THE EFFECT OF LOAN DELINQUENCY ON THE PROFITABILITY OF MICROFINANCIAL INSTITUTIONS IN CAMEROON: THE CASE OF M’MUOCK COOPERATIVE CREDIT UNION, BUEA
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T he Loan portfolio is the largest asset and biggest source of income for Micro Finance Institutions (MFI) as such, most MFIs advance huge portions of financial resources as loans to clients. On a global scale, MFIs grant Loans to better the lives of the poor and also they grant Loans in order to enhance their financial performance. Despite the stringent evaluation and monitoring strategies put in place by MFIs to ensure repayment of Loans by borrowers, there are quite a number of clients who are unable to pay the interest that accrues on the Loan and sometimes even the principal amount of the Loan which could even lead to collapse of the MFI. This study therefore sets out to critically examine the impact of delinquent Loans on the financial performance of MFIs with M’MUOCKCCUL as case study.
Data for the study were collected from primary source which was one through the administration of Questionnaires. The statistical tool that was used to analyze and interpret was multiple regressions: P= β0+β1DL1+β2ENROL2 +β3ALDP3 +μ . The findings show clearly that delinquent Loans do have an impact on the profitability of MFIs. The findings also revealed that the two major factors accounting for Loan delinquency were willful default and diversion of funds. It is therefore recommended that effective and regular monitoring be carried out on the loans from the disbursement till the final repayment of the loan and also that, periodical training programs should be organized for loan officers particularly in the area of risk management, management of loan delinquency and financial analysis.
1.1 Background of The Study
Micro finance as pioneered in Bangladesh by (Muhammad, 1983) was to assist the low income earners and the poorest of the poor through the micro enterprises for their economic development thus, micro finance is the provision of financial and non-financial services to the poor (Mohammed 2003). The loan portfolio is the largest asset and the biggest source of income for Micro finance institutions (MFI), as such, most MFIs advance huge portions of financial resources as loans to clients. Since the major goal of MFI is to give out loans to poor household and low income earners, MFI expects that their clients be loyal and repay their loan on time , but this is usually not the case as some customers found it difficult to repay their loan (plus interest) which becomes a huge vulnerability in most MFI.
Since most micro loans are unsecured, delinquency can mostly spread from a hand full of loans to significant portion of the portfolio. This contagious effect is worsened by the fact that micro finance portfolios often have a high concentration in certain business sectors. International organizations are coming to the realization that MFIs are veritable and effective channels to ensure program implementation effectiveness, particularly in poverty alleviation projects and firsthand knowledge of the needs and interest of the poor (CGAP,1999).
According to (Schreiner, 2003) the Word Bank Sustainable Banking with the poor project (SBP) in mid- 1996 estimated that there were more than 1,000 micro finance institutions in over 100 countries, each having a minimum of 1,000 members and with 3 years of experience. In a survey of 2006 of such institutions, 73% were NGOs, 13.6% Credit Unions, 7.8% banks and the left 5.6 were savings Unions. An overwhelming majority of the World’s poor live is the third World countries. Various approaches have been employed in alleviating poverty of which provision of credit that targets the poor is one.
Delinquency is the situation that occurs when loan payments are past due. It can also be referred to as arrears or late payments; it measures the percentage of a loan portfolio at risk. Delinquency is measured because it indicates an increased risk of loss, warnings of operational problems, and may help in predicting how much of the portfolio will eventually be lost if it never gets repaid. Delinquent payments or payments in arrears are loan payments which are past due, delinquent loans are loans on which any payments are due. Delinquent loans play a critical role in a MFI’s expenses, cash flow, review and profitability. Additional efforts to collect delinquent loans usually mean additional expenses for closer monitoring, more frequent visits to borrowers, more extensive analysis of the portfolio, and so forth. The more time, effort and resources that are put into controlling delinquency, the less there are available for the MFI to reach new borrowers and expand services or outreach.
Delinquency can result to slower turnover of the loan portfolio and an inability to pay expenses due to reduced cash flow. If the loan is not recovered at the scheduled time, loans to other borrowers can’t be made, and payment of some expenses may also have to be delayed. Also, with reduced cash flow, the MFI may be unable to make timely repayment of borrowed funds or to meet the demand for savings withdrawals.
