Abstract

The major objective of the study was to identify the factors responsible for loan default by clients of microfinance institutions, to examine the credit methodologies used in loan default management and to identify the relationship between loan default and MFI operations.

Questionnaires were used collect data for the study. It was a combination of descriptive and analytical research of results from self-administered questions, interviews and record inspection. The researcher analyzed the data and also constructed some tables to show comparisons. Responses were edited for completeness and accuracy; percentages were employed where respondents’ attitude were sought. Tables were also used for data analysis.

From the study, the findings indicated that there is a negative relationship between the study variables meaning that an increase in Loan defaults reduces the performance of microfinance institutions. It was established that loan defaults are Marjory caused by poor sales from the clients and disappointments from the creditors .It was further revealed that institutional factors mostly cause loan defaults.

The study critically recommended that, the institutions should educate people on how to invest money is it was revealed that loan defaults are caused by poor sales. Hence stakeholders should ensure that borrowers invest in activities that they consider productive and that Institutions should improve on their terms of loan collection and repayment as it was revealed that institutional factors greatly cause loan defaults. The most recommended area for further research was: loan default management in big formal institutions.

CHAPTER ONE

INTRODUCTION

1.1:  Background of the Study

Microfinance as pioneered in Bangladesh by Muhammad Yunus was to assist low-income women and men, micro-enterprises for their economic development. Growing concern about poverty stands out in political agendas all over the world, as stubbornness of poverty even in the richest nations is being met with increasing impatience (mwang: et la, 1998). Government and international aid donors have been subsidizing credit from donors; Non-governmental Organizations (NGOs) made it possible for large number of low income people to have access to financial services. Most of the finances available to the rural areas in Africa are through microfinance, this method was known as traditional savings in most of the communities across the continent.   According to Aghion and Morduch, 2009, the African experience suggests that MFIs have built on pre-existing informal sector mechanism. Among the many examples is (NPACCUL Ltd) to create viable channels for capital infusions from formal sector banks, donors and government. As a result, deposit taken MFIs, informal MFIs and credit only MFIs have all developed increasingly close ties with full-fledged commercial banks and other non-banking  financial institutions in the formal sector.

Banks and MFIs complement each other well by servicing substantially different client bases. Banks lend and collect deposit mostly from a limited formal private sector in Africa and to the government, while MFIs services poor and rural household and small entrepreneurs often in the informal sector. In Cameroon, MF industries started thriving in September 1963 with St. Anthony’s Discousion Group (long, 2009). This idea was introduced in Njinikom in the North West Province (Today known as the North West Region) of Cameroon by a certain Rev. father Anthony Jansen, a Roman Catholic Priest from Holland.

However, it was not until the late 1980s, as a result of the commercial banking sector in Cameroon experiencing a serious crisis, with many major banks becoming illiquid and or insolvent that microfinance gained ground. At the root of the banking crisis in Cameroon was multifaceted government intervention, inadequate management and a virtual lack of enforcement of banking regulations (Brown bridge and kirkpatrichi, 1999)

International organizations are coming to the realization that MFIs are veritable and effective channels to ensure program implementation effectiveness, particularly in poverty alleviating projects and firsthand knowledge of the needs and interest of the poor (chakra varty and shahriario: 2010). According to chossudovsky (1998), the World Bank sustainable banking with the poor project (SBP) in Mid-1996 estimated that there were more than 1000 microfinance institutions in over 100 countries, each having a minimum of 1000 members and with 3 years of experience.  In a survey of 2006 of such institutions, 73 percent were NGOs, 13.6 percent credit Unions, 7.8 percent banks, and the rest savings unions. And overwhelming majority of the world’s poor live in the third world countries.

