Abstract

This study seeks to investigate the effect of innovations on the profitability of Microfinance Institutions in the Buea Municipality. It focuses on product innovations, Technological innovation. The general objective of the study was  to determine  the  effects  of  Microfinance   innovations  on the Profitability  of  microfinance  institutions  in  Buea Municipality. Specific objectives included to examining the effects of product innovations, and Technological innovations on the profitability of microfinance institutions in Buea municipality.

The study was guided by the theory of Demand-Supply theory of innovation, Diffusion Innovation theory. A total of 50 employees working with microfinance Institutions in Buea municipality were purposively sampled with the use of a structured questionnaire. After carrying out descriptive analysis of the data, the Ordinary Least Square method was used to analyze the data. From the findings, it is seen that product innovations, and technological innovation positively influence profitability of Microfinance Institutions in Buea municipality.

This shows that an increase in a unit of product technological and technological innovations will contribute to an increase in the profitability of MFIs in Buea Municipality. The study recommended that in-order to enhance the profitability of MFIs; the management of MFI ought to focus on product innovation and technological innovation. This will positively improve the profitability of microfinance institutions in Buea municipality.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

For most firms, successful innovations are engines of growth (Cohen, 1997). Innovation is  described  as  the  technological  by  which,  firms  master and  implement  design,  and  the production of goods and services that are new to them regardless of whether they are new to their competitors, country or the world (Mytelka, 2000).

Innovation is the continuous technological of upgrading by employing new knowledge or the new combination of existing knowledge that is new to the local area (Spielman, 2005). The microfinance industry has every sign of an innovation in its take-off phase with Muhammed Yunus and the Grameen Bank of Bangladesh in the 1970s by granting microcredit, provision of small, unsecured loans to mostly women for enterprise development. These innovations however enabled the microfinance institutions to attain its dual mission of sustainability and growth (the welfarists and institutionalists).

The characteristic aspects of the microfinance innovations were developed in the 1970s and 1980s; thirty years later the industry experienced a phenomenal growth rate and it has diffused to most developing countries in the world. Practitioners of microfinance have referred to microfinance innovations as the last hope for the poor. It is estimated that by 2005, more than 67 million households were served by microfinance programmers (Armend & Morduch, 2005).  Earlier in 2004, approximately 665 million client accounts, at over 3,000 institutions were serving clients poorer than those served by the commercial banks. Of these accounts, 120 million were with institutions normally understood to practice microfinance (Christen et al., 2004).

It also included postal saving banks (318 million accounts), state agricultural and development banks (172 million accounts), financial cooperatives and credit unions (35 million accounts) and specialised rural banks (19 million accounts). The highest concentration was in India (188 million, representing 18% of the population) while the lowest were in Latin American and the Caribbean (14 million, representing 3% of the population) and Africa with 27 million, representing 4% of the population (Christen et al., 2004)

Historically, Microfinance started in Bangladesh and parts of Latin America in the mid-1970s to provide credit to the poor (seen as an important tool to reduce poverty) particularly for women, by giving access to small loans, who were generally excluded from formal financial services (Schwarz, 2011). The model gain popularity and has since been extended to low and high income countries. Banco Sol in Bolivia and Bank Rakyat in Indonesia are two examples of this.  Daley-Harris (2006) reports that, between December 1997 and December 2005, the number  of  microcredit  institutions  increased  from  618  to  3,133 in developing nations.

Similarly, the number of recipients (84% of whom are women) rose from 13.5 million to 113.3 million during the same period (Grameen Bank, 2017). Though with main objective to alleviate poverty, microfinance is yet to achieve its objectives. There is however certainty as Microfinance Institutions have sought to innovations as a solution since Innovativeness is one of the fundamental instruments of growth strategies to enter new markets, extend its services to the poor and needy, to increase the existing market share and to provide the company with a competitive edge.