Micro finance institutions provide financial services (credit, savings, micro insurance etc) to the poor as to reduce the credit rationing they face and help reduce poverty. Should it be profit oriented or not, each MFI tries to maximize repayment performance. High on time repayment rates may allow the MFI to lower the interest rate it charges to borrowers thus reducing the financial cost of credit and enabling more borrowers to have access to credit.(Nara Hai Dhakal Centre for Social and Economic Studies, P.O BOX 10475, Kathmandu, Nepal)
On the 1st of March 2014, National Credit Council (CNC) published that the gross volume of delinquent loans recorded by Cameroonian banks and Micro Finance Institutions was 328 billion FCFA at the end of 2013, while the total in unpaid loans is approximately 14% of the total volume of loans granted by banks and MFIs. This situation is not only detrimental to banks and micro finance institutions but also affects the general health of the economy. While the CNC has put out print ads in the Cameroonian press to make bank debtors more aware of the fact that “ non repayment loan is a virtual scourge for our economy”, the bigger question is what causes customers to default their loans and what needs to be done to avoid loan delinquency.
Dr. Neneh Brownhilder (March 25, 2014). Long (2009) also established that the most common reasons why borrowers default on loans in Cameroon are because of “low household income, mismanagement of funds due to bad business practices” ( customers receive loans with the aim of starting a small business but instead use the loan to send their children to school and or build house); bad faith ( the deliberate act and conscious decision of the borrower), and so called “ acts of God”, or situations that arise that the borrower is unable to control. He further alluded that low household income is the most common of these reasons as the loan is simply not enough to pull some of the borrowers out of poverty and attributed this to the lack of the basic education or initiative required to generate income once credit is given. Consequently, with the high interest rates charged by financial institutions, it becomes difficult for borrowers living in poverty to repay these loans.
1.2 Statement of the Problem
The loan portfolio constitutes the largest operating assets and source of revenue of most micro finance institutions. However, some of the loans given out become non- performing and adversely affect the profitability and overall financial performance of the lending institutions. Most micro finance institutions are confronted with the challenge of rising non-performing loan portfolios despite efforts at stemming the tide. M’MUOCK Cooperative Credit Union is one of such microfinance institutions with a deteriorating trend in the health of their loan portfolio in recent years.
On the 18th of February 2011, COFINEST a major microfinance institution collapsed sparking protest. Thanks to the timely intervention of the government who through the Ministry of Finance, promised to reimburse depositors and pay the February salary of the Institution’s close to 300 employees. COFINEST’ s solvency problems were first revealed in December 2007 when the banking commission place it under provisional administration after a control team from COBAC disclosed a number of irregularities ranging from substantial non- performing and insider loans worth about 3.6 billion FCFA. All efforts made turn around the image and activities of the institutions failed because of the limited power of COBAC. Again as mentioned by the regulatory authority, the shareholders awed the institutions over FCFA5billion, almost 10times more than what is stipulated by the prudential norms on insider lender which led the Minister of Finance to accuse the shareholders of embezzlement.
According to the secretary general of COBAC at the time Idriss Ahmad Idriss, despite efforts made by the supervisory authorities and institutions to certify microfinance in Cameroon, the sector remains fragile and suffers from a total disorder that makes it difficult to control. This led the finance minister of Cameroon at the time to promise the public that the government would put in place a system to control and close down all institutions not adhering to the rules.
Cameroon MFI’s face several constraints related to loan collection and the realization of collateral. Very few of the hundred MFI’s register collateral officially given lack of knowledge and expensive procedures to register. As a result, MFI’s have difficulty realizing collateral through the courts. When clients have loan from banks and MFI’s, the banks are generally better positioned to seize collateral.
As a positive step, the draft OHADA Uniform act on cooperatives provides simplified measures for collateral registration and processing. But little or no efforts are currently being done to sensitize the institutions. The matter is made worst as Cameroon MFI’s do not have access to national credit bureaus and some expert fear this which causes more problems as banks begin to lend more to small businesses. So far, COBAC has made impressive progress in strengthening regulations and licensing the MFIs in the region despite extremely limited resources. (WWW.microfinance gateway.org).
Generally, M’MUOCCCUL provides different varieties of loans such as agricultural loans, educational loans, consumption loans and contract loans, amongst others. From these sets of loans, the following specific questions can be determined:
- What effect does a delinquent loan have on operating profits of micro finance institutions?
- What are the causes related with non -payment of loans in the micro finance institutions?
- What has been done to reduce the rate of probable loss of delinquent loans in micro finance institutions?
- Objectives of the study