude to calculate compound interest payments; and financial skill more generally, in terms
of money management and financial planning and budgeting (Remund, 2010). In practice,
however, these notions frequently overlap in today’s world which has a market with complicated
products, the need for financial literacy becomes foreseeable. It also impacts the raise of
financial inclusion which eventually results in financial stability of any economy (Cuter and
Delvin, 2000).

The stock market plays a significant role in the financial lives of many individuals, firms and the
society. Seeing stocks as a form of investment, many investors use it to generate their asset-based
income and returns. The capital market is the fundamental in inspiring economic growth and
development through collection of resources in an economy (Yartey and Adjasi, 2007). The
markets provide a platform for exchange of financial assets both stocks and bonds, liquidity,

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savings following established rules and regulations to provide continuous liquidity in the stock
market for community use.

A low level of financial literacy is a significant problem to the well-functioning of capital

markets. Several studies have focused on the determinants of financial assets investment. One of
the variables that have been studied in the recent past is the effect of financial literacy. There is in
fact evidence that financial literacy and schooling years are correlated and that the stream of
education and effectiveness of education can affect financial literacy (Almenberg &Soderbergh,
2011).

Wachira &Kihiu (2012) conducted a study to establish the impact of financial literacy on access
to financial services. The study revealed that the probability of a financially illiterate individual
investor remaining financially excluded is significantly high calling for increased investment in
financial literacy programs to reverse the tendency.Githui & Ngare (2014) in their study on
financial literacy and retirement planning postulated that financial literacy is one of the main
causes of poor retirement planning in the informal sector. Clement (2012) sought to investigate
factors influencing investment decisions in equity stocks at the NSE among teachers in Kisumu.
The results proved that decisions to invest in equity stocks are influenced by economic and
behavioural factors.

However, the study established that financially illiterate person remaining financially excluded
yet the country is planning inclusive economy in coming years.

Previous studies focused on advanced financial literacy. This study sought to take departure from
that and focused on both basic and advanced financial literacy to explain the relationship
between financial literacy and financial asset investment in Rwanda market.

The study used a standard measure of financial assets investment: direct stock financial assets
investment through ownership of stocks which was measured through the volume of shares
traded by the respondent over the last years. The measures of financial literacy used in existing
studies are often basic.

In Rwanda, capital market started in 2005 as Rwanda Over the Counter (OTC) market and later
changed to Rwanda Stock Exchange (RSE) in 2011 (Steven, 2012). The RSE is operated under
the jurisdiction of Rwanda’s Capital Market Authority (CMA), previously branded as Capital
Markets Advisory Council (CMAC). In 2008 the Government of Rwanda put in place the capital

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market advisory council (CMAC) to run the Rwandan stock market as over the counter market
(GoR, 2008). CMA organized various workshops all over the country explaining to the public,
potential Investors and business people how the capital market functions and invite them to be
more active and participate in stock market in Rwanda.

There exist very few studies and researches that provide information on both financial literacy
and variables related to financial assets investment decision in Rwanda; for example, saving,
portfolio choice, financial asset, financial use, social interaction and Risk aversion. This research
pursued to find the effect financial literacy on financial assets investment decision in Rwanda.
Thus, the role of financial literacy should not be under-estimated. As more individuals transition
to a system where they must decide how much to save and how to invest their wealth, it is
important to consider ways to enhance their level of financial knowledge or to guide them in
their financial asset investment decisions.

Several studies have produced contradictory results, such as a study by Mwangi (2012) which
found that financial literacy remains low in Kenya. However, the results indicated that
households’ access to financial services is not based on levels of financial literacy but rather on
other factors such as household income levels, distance to and from banks, age, marital status,
gender, household or family size and level of education.

From the studies reviewed, it is evident that little has been done in relation to financial literacy
effect on financial assets investment decision in Rwanda. Most of the studies have focused on the
relationship between financial literacy and other variables such as retirement planning, personal
financial management, access to financial services and savings level among many other factors.

