The effects of loan granting management on the financial performance of micro finance institutions
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The study armed at evaluating the effect of loan granting management on the financial performance of MITACCUL Yaounde. Specifically, the study examine the effect of the loan appraisal on the financial performance MITACCUL Yaounde; to examine the effect of loan monitoring on the financial performance of MITACCUL Yaounde; to look at the effect of loan recovery on the financial performance of MITACCUL Yaounde. The study is underpinned by the liquidity Preference Theory by J.M. Keynes and the loanable Funds theory by Dennis Robertson. The descriptive approach was done with the use of questionnaires and the simple linear regression method was used to find out the effect of the independent variable on the dependent variable. The findings revealed that: Loan appraisal has an effect on the financial performance of MFI’s ; Loan monitoring has a significant influence on the financial performance of MFI’s and Loan monitoring has an effect on the financial performance of MFI’s The researcher recommends that financial institutions must manage their loan granting effectively if they are to increase their financial performance and reduce the problem of loan delinquency. Financial institutions are first and foremost advised to read this research work. Financial institutions must keep in mind that the main goal of assessment, monitoring, and recovery is to enable the institution to timely collect the loan balance and interest. Therefore, timely repayment of the principal and interest by the borrower is dependent upon efficient loan administration. Therefore, financial institutions should stand up and firmly adhere to the loan-granting procedures.
This chapter consists of background to the study, statement of the problem, research objectives, and research questions, significance of the study and scope of the study.
Here we are looking at the historical background of the independent variables, theoretical background, conceptual background and contextual background.
Here, we will be looking at historical background of loan granting and historical background of MITACCUL.
Historical background of loan granting management
The history of loans began thousands of years ago with farmers using seeds and grains to borrow capital and livestock as repayment process. Since then, the leading process evolved into a complex financial procedure before progression into modern streamlined systems in the digital era. Loan granting management could be tracked back thousands of years ago with the Hammurabi code which codified legal thinking in Mesopotamia 4000years ago. The Hammurabi code did not outline the basic rules of borrowing and did not address concepts like interest, collateral, and default to payment. However, the code did emphasize that failure to pay a debt is a crime that should be treated as that of theft or fraud. The consequences of default in payments could be imprisonment, enslavement, or death. Loan granting must therefore be properly managed by MITACCUL YAOUNDE whose main objectives are to receive deposits and give out loans on interest to be paid within a specific time. In England 1600AD, gold was a prominent medium of exchange. Goldsmiths who were uniquely positioned to assay and value the metal charged a fee to wealthy merchants to hold their gold deposits. Repayments were guaranteed by a note which specified the amount and quality of gold the goldsmith held. To reduce friction, goldsmiths began to also lend this money out on behalf of the merchants through promissory notes. For the first time, the debt of the goldsmith was held and traded as value as opposed to a precious metal or other commodity holding intrinsic worth.
Loan granting management is one of the main issues if modern financial institutions. It involves the risk of financial loss due to the applicants’ failure to repay the loan. Loan
Historical background of MITACCUL
The foundation of MITACCUL still takes its roots form the creation of the first ever credit union in Cameroon (Njinikom Cooperative Credit Union Ltd) by Rev. Father Anthony Jansen in 1963. To be more precise, the creation of this giant credit union MITACCUL started in the form of discussion groups sometime in the late 90’s. These discussions were spear-headed by the Pinyin Development Organization (PDO). All other related social groups within Bamenda and its environs equally strategized their sensitization until 16th January 2000 when the launching took place at Longla Comprehensive College Bamenda, Cameroon. During the launching, about 500 potential members were in attendance and finally 137 got registered at the end of the day. Worthy of note is also the fact that about 7.5million francs was raised as initial shares/savings of the credit union. One school of thought “Millennium Cooperative credit union Ltd”. On this note, this school of thought believed that since the word “Mitanyen” means market for the pinyin people”, the historical setting of the union and the common bond cooperative principle could always remember. Even though other schools of thought came up with other proposals for the name of the credit union. “Mitanyen” unanimously adopted as credit union name. However, this credit union is today operated by proud owners (shareholders) from all over the nation with no racial or religious discrimination.
