The Effects of Loan Management on the Profitability of Micro Finance Institutions in the Southwest Region of Cameroon
No of pages
|MS Word & PDF|
The custom academic work that we provide is a powerful tool that will facilitate and boost your coursework, grades and examination results. Professionalism is at the core of our dealings with clients
For more project materials and info!
Call us here
Loan management is one of the most important activities in MFIs and cannot be overlooked by any financial Institution engaged in loan. This study is aimed at assessing the effect of loan management on the profitability of micro finance institution within the southwest region of Cameroon. As with any financial institution, the biggest risk in micro-finance is lending money and not getting it back. The study sought to determine the effect of loan management on the profitability of Micro finance Institutions. As methodology, primary data was collected from the various MFIs in the study using questionnaires and observation. The data was analyzed using the Pearson Product Moment Correlation Coefficient alongside the statistical package for social sciences program. This study argues that loan management greatly affects the Profitability of MFIs in the Southwest Region. It also proved that there is a positive relationship between client appraisal, credit terms, and credit risk control and collection policy on the profitability of MFIs. MFIs need to invest in managing their loans given that it greatly affects their profitability. They should develop an appropriate loan policy used for managing loans in order to match up to the economy they find themselves in so as to reduce loan default and increase profitability.
1.1 Background of the Study
Loan is one of the many factors that can be used by a firm to influence demand for its products. According to Horne and Wachowicz (2019), firms can only benefit from loan if the profitability generated from increased sales exceeds the added costs of receivables. Myers and Brealey (2019) define loan as a process whereby possession of goods or services is allowed without spot payment upon a contractual agreement for later payment.
Loan management is one of the most important activities in any company and cannot be overlooked by any economic enterprise engaged in loan irrespective of its business nature. It is the process to ensure that customers will pay for the products delivered or the services rendered.
Loan management is concerned primarily with managing debtors and financing debts. The objectives of loan management can be stated as safe guarding the companies’ investments in debtors and optimizing operational cash flows. Policies and procedures must be applied for granting loan to customers, collecting payment and limiting the risk of non-payments.
Honker Faze Rashid(2020), Loan management is a term used to identify accounting functions usually conducted under the umbrella of Accounts Receivables.. He explains that the process of loan management begins with accurately assessing the loanworthiness of the customer base. This is particularly important if the company chooses to extend some type of loan line or revolving loan to certain customers. Proper loan management calls for setting specific criteria that a customer must meet before receiving this type of loan arrangement. As part of the evaluation process, loan management also calls for determining the total loan line that will be extended to a given customer.
According to Nwankwo (2018), loan management constitutes the largest single income-earning asset in the portfolio of most banks. This explains why banks spend enormous resources to estimate, monitor and manage loan quality. This is understandably, a practice that impact greatly on the lending behavior of banks as large resources are involved.
Myers and Brealey (2017) describe loan management as methods and strategies adopted by firms to ensure that they maintain an optimal level of loan and its effective management. It is an aspect of financial management involving loan analysis, loan rating, loan classification and loan reporting.
Nelson (2019) views loan management as simply the means by which an entity manages its loan sales. It is a prerequisite for any entity dealing with loan transactions since it is impossible to have a zero loan or default risk. The higher the number of accounts receivables and their age, the higher the finance costs incurred to maintain them. If these receivables are not collectible on time and urgent cash needs arise, a firm may resort to borrowing and the opportunity cost is the interest expense paid.
Nzotta (2020) pointed out that loan management greatly influences the success or failure of commercial banks and other financial institutions. This is because the failure of deposit banks is influenced to a large extent by the quality of loan decisions and thus the quality of the risky assets. He further notes that, loan management provides a leading indicator of the quality of deposit bank’s loan portfolio. A key requirement for effective loan management is the ability to intelligently and efficiently manage customer loan lines. In order to minimize exposure to bad debt, over-reserving and bankruptcies, companies must have greater insight into customer financial strength, loan score history and changing payment patterns.
According to the business dictionary profitability involves measuring the results of a firm’s policies and operations in monetary terms. These results are reflected in the firms return on investment, return on assets and value added. Stoner as cited in Turyahebwa (2019), defines profitability as the ability to operate efficiently, profitably, survive, grow and react to the environmental opportunities and threats.