One of challenges Rwanda stock market is facing as a developing country; it is increasing

individual savings and investment to promote economic growth. These two drivers of economic
growth and development are dependent on the level of financial awareness, financial knowledge
and financial literacy among citizens. Financial illiteracy is also a big barrier to financial
inclusion and entrepreneurship among individual Investors. Rwanda faces low levels of financial
literacy. According to report based on 2013 National Financial Education Strategy (NFES) for
Rwanda, less than 50 per cent of Rwandans could give correct answers to all four numeracy
questions, which test addition, subtraction, multiplication, and division. The report also shows a
disconnect between Rwandans’ knowledge and awareness of money management practices and
their application.
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This study was therefore geared towards investigating the nature and extent of the relationship
between financial literacy and financial assets investment decision by investors in Rwanda.

The paper has the following research hypotheses:

H01. There is a positive significant effect of financial Knowledge and financial assets
investment decision.
HO2. There exist a positive significance effect of financial awareness and financial assets
investment decision
HO3.There is a positive significant effect of finance use and financial assets investment
decision
HO4. The behaviour finance is significantly positive related to financial assets investment
decision.
HO5. Financial confidence is positively and significantly related to financial assets
investment decision.
HO6. There is a positive significant effect of social interaction and financial assets
investment decision.

LITERATURE REVIEW

The progress of the financial industry is one of the important determinants in the growth of the
economy of a country that is constantly developing dynamically. The growth and development
led to a wide variety of market products and services, structures and ease of access to services
and investment decisions. Many researchers believed that there is a comprehensive
understanding of the society so they can have ideas and knowledge about the financial literacy
for better finance decisions.

Chen and Volpe (1998) describe financial literacy as the knowledge to manage finances in
investment financial decision making. Lack of financial literacy may cause a person to be more
likely to have problems with debt, more involved with higher credit costs and less likely to plan
(Lusuardi, et al., 2010). Hilgert et al. (2003) and Cude et al. (2006) also specified that
knowledge helps people to improve the access to financial services (DPAU-BI, 2014), moreover,
based on the research result conducted in the context of the National Strategy for Indonesian
Financial Literacy, disclosed that the literacy level of the Rwandan citizens to the financial
products and services are at the capital market is still quite low and personal finance education is
still rare both in villages, elementary school till college.

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A study carried out by Moore (2003) on the effect of financial literacy on investment decisions, a
sample of twenty companies was surveyed in Washington DC, the results of the analysis showed
that there was a positive correlation between the level of financial literacy and investment
decisions of firms. The victim pool was found to have statistically and significantly less levels of
financial knowledge as compared to the general population. Almost 31% of the general
population were able to answer the majority of financial questions correctly as opposed to 21.9%
of victim pool consumers. This was evidenced by survey results showed that the financial
knowledge scores with significant and positive effect on investment decision.

Rooij, Lusardi and Allesie (2007) sought to find the relationship between financial literacy and
financial asset in the Netherlands. The study reported evidence of an independent effect of
financial literacy on stock financial asset: Those who have low financial literacy are significantly
less likely to invest in stocks. A large fraction (48.3%) of respondents with primary education is
at the lowest level of literacy (first quartile).

Tenai(2014) investigated the factors influencing the development of capital markets as a

developing economy. The study established that the greatest obstacle to the NSE is the level of
financial knowledge of the local investors. Interviews to establish the occupation of the
individual investors in the NSE showed that middle level managers had the highest participation
(25.6%) followed by chief executives (22.5%), while farmers (6.2%), artisans (7.5%) and office
clerks and teachers (7.5%) had a low participation. These findings may be attributed to the fact
that even though middle level managers and CEOs are few, they have more access to information
and understand how the market operates.

A financially literate individual is able to plan, save, borrow, invest, and spend wisely, take risks
reduction measures, (Moulton et al. 2013; Atkinson & Messy 2012; Grohmann et al. 2014;
Attridge 2009; Lusardi & Mitchell 2009; Van Rooij et al. 2007) and even seek financial
information where necessary. However, previous studies reveal that, a great number of people
worldwide are financially illiterate. Xu and Zia (2012) in their research found that financial
literacy levels are low in both high and low income countries. Lusardi and Mitchell (2011)
observe that, financial illiteracy is widespread even where financial markets are well developed.

Shiller (2005) suggests that investor sentiment transmitted through social interaction plays a
crucial role in the formation of asset pricing bubbles.

