Molyko, Southwest Region - Buea, Cameroon


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The main objective of this study is to assess the effect of non-performing loans on the performance of Buea P & T cooperative credit union. The study used a survey design using primary data obtained from a structured questionnaire. Data obtained was analyzed using correlation and Regression model and results obtained (r = 0.794) tested for significance using Kolmogorov Smornov test.

From the results gotten it is seen that loans ratio and leverage have a negative relationship with the profitability (ROA) while firm size had a positive relationship with return on assets.This is seen from the coefficients of -0.229, -0.23 and 1.529 respectively. However, this study also concluded that, there is a significant negative relationship between holdings of non-performing loan ratio and profitability. T

his results are so because the variable relationships showed significant values, since the p-value was in all cases less than 0.05, at 95% level of significance. The study recommends that BUPTCCUL’s should opt for equity financing instead of debt financing if it wants to improve on its leverage.

This involves funding growth through retained earnings and issuing of shares. The study also recommends that credit approval and monitoring procedures should focus on the borrower’s cash flow and ability to repay in an effort to improve the quality of the loan assets and mitigate future allowances for loan losses.

KEYWORDS: Loan ratio, Leverage, firm size, Performance, Microfinance Institutions.


1.1 Background of the Study
Extension of credit facilities is one of the major activities of all Microfinance institutions including Savings and Loans Companies, Rural banks, Financial Non-Governmental Organization (FNGOs) and credit Unions. Loans are the dominant asset and represent 50-75 percent of the total amount at most Microfinance institutions, generate the largest share of operating income and represent the Microfinance institutions greater risk exposure (Mac Donald and Koch, 2006).

Moreover, its contribution to the growth of any country is huge in that they are the main intermediaries between depositors and those in need of fund for their viable projects (creditors) thereby ensure that the money available in economy is always put to good use.
Healthy loan portfolios are therefore vital for lending institutions in view of their impact on Liquidity, lending capacity, earnings and profitability of the MFIs. A loan refers to money lent out at an interest. In other words, a loan refers to something lent for the borrowers temporary use on a condition that is equivalent to what is returned. Successful lending is about getting the balance right between financial return the lender expects and the risk that the borrower may not be repaid as anticipated.
To some extent lending money is said to be a matter of common sense but in addition to succeed as a lending institution one needs to adopt a formalized approach to lending so that they don’t miss anything. Every lending institution finds itself from time to time with loans in portfolio for which the risk of loss is greater than the anticipated when the loan was made or which the risk is greater than a lender would ordinarily or willingly assume.

For instance according to the Central Bank of Kenya Supervision Report of 2002, a total of 1,098,437,000 were classified as losses in Stanbic and were attributed to the failure of the borrowers to pay back their loans advances (Islam, 2009). Industries in the world has been driven largely on credit facilities from the banks and other financial sectors in the world economy and has played a pivotal role in our socio-economic development, (Hamisu, 2011).
The banking industry has to be applauded for this prominence and influential role.

This means that the other industries in world have depended mostly on the financial sector especially the banks for various financial supports and this have contributed to the survival of the world economy.
However, many banks in the world most especially those in the developing world today are making huge losses due to the problem of nonperforming loans in their books. The possibility of a bank to make losses as a result of loans defaults by debtors often happens in the financial sector especially Microfinance institutions.

This is clearly a negative effect against the intermediary role the banks play towards the growth of the economy. The rate at which these institutions give credit to businesses and some individuals step up the pace of economic growth of the nation (Kolapo, Ayeni, Oke, 2012).
Cameroon financial system is regulated and monitored by the CEMAC. There are acts that guide the functioning of microfinance institutions. Acts has regulations which guide the activities of all banks and some other financial institutions in the country. Unfortunately, records show that profits in the sector fell sharply in the years 2005 to 2007 to numerous reasons amongst the non-performing loans ratio(NPLR) on the books of most MFI but however saw a better liquidity and profitability performance at the close of 2009 (BEAC, 2012).
Financial institutions all over the world face several risks of nonperforming loans, it is however prudent for these institutions to introduce monitoring mechanisms to follow up with the activities of borrowers. It is well noted that importance of credit risk management has increased particularly in the developing countries for both lenders and borrowers.