Theories related to this study include:
The Loan Appraisal process theory by Johnson and Johnson (1985)
Johnson pointed out that the activities in the process of commercial and industrial loans follow eight steps. These steps are application, credit analysis, decision document preparation, closing, recording, serving and administration and collection. These activities and the primary task for those responsible for these activities must be well documented. The first step covers the initial interview and screening of a loan request. Secondly, the credit analysis form information gathered from the borrower is conducted by credit department. The analyst report and determines whether the report accurately describes the borrowing capacity and characteristics of the borrower.
The loanable fund theory by Denis Robertson (1930)
This is a classical theory that states that the rate of interest on the loanable funds is determined by the interactions of the forces of the demand and supply of loanable funds. The demand for loanable funds is derived from the demand of capital goods while the supply of loanable funds depends in the willingness of the lenders to forgo present consumptions in order to save. The rate at which people will save depends on the rate on the interest received from the savings which is the opportunity cost of not consuming the money. Thus, the higher the rate of interest, the more money financial institutions will be willing to lend in order to make gain thereby improving on the financial performance. On the capital market, the interaction of the demand for and supply of loanable funds is the demand for investment. Investment refers to the expenditure for the purchase of making of new capital goods including inventories. The price of obtaining such funds for the purpose of investing depends on the rate of interest.
The liquidity Preference theory by J.M Keynes (1936)
According to Keynes, people demand money not only for investment but for other motives. He concluded that people demand money for transaction, precaution, and speculative motives. The demand for money in liquid from is due to the risk that goes with these assets. Keynes further explained that people demand money for day-to-day transactions (transaction motive), for unforeseen circumstances (precautionary motive) and for changes in the prices of securities (speculative motive). The demand for money for transaction and precaution are active demand and is not influenced by the rate of interest while speculation in influence by the rate of interest. When the rate of interest falls, much money will be demanded for speculative motive. The demand for cash is more complex thus Keynes had to first investigate the motives for holding cash and that is transitionary and precautionary demands are considered to be reluctant to change with the rate of interest while the speculative demand is sensitive to the changes in the rate of interest.
Here, we are going to define some key words
A loan involves an agreement to let the borrower use a certain number of resources for a certain period. In exchange, the borrower must pay the lender a series of payments over a predefined period, which is equal to the original loan plus a predefined interest rate. Josh Kuafman (2012). Usually, there is a predefined time for repaying a loan and generally the lender must bear the risk that the borrower may not repay the loan.
According to Aaron Hill (2003), a loan is when you receive money from a friend, bank, or financial institution in exchange for future repayment of the principal plus interest. The principal is the amount you borrowed, and the interest is the amount charged for receiving the loan.
According to George R, Terry (1955), management is a distinct process consisting pf planning organizing, actuating, and controlling; utilizing each both science and art and following in order to accomplish pre-determined objectives.
Merriam Webster dictionary (2020) defines management as the act or skill of controlling and making decisions about a business, department, or sport team. It is the act of coordinating a group of people to achieve a specific goal.
This refers to the controlling and decision making on the amount of money individuals can borrow with interest on stated amount as well as the monitoring of the loan and how it could be fully recovered.
Anshul Soxane (2009) defined loan appraisal as the process by which a lender appraises the technical feasibility, economic viability and credit worthiness of the prospective borrower. It refers to evaluating credit worthiness of the proposed applicant, credit worthiness also indicate the ability to honor commitments
It is the regular observation and recording of the activities taking place in a project or program concerning the loan. It is a process of routinely gathering information on all aspects of the loan. Phil Bantle (2001).
Loan recovery is the process of making people or companies pay the money that they owe to other people or companies, when they have not yet paid back the debt at the time that was arranged (Cambridge Advanced Learner’s Dictionary & Thesaurus, 2019)
Wikipedia defines loan recovery as the collection of amounts due. The recovery depends on the purpose, time condition, or business purpose.