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A study by Mwangi (2013) the results indicated that households’ access to financial services is
not based on levels of financial literacy but rather on factors such as income levels, distance to
and from banks, age, marital status, gender, household and family size and level of education.
Therefore, financial literacy remains low in Kenya. However, the study established that there is a
financially illiterate person remaining financially excluded and have no access to financial
services in the capital market in Kenya.

The research conducted by the Rwanda Institute of Statistics in 2016 stated that only the Rwanda
population can be classified as follow; well literate: 21.84%; sufficient literate: 75.69%; less
literate: 2.06% and 0.41% not literate. If we see from the types of financial products and services
offered, it is the banking products amounted to 21.8%, in insurance products amounted to
17.84%, in the pawnbroker products amounted to 14.85%; the products of finance company also
amounted to 9.8%; the pension fund products also amounted to 7.13% and the lowest, on capital
stock market is only 3.79%. This condition indicates that there is imbalance in the financial
intelligence of the population of Rwanda. Rwanda population is more familiar with banking,
insurance and pawnshop products, compared to financing, pension funds and capital markets
products (NISR, 2016).

In Rwanda a study by Sindambiwe (2014 results indicated that the extent of directors’ awareness
of stock market functioning is moderate with a mean of 2.40 on average. Regarding the directors’
stock market awareness, they have higher financial literacy regarding computation of interest
rate and exchange rate, business diversification, portfolio management and location of stock
market while they have a little awareness and knowledge of existence of brokerage services
where the mean is only 2.05, the study confirmed that there is a significant relationship between
the directors’ awareness and knowledge of the stock market functioning and the level of
organizations’ investment decision in the Rwandan stock market.

Possessing basic financial skills and knowledge allows people to know how to navigate in the
financial system. Individuals with appropriate financial literacy training generally make better
financial and cash management decisions. National Bank of Rwanda has committed to the
development of the Rwandan financial sector through rendering accessible services to the people
and communities, with excellent quality standards. It is in this context that National Bank of
Rwanda assigned its staff to impart knowledge and skills to its clients to increase client’s
financial literacy by building their capacity in saving culture, financial management, borrowing

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responsibly and debt management, with the aim of enlightening financial management skills in
both in their businesses and in their personal finances (BNR, 2018).

The researcher used the Modern Portfolio Theory (MPT), developed by Professor Harry
Markowitz. (1952) explains how risk averse investor construct their decisions that
optimize or maximize the investment expected return based on given period of time at a
given level of market risk.

Conceptual framework

Financial Knowledge

Financial awareness
Financial asset
Investment decisions

Financial uses -Market participation,

-Savings
Behavior finance
-Retirement planning

Finance confidence -Private pension funds

investment
Social Interaction

METHODOLOGY

The researcher used a correlationnal research design that enables the researcher to use past view,
ex-post, present view and future view to establish the relationship between the financial
knowledge, financial awareness, behavior finance, financial confidence and social interaction on
financial asset investment decision. This research design was used to explore co-varying
relationships between the two variables, to identify variables that relate to one each other, to
make predictions of one variable from another variable and helped the researcher to examine
possible cause and effect relationships between one variable and another. The target population
is all firms that are registered in the Rwanda stock exchange by March 2019. All the data
collected were analyzed using different measurements and were put in the SPSS for cleaning and
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analysis. The multiple linear regressions were used and to estimate the regression OLS was used.
The general regression model is presented as follows:

Y= β o+ β 1X1+ β 2X2+…….. β KXK+ꜫ

Where Y=Financial asset Investment decision, β1, β2, ……. βK are parameters regression
coefficient associated with X1, X2,…..XK which are predictors or independent variables that are
financial knowledge, financial awareness, finance uses, behavior finance, financial confidence
and social interaction. The specific model is presented as follows

Financial asset investment decision model= β o+β1FK+ β2FA+ β3FU+ β4BF+ β5FC+ β6SI+ꜫ

FK=Financial Knowledge, FA=Financial awareness, FU=Financial uses, BF=Behavior finance,

FC=Financial confidence, SI=Social interaction, ꜫ=error Term.

RESEARCH FINDINGS

Linear correlation analysis between dependent variables

1 2 3 4

1 1 .307** .696** .659**

2 .607** 1 .683** .772**

3 .496** .583** 1 .770**
4 .759** .672** . 670** 1

**. Correlation is significant at the 0.01 level (2-tailed).

1= Stock Market Participation, 2= Efficiency in Saving Behavior, 3= Retirement Planning, 4=

Investing in Private Pension Funds.

