Abstract

This study was conducted in order to find out The Effect of loan delinquency on the performance of microfinance using UNICS plc, P and T Cooperative Credit Union limited in Buea as a case study, despite the stringent evaluation and monitoring strategies put in place by microfinance and banks to ensure repayment of loans by borrowers, a considerable proportion of loans become delinquent.

The main objective of the study to identify the causes of loan delinquency, to ascertain how the loan delinquency can be prevented in these microfinance institutions, to evaluate the effects of loan delinquency on performance in UNICS plc, P and T Cooperative Credit Union limited in Buea.

The study specifically employed descriptive statistics and chi-squared Analysis to validate the stipulated hypothesis. The research found out loan delinquency affects the performance of microfinance; some of the factors, which were loan delinquency, affect your ability to grant future loans, loan delinquency affect productivity time, loan delinquency affect remuneration and promotion had a significant influence on performance.

Hence we recommend that policy adoption Regular Credit risk assessment and analysis should be undertaken, preferably monthly or quarterly by the management of MFBs(microfinance banks), as this is a continuous process rather than a once in a while exercise., delinquency actually have an impact on the performance of microfinance institution.

CHAPTER

ONE INTRODUCTION

1.1 Background of the study

Microfinance evolved from an informal beginning in the eighteenth and nineteenth century as a type of banking for the poor. International organizations are coming to the realization that microfinance institutions(MFI) are veritable and channels to ensure program implementation effectiveness, particularly in poverty and knowledge of the needs and interest of the poor (Okumadewa, 1998). In the mid-1996, worldwide was an estimate of 10,000 microfinance institution in over 100 countries each having a 1,000 members and with 3 years‟ experience. Microfinance institution may be defined as any financial institution which offers not only small loans to microenterprises, SMEs, groups and individuals but also provides other financial services like savings, insurance, and investment advice including even training programs to its clients.

In Africa, the history of microfinance can be traced back to the roots of civilization itself. Written loan contracts from Mesopotamia that are more than 3000 years old showed the development of a credit system that included the concept of interest (carlin and mayer 2003). Banks in Africa started giving loans to the white settlers in the 1950s. Getting to the 1990s loans given to customers did not perform which called for an intervention. Most suggestions were for the evaluation of customers‟ ability to repay the loan, but this didn’t work as loan delinquency continued (modurch,1999). This brought about crises in the banking sector. Lending is very risky in that repayment of the loan is not always guaranteed and most of the time depends on other factors not in the control of the borrower. Therefore, managing loans in a proper way not Only has positive effects on performance of the microfinance institution but also on the borrower and a country’s economy as whole. Failure to manage loans, which make up the largest share of microfinance assets, would likely lead to high levels of non-performing loans. Hence, this affects the performance of microfinance institutions. As contained in a central bank of Kenya report (2012), it is reported that the banking industry had been registering high non-performing loans in the last three years.

The issue of loan delinquency among banks and microfinance institutions has been discussed in many public lectures and as one of the reasons why commercial banks have not shown much interest in financing micro, small and medium enterprises (MSMEs). Microfinance institutions all over the world including Cameroon are faced with the challenge of loan delinquency.

In Cameroon, the history of microfinance dates back to more than one century in traditional form and has existed for more than fifty years popularly known as “njangi or tontine‟. The introduction of modern microfinance in Cameroon started in 1963 in Njinikom in the North-West of Cameroon (creusot, 2006). This idea of credit unionism spread all over the North-West and South-West Region of Cameroon and by 1968, 34 credit unions that were already in existence joined together which lead to the creation of Cameroon Cooperative Credit Union League (CAMCCUL) Limited.

CAMCCUL is therefore the umbrella organization of cooperative credit union and the largest microfinance in Cameroon and the Commununaute Economique des Etas de l’Afrique central (CEMAC) sub-region (www.camccul.org). There are more than 46 registered microfinance institutions in Cameroon with a sum accounting to over 258 billion FCFA which has been accumulated by way of deposits and lending from close to one million customers (Gwasi and Ngambi,2014).

The league provides profitable lending services to micro finances affiliated in the network. Loans are granted at a favorable rate of 12%. Through these services, the league also implemented recovery strategies to minimize loan delinquency in the network. CAMCCUL provides technical advice to affiliates on issues relating to organizational structure and the management of human resource

Loan delinquency has posted a problem to credit union and microfinance institutions in Cameroon and the world at large, such as the winding up and closure of some credit unions.

Another problem caused is the traditional cost, which is implemented on loan contracts and or agreement in the situation of default. An example is the cost of enforcement of the loan contracts for instance, the legal cost of hiring a lawyer.

Liquidity problems also occur because the bank does not have the resources that could enable it meets its short term expenses.

The institution also faces reputational cost following the default because it cannot meet the payment of the deposits collected from savers whenever they want to withdraw their savings. This affects confidence that the savers have in the lending institutions and hence its reputation.

1.2 Problem statement

Micro Finance Institutions (MFIs) are increasingly a central source of credit for the poor in many countries particularly in Cameroon. It is believed that the MFIs industry constitutes the largest percentage of the market with about 53.5% of the customer base for financial services.

According to statistics from an industry survey conducted in 2011, it indicated that the outstanding credit percentage of microfinance institutions stood at 56.2% with a huge potential to grow. Financial institutions particularly MFIs are very important not only in providing financial assistance to the low income earners in the society, but also in granting of credit facilities to them. It is common knowledge that most microfinance institutions face enormous risk of loan delinquency sometimes caused by delinquent or non- performing loans.

Microfinance institutions in Buea aims at ensuring the lowest rate of delinquency as possible because it guarantees them a steady availability of liquidity so as to meet up with the financial demands of their clients or members. But the fact that most of these MFIs serve mostly those who belong to the middle and peasant class of the population, makes it difficult and even more so impossible to achieve the lowest rate of delinquency on loans because of the inability of their clients or members to meet up with their financial obligations.

For some time now, certain members of microfinance institutions in Buea have not been able to pay their loans on time; others have gone beyond the default level to the level of bad loans. As a result of this, some clients have not been allowed to withdraw certain heavy amounts of money,

It is important to note that, loan delinquency does not only have a harmful effect on the performance of microfinance institutions in Buea but it also has other far reaching repercussions. This is due to the fact that; other potential borrowers may be denied access to credit facilities since part of the funds that could be extended as loans by the microfinance institutions in Buea are still knotted to non-performing loans (NPLs) causing a huge problem on the performance of microfinance institutions in Buea that further affects the profitability of the institution. It is based on this that the researcher decided to carry out a study on the Effect of loan delinquency on the performance of microfinance institutions in Buea.

1.3 Research questions

1.3.1 Main Question

The main research question was “What is the effect of loan delinquency on the performance of microfinance institutions in Buea?”

1.3.2 Specific Questions

1. What factors account for loan delinquency in microfinance institutions in Buea?
2. What type of control measures are used to prevent loan delinquency in microfinance institutions in Buea?

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