Financial Institutions

Lessons

Senior 4 · Entrepreneurship

Financial Institutions

4 lessons

Lesson 1 of 4

Meaning of financial institutions

25 min

Case: the wooden box

Twenty-five tea pickers in Nyamasheke run an ikimina, a savings group. Every Friday each member puts Frw 2,000 into a wooden box kept by the treasurer, and each week one member takes the whole pot in turn. It works, and it has taught them to save. But this year three problems came up. Uwera wants Frw 600,000 to open a small shop, far more than one week's pot, and wants to repay over a year. The treasurer is nervous about keeping the cash at home. And the money in the box earns nothing while prices rise. (The group and its members are illustrative.)

Think about it: What can a SACCO or a bank do for Uwera that the wooden box cannot? What would the group give up by moving its savings there?

Definition

Financial institution: an organisation whose main business is dealing in money and financial services: accepting deposits, lending, insuring, investing, or making payments and transfers. Examples: a commercial bank, a District SACCO, an insurance company, a pension fund.

Financial intermediation: the process by which a financial institution collects funds from savers and channels them to borrowers or investors.

Definition

Deposit-taking institution: one licensed to accept deposits from the public, such as a bank or a SACCO. Non-deposit-taking institution: one that provides financial services without taking deposits, such as an insurer, a pension fund, a leasing company or a forex bureau.

Formal financial institution: registered, licensed and supervised by a regulator (in Rwanda, mainly the National Bank of Rwanda). Informal arrangement: not licensed or supervised, such as an ikimina, a rotating savings group or a private moneylender.

What financial institutions do

Mobilise savings. They collect many small sums that would otherwise sit idle in boxes and pockets, and pay interest on them.
Provide credit. They lend to households, entrepreneurs and the government, in sizes and for periods that suit the borrower.
Transform size and maturity. Thousands of small deposits that can be withdrawn at any time become a few large loans repaid over years.
Pool and share risk. Insurers collect premiums from many people and pay the few who suffer a loss; lenders spread risk over many borrowers.
Make payments. Transfers, cards, cheques and mobile money let buyers and sellers pay without carrying cash.
Keep money and valuables safe, and in Rwanda deposits in banks and microfinance institutions are insured by the Deposit Guarantee Fund up to Frw 1,000,000 per depositor per institution (BNR, March 2026).
Gather information and advise. They assess borrowers, report repayment histories to the credit reference bureau, and advise clients on managing money.
Exchange currencies for importers, exporters and travellers.

Feature	Ikimina (informal)	District SACCO (formal microfinance)	Commercial bank (formal)
Supervised by the BNR	No	Yes	Yes
Size of loans	Limited to the group's pot	Small to medium	Small to very large
Interest on savings	Usually none	Usually yes	Yes, on savings and fixed deposits
Safety of savings	Depends on the treasurer	Regulated; deposits insured up to a limit	Regulated; deposits insured up to a limit
Ease of joining	Very easy; trust replaces collateral	Easy; membership and local knowledge	Needs documents; loans usually need collateral

Rwanda's formal sector is large and still growing. The chart shows that banks hold about two-thirds of all its assets, with pension schemes second.

Tip

Pool, lend, pay, protect. Almost every service a financial institution offers is one of these four verbs. When an exam asks for "functions of financial institutions", group your points under them and give one Rwandan example of each.

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Worked example 1: which part of the sector grew fastest?

BNR figures for total assets (Frw billion): banks 8,702 in December 2024 and 10,678 in December 2025; pension schemes 2,051 and 2,774; insurers 1,141 and 1,304; microfinance 883 and 1,085. Calculate each sector's percentage growth and say which grew fastest.

\text{Growth} = \frac{\text{new} - \text{old}}{\text{old}} \times 100\%

\text{Banks: } \frac{10\,678 - 8\,702}{8\,702} \times 100\% \approx 22.7\%, \qquad \text{Pensions: } \frac{2\,774 - 2\,051}{2\,051} \times 100\% \approx 35.3\%

\text{Insurers: } \frac{1\,304 - 1\,141}{1\,141} \times 100\% \approx 14.3\%, \qquad \text{Microfinance: } \frac{1\,085 - 883}{883} \times 100\% \approx 22.9\%

Interpretation: pension schemes grew fastest, consistent with the spread of long-term saving schemes; banks grew by the largest amount in francs (about Frw 1,976 billion), because they started from the largest base. A percentage and an absolute change can rank sectors differently, so state which one you are using.

Worked example 2: how a SACCO turns small savings into loans

A District SACCO has 1,200 members with average savings of Frw 50,000. It keeps 20% of deposits as cash and liquid assets and lends the rest in loans of Frw 1.2 million each. On a normal day, members withdraw about 2% of deposits. (Illustrative figures.)