The table below reveals correlation analysis between measures of financial literacy indicates that
all the factors used to measure financial assets investment decisions are related but not strongly
and perfectly correlated. The level of correlation between the variables can be seen in the sense
that one variable affect and influence another one but cannot replace another one.

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 Linear correlation between predictors (independent variables) and dependent variables

1 2 3 4 5 6 7 8 9 10
1 1 .832** .896** .939** .759** .780** .807** .768** .7234** .546
2 .832** 1 .875** .766** .823** .832** .762** .643 .0786** .675**
3 .896** .875** 1 .896** .870** .708** .883** .782** .5896** .587**
4 .839** .766** .796** 1 .812** .732** .767** .802** .7103** .785**
5 .759** .823** .870** .512** 1 .761** .772** .765** .872** .589**
6 .780** .832** .508** .832** .761** 1 .933** .567** .687** .767**
7 .907** .762** .883** .867** .772** .833** 1 820** .7863** .609**
8 .536** .789** .674** .721** .890** .891** .714** .721** .888** .789**
9 .549** .849** .810** .789** .777** .679** .635** .890** 1 .649**
.
10 732** .821** .628** .
650** .896** .877** .547** .
822** .577** 1
**. Correlation is significant at the 0.01 level (2-tailed).
This correlation matrix was run using product Pearson moment indicates that all variables in the
study are important because they are indicating the level that each variable has an influence to
another. This complementarily of variables indicates that all the variables are important in the
study and the correlation between the variables exists.

Regression analysis

The linear regression model analyzed the relationship between predictors and stock market
participation.

Model Unstandardized Coefficients Standardized Coefficients t Sig.

B Std. Error Beta
(Constant) .094 .070 1.339 .182
Financial use .091 .039 .061 2.350 .020
Financial Knowledge .153 .032 .193 4.846 .000
Social Interaction .744 .046 .749 16.25 .000
Financial awareness .146 .029 .091 1.77 .037
Behavior finance .786 .022 .066 1.06 .000
Financial confidence .654 .033 .187 1.24 .002

Dependent Variable: Stock Market Participation, Predictors: Financial knowledge, financial

awareness, finance uses, behavior finance, financial confidence, social interaction.

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It is clear from the table above when the community, society, investors have financial knowledge,
aware and communicated financially, know how and when to spend the money that they have,
when they know the investment vehicle around the market and the related risks, and they don’t
have fear to invest in asset confidently, and interact with other as social interaction, there is no
doubt that they increase the stock market participation. This is indicated by the level of
significant of the predictors. The research revealed that Financial use is positive and significant
on the stock market participation where p=0.20<p=0.05. Social interaction is also positive and
significant to stock market participation p=0.00<p=0.05. Behavior finance and financial
awareness and financial confidence is positively and significant to the stock market participation
p=0.00<p=0.05, p=0.037<p=0.00<0.02; p>0.05

The results revels that R coefficient 0.983 of predictor measures has significant relationship with

stock market participation. The coefficient of determination 0.966 R-square shows that the

predictor measures used in this research project explains 96.6 % of variability in stock market

participation of Rwanda stock market. Thus, based other findings measures such as constant,

social interaction, cognitive skills and financial knowledge contribute 96.6 % of Rwanda stock

market growth mainly in terms of stock market participation.

The linear regression model analyzed the relationship between predictors and retirement
planning

Model Unstandardized CoefficientsStandardized T Sig.

Coefficients
B Std. Error Beta
(Constant) .309 .122 2.529 .012
Financial use .588 .067 .403 8.714 .000
Financial .318 .055 .410 5.773 .000
Knowledge
Social Interaction .184 .080 .190 2.317 .002
Financial awareness .267 .065 .219 1.478 .007
Financial confidence .5678 .087 .344 7.890 .009

a. Dependent Variable: Retirement Planning

The results indicated that financial use, financial knowledge, social interaction, financial
awareness and financial confidence are statistically and significant on retirement planning. This
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explains that when there is a social interaction, aware of finances and communication, confident
and has the ability to use the financial resources when necessary, the investors, community and
society are able to save for their retirement planning. P-Value of all the predictors are statistically
significant p=0.012, p=0.000, p=0.002, p=0.007 and p=0.009<p.0.05 respectively.

