THE EFFECT OF LOAN GRANTING ON THE PROFITABILITY OF MFIs IN CAMEROON: CASE STUDY OF TIKO BANANA PROJECT COOPERATIVE CREDIT UNION LIMITED (TBPCCUL)
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The purpose of this study was to investigate the effect of loan granting on the profitability of Microfinance Institutions in Buea, Cameroon. The study was guided by two specific objectives which included: To evaluate the effect of credit management on the profitability of microfinance institutions in Cameroon, and to examine the effect of interest rate on the profitability of microfinance institutions in Cameroon. The study adopted a descriptive correlational research design. A stratified random sampling technique was used to select a sample of one hundred (100) officers of MFIs from the total population. The data collection instrument used in this study was a structured questionnaire. The study analyzed data using descriptive and inferential statistics. The descriptive statistical analysis included frequencies and percentage distributions, mean and standard deviation while the inferential statistical analysis included Pearson Correlation and Regression analysis. Statistical Package for Social Sciences (SPSS) was used as a tool for statistical analysis and the results and was presented in figures and tables. The hypothesis tested through a correlation test, revealed that there is a strong positive relationship between credit management and the profitability of MFIs (r = .706, p = 0.044b*). The findings also revealed that there is a strong positive relationship between interest and the profitability of MFIs (r = .686a, p = 0.042b*). However, it is recommended that TBPCCUL collection procedure for any loan arrangement should be spelled out as part of the loan terms since is important for borrowers to be aware of the details of the collection procedure so as to avoid penalties, and in the case of collateral or secured loans, repossession of the collateral in the event of a loan default. The study further recommends that future research should be conducted to investigate the impact of access to credit information on the growth of MFIs in other parts of the country not Tiko. Keywords: Credit Management, Interest Rate and MFIs Profitability
1.1 Background of the Study
The concept of micro finance originated from the field of informal finance in the years 1970 and 1980.Micro finance involves the provision of financial services such as savings, loans and insurance to poor people living in both urban and rural settings who are unable to obtain such services from banks (Basley 2002).Micro finance according to Otero (1999.p.8) is the provision of financial service to low income poor and very poor finance self-employed people. These financial services according to Ledger wood (1999) generally include micro savings and micro credit, but can also provide other services like micro insurance and money transfer or payment services. Micro finance institutions also provide non-financial services like education, counseling, health, technical assistance training and many others. They are nine approaches of providing micro credit or finance to customers. These ones are; the minimalist approach, the integrated approach, the institutional approach, welfarist approach, the commercial approach, the individual approach, the group lending approach, the existing business approach and the creation approach(Messomo,2012).When micro finance institutions perform services like micro credit, there is high probability of default. This at times greatly affects the probability of microfinance institutions.
The concept of microfinance was pioneered in Bangladash MuhammedYunus in the year 1970s in the village of jobra. He experimented by lending to the poor women of the village of Jobra. He also found the Grameen bank and won the noble price in 2006(Helms, 2005). Since then, innovation in microfinance services has evolved. This evolution is aimed at alleviating poverty. Poverty has been the talking point of most political agendas worldwideespecially less developed countries like Cameroon. According to International Monetary Fund (IMF, 2003) country report on poverty reduction strategy papers(PRSPS), poverty rate in Cameroon has about was 40.2% in 2001.According to Ayuk (2012), Cameroon has about 500 microfinance institutions of all categories actively participating in the alleviation of poverty. If alleviation of poverty by MFIs through the granting of micro credit leads to default at times, there is a need to identify this problem. The evolution of microfinance has been the turning point in financing of both entrepreneurial ventures and small businesses.
In a number of European countries micro finance evolved from informal beginnings during the 18th and 19th centuries as a type of banking of the poor, juxtapose to the commercial and private banking sector. Almost from the unset microfinance meant financial intermediation between micro savings and micro credit and was powered by intermediation. In Germany, the former microfinance institution now accounts for about 50% of banking assets; the outreach is to about 90% of the population. Microfinance in Asia has much longer history, though little seems to known about the early history of hui in China, Chit funds in India, the arisen in Indonesia or the paluwagan in the Philippines to name a few. Financial institutions of indigenous origin, most of them informal are still exceedingly wide spread but had been largely ignored in financial sector developments. However, there are exceptions on a limited scale, as in India where chit funds are regulated like in Indonesia with its highly diversified rural microfinance sector where various forms of informal financial institutions have been registered and eventually regulated throughout the 20th century (Hans, 2005).