Hitt,et al (2017) believe that many firms’ low profitability is the result of excessive operating costs, inadequate revenue, or, in most cases, a combination of both. MFIs earn financial revenue from loans and other financial services in the form of interest fees, penalties, and commissions. Financial revenue also includes income from other financial assets, such as investment income. MFI‟s financial activities also generate various expenses, from general operating expenses and the cost of borrowing to provisioning for the potential loss from defaulted loans. Profitable institutions earn a positive net income (i.e., operating income exceeds total expenses).
The success of MFIs in Cameroon largely depends on the effectiveness of their credit management system because these institutions generate most of their income from interest earned on loan extended to small and medium entrepreneurs. The Central Bank Annual Supervision Report (2020) indicated high incidence of credit risk reflected in the rising level of non- performing loan by the MFIs in the last 10 years, a situation that has adversely impacted on their profitability. This trend not only threatens the viability and sustainability of the MFIs but also hinder the achievement of the goal for which they were intended which are to provide credit to the rural unbanked population and bridge the financing gap in the mainstream financial sector.
Today, Microfinance institutions like BALI CENTRAL CREDIT UNION LIMBE are seeking financial sustainability. Many MFIs were restructured in order to achieve financial sustainability and finance their growth. Microfinance institutions in Cameroon provide a reliable source of financial support and assistance compared to other source for financing.
Microfinance was originally conceived as an alternative to banks which in most developing countries serve only 5-20% of the population. It was initially developed by and is today still primarily developed by non- government organization (NGOs) who received donor funds and lend to microfinance clients (often at subsidize rate). In many cases government also play a critical role in setting policy for the microfinance industry, providing sum grants to NGOs or other microfinance institutes (MIFs) or lending directly to the poor credit unions, cooperatives, commercial banks and small information groups and important players in microfinance. The model of non-market base micro lending has had mixed success in term of financial performance.
1.2 Problem Statement
loan management in BALI CENTRAL COOPERATIVE CREDIT UNION LIMBE is placed as prior condition for a Financial institutions stability and continued profitability, while a deteriorating quality of loan management is the most frequent cause of poor ptofitability among MFIs.
The probability of bad debts increases as loan standards are relaxed. Firms must therefore ensure that the management of receivables is efficient and effective. poor management of loans in form of delays in collecting cash from debtors as they fall due has serious financial problems, increased bad debts and affects customer relations.
Effective loan management practices and loan accounting practices should be performed in a systematic way and in accordance with established policies and procedures. To be able to prudently value loans and to determine appropriate loan provisions, it is particularly important that banks have a system in place to reliably classify loans on the basis of loan risk to facilitate repayment of loans by customers (Kagwa, 2020) and goes ahead to stress that if loan management is not properly handled, then the overall profitability of an institution is affected.
It is against this background that the researcher wishes to examine the effects of loan management on the profitability of Micro Finance Institutions in the southwest region of cameroon.
1.3 Research Questions
This study seeks to answer the following questions;
- What is the effect of loan management on the profitability of MFI?
- To what extend does client appraisal affects profitability?
- To what extend does loan terms affects profitability?
- To what extend does credit risk affects profitability?
- To what extend does collection policy affects profitability?
1.4 Objective of the Study The Main Objective
The main objective of this study is to establish the effect of loan management on the profitability of MFIs.
The specific objective
- To assess the impact of credit risk on the profitability of MFIs.
- Identify the problems associated with loan management in MFIs.
- Recommending strategies that effectively address the proper loan management in MFIs.
- Research Hypotheses
Here the researcher intern uses the alternative hypothesis and the null hypothesis to test the findings.
H0: loan management has no significant effect on the profitability of MFIs.
H0: Collection policy has no effects on the profitability of MFIs.
H0: Client appraisal has no effect on the profitability of MFIs.
H0: Loan terms has no effect on the profitability of MFIs.
H1: loan management has a significant effect on the profitability of MFIs.
H1: Collection policy has no effects on the profitability of MFIs.
H1: Client appraisal has no effect on the profitability of MFIs.
H1: Loan terms has no effect on the profitability of MFIs.