Intracompany Loan and Financial Performance of Manufacturing Firms in Rwanda
Abstract
The manufacturing sector in Rwanda contributes to less than 5 percent of the GDP. The financial performance of manufacturing companies in Rwanda has been declining over the years. This may be due to low intracompany loans, thus formed the justification of the study. For instance, Cimerwa, the largest cement manufacturing company in the country, made a net loss of Rwf 7.4 million in 2016, Rwf 5.5 million in 2017 and further Rwf 7.1 million in 2018. The reviewed empirical literature had mixed results. Some studies revealed that intracompany loans positively affect financial performance, while other studies showed a negative effect. Based on this background, the study sought to examine the effect of intracompany loan on financial performance of the manufacturing firms in Rwanda. The study was anchored on pecking order theory. The target population was 32 manufacturing firms. The data was collected from 2015 to 2019. The findings of the study revealed that a positive association existed between intracompany loans and financial performance. Based on the regression analysis, it was found that intracompany loans had a positive and significant effect on return on investment (β=0.956415, p=0.001). The study recommended that intracompany loans need to be increased between a subsidiary and parent company. The terms and conditions of payment of a given loan between a subsidiary and parent company need to be made more friendly and promising than a loan taken from other lenders.
Keywords: Intracompany loan, ROI, financial performance, manufacturing, Rwanda
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