According to Cambridge Advanced Learner’s online Dictionary & Thesaurus, 2018; performance is how well a person, machine, etc. does a piece of work or an activity. Performance encompasses specific behavior (e.g., sales conversations with customers, teaching statistics to undergraduate students, programming computer software, assembling parts of a product). This conceptualization implies that only actions that can be scaled (i.e., counted) are regarded as performance (Campbell et al., 1993). Moreover, this performance concept explicitly only describes behavior which is goal-oriented, i.e. behavior which the organization hires the employee to do well as performance (Campbell et al 1993)
It is the ability of a business to generate profit on assets, pay its bills smoothly without running out of cash and the ability to manage its assets and liabilities, Josh Kaufman (2012). This refers to how well a firm acquires money (revenue). Will Kenton defines financial performance as a subjective measure of how well a firm can use assets from its primary mode of business and generate revenue.
MITACCUL being a category I micro finance, its main activity is receiving deposits from members and giving out loans on interest bases to make profit. Looking at the context of loan granting management, MITACCUL faces financial issues when these loans are not paid back in time. There is the risk that the member or borrower will not pay the principal and the interest at the required time and this will affect the financial performance of MITACCUL. Hence, it is of great importance to identify the determinants of loan granting management and causes of loan delinquency and propose adequate solutions. MITACCUL YAOUNDE make profit by giving out loans to members with an interest rate; so when these loans are paid back in time the interest, will have an effect on the financial performance of the institution.
MITACCUL YAOUNDE have as main objective receiving deposits and granting out loans to members on interest basis in order to make profit. For these loans to be granted, predefined procedures have to be followed for a better management of the loans. The financial institution needs to conduct a serious appraisal, monitoring and recovery for the better management of the loan.
But this was not the case during our internship at MITACCUL cooperative credit union.
The method used in granting loans were inappropriate such as philosophy of granting loans, loan agreement/contracts were not solved, choice of borrower is not the best, loans officers do not follow loan policy, no capacity to repay, no willingness to repay, members not available, tribalism, corruption, favoritism, poor policy and procedures of recovery which may include;
Directions are not clear enough.
Not follow up, monitoring and poor evaluation.
Policies and procedures are not clear.
Lack of education to members on the various loan types, implications, and disadvantages.
There is an acute lack of financial counseling to know members’ existing problems.
There was a poor loan appraisal, little or no loan monitoring and this led to serious loan delinquency and default. This affected the ability of the financial institution to pay bills since it was running out of cash due to members’ inability to pay back the loan and interest at the stated date. Effective loan appraisal, monitoring and recovery process must be taken into consideration for the financial institution to be able to meet up with its stated objectives. The fact that members could not successfully withdraw convenient amount of money from their account because the union is running out of cash caused the members to become very reluctant to save. This then made us to access the effect loan appraisal, loan monitoring and loan recovery will have on financial performance of MITACCUL YAOUNDE.
The research objectives are divided into two which are the main objectives and the specific objectives.
1.3.1 The main objective
To evaluate the effect of loan granting management on the financial performance of MITACCUL YAOUNDE
1.3.2 Specific research objective
- To examine the effect of the loan appraisal on the financial performance MITACCUL YAOUNDE
- To examine the effect of loan monitoring on the financial performance of MITACCUL YAOUNDE
- To examine the effect of loan recovery on the financial performance of MITACCUL YAOUNDE
The research questions are divided into two that is the general and the specific research questions.
1.4.1 General research question
What is the effect of loan granting management on the financial performance of MITACCUL YAOUNDE?
1.4.2 Specific research questions
- What is the effect of loan appraisal on the financial performance of MITACCUL YAOUNDE?
- What is the effect of loan monitoring on the financial performance of MITACCUL YAOUNDE?
- What is the effect of loan recovery on the financial performance of MITACCUL YAOUNDE?