It is a fact that average MFI asset quality worsened sharply due to the global economic meltdown. It is argued however that the poor performance of loans was very uneven in a number of countries. It is also established that a number of variables significantly affect NPL ratios which includes but not limited to lending interest rate, share prices and some risk factors. Non-Performing Loans is the possibility of a borrower defaulting an unpaid loan either partly or in full (Basel Committee on Banking Supervision ,2001), This is in line with Ahmad and Ariff (2007), who stated that NPL is a percentage of loans that are not repaid within three months.

The committee further emphasized on credit risk management practices due to the rise of NPLs which is unfavorable to banks achievement of core targets. Balasubramaniam (2013) outlined some effects that NPLs can have on MFI’s activities.
Non-performing loans are considered to be a drag on the economic activity of each bank. A study from IMF (2015) supported that countries in which their MFI have high levels of NPLs credit growth remains slow.

More specifically, firms that are more dependent on MFI finance are likely to be affected more than other firms from the reduced lending capacity of MFI.
Moreover, from IMF (2015) it was also found that banks that have high levels of NPLs on their balance sheets, they also have a lower ability for lending to the real economy. This happens through 3 major channels: Lower profitability: The existence of a high NPL level implies less net operating income for a MFI.

Also, increased levels of NPLs significantly reduce profits due to the greater effort that must be exercised from the human resources in order to manage and monitor the large stock of NPLs. Higher capital requirements: NPLs constitute risky assets. This means that they attract greater risk weights and as a result higher capital requirements will be needed. Higher funding cost: MFI that hold large amounts of risky assets, such as NPLs, make other banks and investors have less willingness to lend them or lend with higher funding costs.
In particular, increasing levels of NPLs constitute a substantial drag on the MFI performance in the sense that MFI with high levels of NPLs will have: • net interest income cuts • rise of impairments costs • extra capital requirement for risky weighted assets • potential lenders with lower risk appetite (i.e. less risk-lover borrowers).
The emergence of microfinance as a support to mainstream financial services provision has become indeed a sigh of great relief for most people and institutions that are often unable to partake in the formal financial sector even though its (microfinance) advent has also instigated some challenges.

It is important that such a great contributor to socio-economic development be considered at global, African and national or local levels. According to the World Bank Group of the International Finance Corporation (IFC) 2018, globally, microfinance has built a solid track record as a critical tool in the fight against poverty and has entered the financial mainstream.
The World Bank Group further stated that rapid growth of the industry over the past 15 years has reached approximately 130 million clients according to recent estimates.

Yet, microfinance still reaches less than 20 percent of its potential market among the world’s three billion or more poor. The evolution of the industry has been driven by many factors which include the transformation of microfinance providers, the sizable supply gap for basic financial services, the expansion of funding sources supporting the industry and the use of technology.

As theindustry has developed, there has been a shift from specialized Non-Governmental Organizations (NGOs) to an increasing number of regulated and licensed MFIs which stress that sustainability and impact go hand in hand. Furthermore, The World Bank Group is working with private microfinance institutions and stakeholders to incorporate responsible finance practices into all aspects of business operations.

When done responsibly, private microfinance can have significant development impact and improve people’s lives. Microfinance simply has to do with the extension of financial services such as microcredit, micro savings, money transfer and other financial products to poor or low-income and unsalaried. Individuals or micro enterprises, who but for such services would have been excluded from the formal banking system, Institutions that engage in these are called Microfinance Institutions (MFIs). Cameroon continues toperiodically experience a proliferation of these institutions. Boateng et al. and Belnye, observed that in response to rampant collapse and disappearance of MFIs or Susu companies and financial service providers (as they were then called).
There is no deposit insurance in Ghana, therefore, when MFIs collapse, customers irretrievably lose their working capital, savings and their sources of livelihood –their businesses are likely to collapse, which further predisposes them to indebtedness and consequentially impoverishment. Boateng et al. further hinted that the public needs to have confidence in financial institutions to patronize their services; the collapse of MFIs is therefore a bad press for Cameroon’s finance sector.

In a country whose microfinance penetration to the low-income population is as low as 9 percent, it is also detrimental for existing MFIs. Typical of this situation is the collapse of MFIs.
1.2 Statement of the Problem

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