Over time, micro credit programs all over the world improved upon the original methodologies and defiled conventional wisdom about financing the poor. First, they showed that poor people, especially women, had excellent repayment rate among the better programs, rates that were better than the formal financial sectors of the most developing countries. Secondly, the poor were willing and able to pay interest rate that allowed microfinance institutions to cover their cost. So, financial service providers have had better understanding of the need of microfinance institutions and of the wide range of financial rate of low income people in both urban and rural areas (Gateway). These needs might be managing irregular income flows and coping with crisis such as unexpected sickness, natural disasters and death, many financial service providers have broaden their scheme of operations beyond their product of providing only credit services but also offer other services like; savings, insurance and money transfers, to help poor people manage their financial lives (Robert et al, 2004). New technologies continue to create opportunities to broaden microfinance institutions financial services and to also provide those services at a lower cost to the poor.
Over the last 10 years, the quality of the loan and its portfolios across many economies worldwide stayed comparatively stable until the emergence of 2007-08 financial crises. Since then, the quality of the bank assets declined quickly because of the world economic downturn. The reality is that loan performance is closely associated with the economy of any country and decline in the loan performance was not yet standardized across the world economies (Gerstel and Baesens, 2008).
Healthy loan portfolios are therefore vital for lending institutions in view of their impact on Liquidity, lending capacity, earnings and profitability of the financial Institutions. Nonetheless some of the loans given out by the lending institutions unfortunately are not paid back and eventually result in bad debts with adverse consequences for the overall financial performance of the institutions. The issue of loan defaults becoming an increasing problem that threatens the sustainability of financial institutions. The causes of the problem are multi-dimensional and non-uniform among different literatures. Unsettled loans are always a source of misery for lenders because if a bank has too much of it on its balance sheet, it can adversely affect its operations in terms of liquidity, profitability, debt- servicing capacity, Lending capacity and ability to raise additional capital.
The concept of microfinance development in Cameroon can be traced back to the 19th Century when moneylenders were informally performing the role of new formal institutions. These informal lenders were mostly „„Njangi‟‟ groups and Cooperative Credit Unions. The first micro-finance institution in Cameroon was created in 1963 by Janson, a Dutch Catholic Father in Njinikom, Bamenda of the North West Region of Cameroon. The law of 1990 which allowed for freedom of association and creation of Common Initiative Groups (CIG) came to foster the powerful existence and manifestation of micro-finance institutions in Cameroon. For many years in Cameroon, the micro-finance sector has evolved and has been transformed into a system of provision of short term loans, savings, credits, money transfers, etc thanks to various financial sector policies and programs undertaken by the government since independence. MFIs now are the primary sources of funds to small and medium size enterprises in Cameroon and other countries in the process of economic growth. Although finance literature explains the emergence of the micro-finance industry as an answer to an unfulfilled demand (Littlefield & Rosenberg, 2004), MFIs are not evenly spread around the globe and Cameroon in particular. Hardy et al. (2002), by comparing Cameroon and Gabon concludes that even though the countries have similarities (common currency, comparable per capita income, etc.), the microfinance industry is more expanded in Cameroon than in Gabon. The environment in which MFIs operate plays a vital role in the crosscountry differences. While a lot has been written on factors influencing the development of the financial sector as a whole, almost nothing has been written on the factors determining microfinance performance and its macro environment. Most works on the microfinance industry focus on the institutional side of the organizations (Hudon, 2006). The impact of MFIs on poverty reduction, economic growth and women empowerment has increasingly received greater attention in many developing countries like Cameroon. Conversely, much has not been done linking the development of the microfinance industry with macro-economic activities.
In 1969 there were already 34 credit union in existence organized jointly by the mission and the government department in charge of cooperatives. 34 credit union the joint to form the league known today as CAMCULL acting as a regulating organ to its affiliate‟s credit union. It operates in all the region of Cameroon with its headquarter in Bamenda. Today, it‟s an umbrella organization for over 200 credit union with a total of 196922(urban and rural) members. Its provides a wide range of services to its members, it also manages savings that is an amount of over 41000million FCFA its network consolidated balance is over 49840589FCFA.It is worth mentioning that credit unions are also subjected to law number 921006 of 14180106 and decree number 21455pm of 23/11/92 relating to rules and regulations governing cooperative societies as well as initiative groups. Another credit union network named Renaissance cooperative credit unions RECCU-CAM ltd now exist in Bamenda, north west regional chief town, according to the local English language newspaper, the SUN. It was officially registered on May 30, 2013 but its constituent assembly held earlier in Bamenda on Saturday May 11. Mohammed Yunus founded the Garment bank whose research pioneered the concept of providing micro banking services and non-collateralized loans or the poor in order to alleviate poverty.