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Tue dole of National Bank of Rwanda from 1995 to 2010

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par Paterne RUKUNDO
National university of Rwanda - A0 2011

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2.1. Introduction

This chapter presents a review of the research literature already carried out in the field under study. It is a reflection of what economic theory reveals about the topic under study and also what different researchers have come up with as empirical findings in their different studies. This review helps to understand the topic under study and also identifies different gaps of further research. Unfortunately, as shall be noticed, little has been researched in Rwanda relating to the topic under study.

2.2. Development

Development has been defined by many writers (scholars) in different ways; some argue that development involves growth of per capita income which others based on the view of improving living conditions by reducing inequality of income distribution.

According to Kocher (1973: 4), the term development is defined as the process of a general improvement in levels of living together with decreasing of inequality of income distribution and the capacity of sustaining continuous improvements overtime.

Todaro (2000: 56) defines development as a multi-dimension process involving the reorganization and the reorientation of the entire economic and social systems. He further argues that development of physical reality and a state of mind in which society has, through some combinations of social, economic and political process secured the way of obtaining better life.

2.3. Financial institutions

There are different definitions with respect to financial institutions. According to Collins (1993: 193), financial institutions are institutions that act primarily as a financial intermediary in channeling funds from lenders to borrowers (e.g commercial banks and building societies), or from savers to investors (e.g pension funds, insurance companies).

Financial institutions are institutions that move funds from people who save to people who have investments opportunities (mishkin, 2001: 179).

Financial institutions are business firms whose principal assets are financial assets or claims (stocks, bonds, loans, etc) and make loans to customers or purchase investment securities in the market place and offer other financial services (Rose et al, 1993: 11).

2.4. Financial institutions and financial system

Financial intermediaries and other financial institutions are part of a vast financial system that serves the public. The financial system is composed of a network of financial markets, institutions, businesses, households, and governments that participate in that system and regulate its operation. That system today knows no geographic or political boundaries, but girdles the globe, marking loans, issuing securities, and proving outlets for the public's savings 24 hours a day. (Rose: 1993, 6)

2.5. Functions of financial system

The basic function of the financial system is to transfer loanable funds from lenders or savings surplus units to borrowers or savings deficit units. These funds are allocated by negotiations and trading in wide web of financial markets that bring together individuals and institutions supplying funds with those demanding funds. Most savings flowing through the financial system come from households: the principal borrowers in the financial system are business firms and the government. (Rose (1993))

Rose, Kolari and Fraser (1993) further reveal that the financial system is one of the most important components of the global economy. It provides essential services without which a modern economic system could not function, thus presenting us with some roles of financial intermediation. Among these roles we analyze the important ones: credit, payments, money creation and savings.

2.5.1. Credit: the financial system supplies credit to support purchases of goods and services and to finance capital investments , construction of buildings, highways, bridges, and other structures, and the purchase of machinery and equipments.

Investment increases the productivity of society's resources and makes possible a higher standard of living for individuals and families. (Rose et al, 1993: 7)

2.5.2. Payments: the financial system supplies mechanisms for making payments in the forms of currency, checking accounts and other transactions media. In recent years institutions operating in the financial system have developed many new payment services, including money market and NOW accounts and share draft (all types of interest- bearing checking accounts), telephone bill- paying services, and electronic machines that accept deposits and dispense cash.( Rose et al, 1993: 7)

2.5.3. Money creation: through the services of supplying credit providing a mechanism for making payments, the financial system makes possible the creation of money. Although several different definitions and forms of money are in use today, all forms of money serve as medium of exchange for purchasing goods and services. (Rose et al, 1993: 7)

2.5.4. Savings: finally, the financial system provides a profitable outlet for savings. Both individuals and institutions save today to be able to consume more goods and services tomorrow. Saving performs an essential economic function because it releases scarce resources from producing goods and services for current consumption in order to produce investment goods (buildings, equipments, etc). (Rose et al, 1993: 8)

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"Les esprits médiocres condamnent d'ordinaire tout ce qui passe leur portée"   François de la Rochefoucauld