\text{Deposits} = 1\,200 \times 50\,000 = 60\,000\,000\ \text{Frw}

\text{Lent} = 0.80 \times 60\,000\,000 = 48\,000\,000\ \text{Frw} \;\Rightarrow\; \frac{48\,000\,000}{1\,200\,000} = 40\ \text{loans}

\text{Liquid reserve} = 12\,000\,000\ \text{Frw}; \quad \text{daily withdrawals} \approx 0.02 \times 60\,000\,000 = 1\,200\,000\ \text{Frw}

Interpretation: 1,200 savers who could each lend only Frw 50,000 have together financed 40 loans 24 times as large. The reserve covers about ten normal days of withdrawals, which is why a sudden rush of withdrawals is dangerous and why the BNR sets liquidity rules and insures deposits.

Warning

Common mistakes. Saying a financial institution "keeps" all deposits in its safe: most is lent or invested, which is how it pays interest. Calling every financial institution a bank: insurers, pension funds and forex bureaus are financial institutions but not banks. Thinking informal groups are useless: an ikimina builds the saving habit and trust, and many groups later open a SACCO account together.

Marginal Revolution University, "What Do Banks Do?". Note how a bank bridges savers and borrowers who do not know each other, and compare it with the tea pickers' wooden box.

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Practice

Define financial institution and financial intermediation.
Distinguish between deposit-taking and non-deposit-taking institutions, with two Rwandan examples of each.
Explain five functions of financial institutions.
An ikimina of 25 members collects Frw 2,000 from each member every week for 52 weeks. How much is collected in the year? If the cash is kept in a box for a year while prices rise by 7.0%, what is it worth in the buying power of the start of the year?
A SACCO has deposits of Frw 80 million and keeps 15% as liquid reserves. How much can it lend, and how many loans of Frw 1.7 million is that (whole loans)?
Using the chart, calculate the share of total financial-sector assets held by pension schemes in December 2025, to one decimal place.
"The tea pickers should close their ikimina and save only in a bank." Evaluate this advice.

Show answersHide answers

A financial institution's main business is money and financial services (deposits, loans, insurance, investment, payments). Financial intermediation is collecting funds from savers and channelling them to borrowers or investors.
Deposit-taking: licensed to accept public deposits, e.g. a commercial bank, a District SACCO. Non-deposit-taking: no deposits, e.g. an insurance company, RSSB's pension fund, a forex bureau, a leasing company.
Any five: mobilising savings; providing credit; size and maturity transformation; pooling risk; payments; safekeeping (with deposit insurance); information and advice; foreign exchange. Each needs a sentence of explanation.
$25 \times 2\,000 \times 52 = 2\,600\,000$ Frw. Real value $= \frac{2\,600\,000}{1.07} \approx 2\,429\,907$ Frw, a loss of about Frw 170,000 in buying power.
Lendable $= 0.85 \times 80\,000\,000 = 68\,000\,000$ Frw; $\frac{68\,000\,000}{1\,700\,000} = 40$ loans.
$\frac{2\,774}{15\,994} \times 100\% \approx 17.3\%$ .
Partly sound. A bank or SACCO is safer, pays interest, offers larger and longer loans and builds a credit record. But the ikimina is easy to join, needs no collateral, and its weekly meetings enforce saving. A good compromise: keep the group, and deposit its pot in a SACCO account in the group's name.

Quick check

Which of these is a non-deposit-taking financial institution?

Key points

A financial institution deals in money and financial services; intermediation moves funds from savers to borrowers.
Institutions may be deposit-taking or not, banking or non-banking, formal (licensed and supervised by the BNR) or informal (ikimina, moneylenders).
Their functions: mobilise savings, lend, transform size and maturity, pool risk, make payments, keep money safe, inform and advise, exchange currency.
In December 2025 banks held about two-thirds of Rwanda's financial-sector assets (Frw 10,678 billion of about 15,994 billion).
Deposits in banks and microfinance institutions are insured up to Frw 1,000,000 per depositor per institution.

Sources and credits

Image: Ikimina Sangwa Job Training Center, Cnyirahabihirwe123, 2018, via Wikimedia Commons, CC BY-SA 4.0.
Video: What Do Banks Do?, Marginal Revolution University, embedded from YouTube.
Data: asset figures (Table 15) and the Deposit Guarantee Fund's cover, from the Monetary Policy and Financial Stability Statement, March 2026, National Bank of Rwanda.

Written by Ganzaa: the Nyamasheke case, the comparison table, the chart (drawn from BNR data), the worked examples and the practice items. People, groups and the SACCO are illustrative (2026). This lesson uses CC BY-SA material and is shared under CC BY-SA 4.0.

1Case: the wooden box

2What financial institutions do

Case: the wooden box

What financial institutions do