Also motivated by the increasing competition in global financial markets, Microfinance Institutions have started to grasp the importance of innovation, since swiftly changing technologies and severe global competition rapidly erode the value added of existing products and services. Thus, innovations constitute an indispensable component of the corporate strategies for several reasons including to apply more productive manufacturing technologicales, to perform better in the market, to seek positive reputation in customers’ perception and as a result to gain sustainable competitive advantage which all contribute to increase profitability in the form of profitability and returns.

Technological innovation is the introduction of a good or service that is new or significantly improved regarding its characteristics or intended uses; including significant improvements in technical specifications, components and materials, incorporated software, user friendliness or other functional characteristics (OECD Oslo Manual, 2005). Product and technological innovations are closely related to the concept of technological developments ( Gunday & Kilic, 2009). Product innovation is inevitable if businesses are to remain relevant and sustainable. There are various theories that have been developed that tend to bring out the relationship between product innovation and organizations profitability.

For example according to the product life cycle theory by Vermon, (1966), a product goes through 5 stages in life where at some point unless modifications are done, the product becomes obsolete and irrelevant and drops the profitability. It is important that businesses invest highly on market research programmes in order to identify changes in consumer needs as the product advances through its productive life. He argues that like any living being, products go through various stages in their productive lives from invention, maturity to decline stage forming a unique cycle in the product life. These stages are characterized by specific features which determine the length of time a product spends in one stage depending on the marketing strategies applied (Kulkarni, 2009).

If not nurtured through continuous improvements the products decline and die naturally like any living being. With this understanding, product innovations are expected to be a continuous and deliberate strategic approach if organizations especially MFIs expect to sustain profitability and growth (Palmer, 2000).This theory has proven that products do not survive forever. Aggressive marketing strategies have to be applied to prolong product life in any stage of the product life cycle. These innovations strategies may include differentiation strategies, modifications via technology and product positioning techniques (Schilling & Hill, 1998).

In Cameroon, the concept of innovation and profitability lacks a lot of empirical literature with little or no information relating to this area of study. Most studies that exist bring highlighted aspects such as operational expense ratio, portfolio at risks, and staff productivity as major determinants of profitability for MFIs (Nwasi & Ngambi, 2014). Poor profitability of Microfinance in Cameroon is also associated with decision making and operational technologic ales known by Wamba, Bengono & Teulon (2018) as governance issues.

This is further compounded by the fact that the boundaries between microfinance and commercial banking activities are becoming blurred, microfinance services in Cameroon have been left at the mercy of Non Governmental Organization (NGOs). With increase competition with commercial banks, MFIs become more profit orientated drifting away from its original mission. Formal microfinance activities can be traced back in 1963 following the creation of the first cooperative savings and loans institution at Njinikom, North West region of Cameroon by the Roman Catholic clergy (Fotabong, 2010). Until 1990s, the development of microfinance institutions in Cameroon remain very weak when the president passed a law No. 09/053 of 19 December 1990 relating to freedom of association and law No. 092/006 of 14th August 1992 relating to cooperatives, companies and common initiative groups were enacted.

Banking crisis of the late 1980s is another contributing factor that led to the growth and development of microfinance in Cameroon. Some top executives who lost their jobs or dismissed during the crisis formed corporative credit unions that functioned like mini-banks.

Though  most  of  these  institutions had  their origins  from  the  North  West  and Western  regions  of  the  country, most of their branches are highly concentrated in Yaoundé, Douala, Bafoussam and Bamenda. Most villages and some semi urban areas are yet to feel a touch of MFIs thus hampering their initial promise of poverty alleviation.

This is due to poor road infrastructures, little or no telephone coverage, and lack of electricity supply and low level of security. This is particularly sad as close to 50% of the country’s population live in rural areas and an estimated more than 60% is dependent on agriculture and farming for their livelihood (Fotabong, 2012). Also, lack of a well-defined technological of operations, provision of the same product year in, year out, limited technology, high operation cost are some of the causes of low profitability in MFIs in Cameroon.