The significance value in analyzing the relationship between financial literacy and Retirement

Planning was obtained as .000 which is lesser than 0.05 the critical value at 95% significance

level. Therefore, the model is statistical significant in predicting the relationship between

financial literacy and Retirement Planning. The value calculated 17.009 prove a significant

model for the relation as given by regression coefficients. This shows that the overall model was

statistically significant clarifies the effect of the predictor measures to Retirement Planning of

Rwanda stock market. The results reveal that R coefficient 0.945 of predictor measures have

significant relationship with Retirement Planning. The coefficient of determination 0.893 R

square shows that the predictor measures used in this research project explains 89.3 % of

variability in Retirement Planning of Rwanda stock market. Thus, based other findings measures

such as constant, social interaction, cognitive skills and financial knowledge contribute 89.3% of

Rwanda stock market growth mainly in terms of Retirement Planning.

The linear regression model analyzed the relationship between predictors and efficiency savings

Model Unstandardized Coefficients Standardized Coefficients T Sig.

B Std. Error Beta
(Constant) .065 .113 .577 .564
Financial use .043 .062 .024 .694 .008
Financial Knowledge .720 .051 .737 14.112 .000
Social Interaction .324 .074 .265 4.394 .000
Financial awareness .267 .234 .489 2.578 .003
Financial confidence .534 .348 .329 4.27 .000

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 a. Dependent Variable: Efficiency in Savings

The model shown that where there is a good finance use, people know and are aware of finance
with the ability of using finances and taking decisions related to investment in buying stocks
and bonds in the capital market. It is clear also that when people interact and share experiences
on the returns from the stock investment, there is no doubt savings increase. Finance use,
financial knowledge, social interaction, financial awareness and financial confidence, are
positive and significant to the efficiency savings. p. value of all predictors are p=.000 <0.05

Indicates that all financial literacy factors showed a positive coefficient representing a positive
effect on Efficiency in Saving Behavior of Rwanda stock market. The regression coefficient
indicates significant relationship as indicated the p-value where all the significant values are
less than 0.05 indicating a significant relation with Efficiency in Saving Behavior as a factor of
financial asset investment decision. Based on the coefficient, the regression model.
the results revels that R coefficient 0.971 of predictor measures have significant relationship
with Efficiency in Saving Behavior. The coefficient of determination 0.942 R square shows that
the predictor measures used in this research project explains 94.2 % of variability in Efficiency
in Saving Behavior of Rwanda stock market. Thus, based other findings measures such as
constant, social interaction, cognitive skills and financial knowledge contribute 94.2 % of
Rwanda

The linear regression model analyzed the relationship between predictors and private pension
funds investment.

Model Unstandardized Coefficients Standardized Coefficients T Sig.

B Std. Error Beta
(Constant) .101 .175 .576 .566
Financial use .952 .097 .642 9.827 .000
Financial Knowledge .654 .079 .830 8.273 .000
Social Interaction .538 .114 .547 4.709 .000
Financial awareness .480 .290 .789 7.902 .000
Behavior finance .279 .089 .578 4.001 .000
Financial confidence .609 .187 .673
a. Dependent Variable: Investing in Private Pension Funds

The results revels that R-coefficient 0.887 of predictor measures have significant relationship
with Investing in Private Pension Funds. The coefficient of determination .786 R-square shows
that the predictor measures used in this research project explains 78.6 % of variability in
Investing in Private Pension Funds of Rwanda Stock market. Thus, based other findings
measures such as constant, social interaction, cognitive skills and financial knowledge contribute
78.6 % of Rwanda stock market growth mainly in terms of Investing in Private Pension Funds.

13
The results proved that the significance value in analyzing the relationship between financial
literacy and stock Investing in Private Pension Funds was obtained as .000 which is lesser than
0.05 the critical value at 95% significance level. Therefore, the model is statistical significant in
predicting the relationship between financial literacy and Investing in Private Pension Funds. The
value calculated 35.021 prove a significant model for the relation as given by regression
coefficients. This shows that the overall model was statistically significant clarifies the effect of
the predictor measures to Investing in Private Pension Funds of Rwanda stock market.

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