1.2 Statement of the Problem

Microfinance innovations (product, technological and institutional innovations) have eased the way of doing business for financial institutions including microfinance institutions (Ongwen, 2015). Various scholars around the world have examined the effects of innovations on profitability. This is seen in the studies of Kariuki (2010), Mugo (2012), Chemitei (2012), Chemitei (2012) and Mwangi (2014), Ongwen (2015) etc. But however, some of these studies did not link these innovations to profitability of MFIs. In Cameroon, studies carried out in relation to microfinance and innovation failed to show the effects of these innovations on the profitability of MFIs.

Innovations have brought about greater outreach and sustainability, especially with the adoption of technology. Leading financial institutions such as commercial banks are very innovative in their institutionalization, products and technologies which have resulted in improved profitability (Talom & Tangeh, 2019). However, this has not been the case with MFIs in Cameroon and Buea Municipality in particular.

It remains largely unclear whether MFIs in Buea Municipality are adequately innovative in running their businesses given that they are faced by the challenge of limited growth and expansion which is as a result of low profitability. Profitability and growth are related in that a firm cannot grow if it fails to post sound profitability. This is underscored by the fact that MFIs in Buea Municipality continue to witness low profitability in terms profitability which is generally low, poor quality of loan portfolios, lack of financial independence, unequal distribution of MFIs and its services within the municipality with high concentration in Molyko. Shu (2014) reported the only 48% of the MFIs are can be seen in semi urban areas in Cameroon.

In February, 2012, the ministry of finance paid salaries of over 300 civil servants in COFINEST due lack of funds and promised to reimburse depositors in a bid to contain the protest from the customers (Fotabong, 2012). Djamaman (2012) reported a drop in deposits by 35% at COFINEST between 2007 to 2012 and cumulative non performing and insiders’ loans to the turn of 3.6billions. This poor profitability has caused COFINEST SA and Credit du Golfe which were placed under liquidation in 2012 by COBAC after three years of provisionary administration to finally shut their doors (Djamaman, 2012). Recently, Credit Mutuel is at the verge of collapsing due to the dead of its only main sponsor (Business in Cameroon, 2016). It should be noted that MFIs have been around for decades and have primarily been serving the low cadre members of the society.

It is against the backdrop of dynamics in the world today and advancement of technology in the financial sector, in addition to commercial banks providing microfinance services. MFIs in Buea Municipality have found themselves in an awkward position in terms of competition. This has threatened their very existence. These institutions employ thousands of Cameroonians who are breadwinners in thousands of households across the country.  As  such,  in  the  event  that MFIs  post  poor  profitability  and downsize their staff or close their doors, there are many Cameroonians especially in Buea Municipality who would directly and indirectly be affected. More so, these Institutions pay taxes to the government and poor profitability would translate to reduced tax revenue. This would definitely affect the revenue collection by the government.

It is evident from the studies carried out by various scholars around the world as stated above that microfinance innovations greatly affects the profitability of MFIs and other financial institution. In Cameroon and particularly in Buea Municipality, studies carried out in relation to microfinance and innovation failed to show the effects of these innovations on the profitability of MFIs. It’s against this backdrop and low profitability experience by microfinance institutions in Buea Municipality that this study was carried out to fill these gaps and examine how microfinance innovations affects the profitability of Microfinance Institutions in Buea Municipality. It shall thus provide answers to the following research questions.

1.3 Research Questions

1.3.1 Main Research Question

The main research question for this study is : what are the effects of microfinance innovations on the profitability of microfinance institutions in Buea Municipality, South West Region of Cameroon?

1.3.2 Specific research questions include:

1. What is the effect of product innovations on the profitability of MIFIs in Buea- Municipality?
2. What is the effect of technological innovations on the profitability of MFIs in Buea- Municipality?

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