Various approaches have been employed in alleviating poverty of which provisions of credit that targets the poor is one. Many are now of the opinion that allowing the poor to have command over resources through credit can contribute towards poverty alleviation. Schrader (2009) argues that the best way to do something about poverty is to let the people do their own thing nobody will have more motivation to change his situation than the sufferer himself/ herself. Alemayehu (2010), defined microfinance as a provision of financial services to low income clients or solidarity lending groups including consumers. According to Grameen foundation, microfinance is some time called the ‘bank for the poor’ Microfinance is an amazing simple approach that has been proven to empower very poor people around the world to pull themselves out of poverty. A key to microfinance is the recycling of loans.

As each loan is usually repaid within six months to a year, the money is recycled as another loan, thus multiplying the value of each dollar in defeating global poverty and changing lives of communities (Grameen Trust, 1995). Microfinance helps the poorest people to work their own businesses enabling them to feed their families every day (micro loan foundation, 2010). Microfinance also known as micro credit, as small loans offered to poor households to foster self-employment and income generation (Fazle, Hazan, and Abed, 2010). Yacob (2010) opines that microfinance is the supply of loans, saving, and other basic financial services to the poor. Microfinance is a facility that makes it possible for the focused poor people to get a small loan to start a business, pay for school fees, procure housing or receive health care (Microfinance Vital to economic growth 2010:15). Such an initiative is instrumental in changing the poverty patterns in view of improved facilities to lessen the challenge posed by startup capital. Microfinance has been changing people’s lives and revitalizing communities since the beginning of trade (United Nations, 2010).

Microfinance Institutions emerged as an alternative financing source and a powerful instrument for poverty reduction among relatively poor people through the provision of broad range of financial services such as loans, deposit, payment services, money transfer and insurance services ( Robinson 2003: ADB, 2000). Among the major objectives of these institutions was to help poor people who are financially constrained and vulnerable, with financial services to enable them to engage in productive activities or start small businesses (CGAP, 2009). With a primary objective of social mission through outreach to the poor, MFIs were originally financed entirely by grants, low-interest loans and donors subsidies (zeller and Mayer, 2002), and offered financial services at low cost to ensure that the poor could access the services. This resulted into highly dependence on subsidies and grants from the donors, governments and other development grants (Amendariz and Morduch, 2005).

With rapid growth of microfinance sector, they have been change in the line of thoughts among donors, policy makers and other stakeholders about the profitability and efficiency of these institutions (Cull et al, 2009: Barres et al, 2005), also the have been changes in business environment including increase competitions, involvement of more commercial banks offering microfinance services and advancement in banking technology which have affected microfinance institution’s operations and their way of doing business ( Rhyne and Otero, 2006). This has led to the increasingly debate on the need for sustainable and efficient microfinance institutions which can cover their operating cost with better allocation of scarce resources ( Morduch, 2000;Hernes et al, 2008) Attention to credit has had a much longer history within both aid agencies and governments.

It is seen as crucial to the development of the firms and other micro-enterprises in the third world. That small enterprise may make more efficient use of capital, labor, and that their contribution to the economy is far greater than was earlier imagined is now widely recognized (Thea and oppenooth, 1992). Cooperatives and microfinance demand can be globally only through the provision of financial services by self-sufficient institutions. This implies that they must learn to manage loan default on their operations. Hence they have to emphasize and encourage timely payment of the loan borrowed so that rotation is realized. Specific measures to discourage default can be incorporated in credit schemes, but viable project designed and good administration are most important save guards (Marguerite, 2001).

Two basic tenets of micro-lending are excellent client service and strict default management. Loan default management is therefore crucial to the institution because loans are their target assets, generator of income and highest reasons for their existence. Hence default loans determine the quality of portfolio for instance cooperatives are sustainable institutions that are financed from local savings and require little external subsidy. They perform an active financial intermediation function particularly mediating flows from urban and semi urban to rural areas and between net severs and net borrowers while ensuring that loan resources remain in the communities from which the savings were mobilized (Otero and Rhyne, 1994).  NPACCUL LTD is an institution registered under COBAC as category one microfinance.

It is owned and controlled by members, existing for the financial benefits of its members since 1970. It is affiliated to CamCCUL. It started its operation in Cameroon in November 22, 1970. Its mission is to provide the best possible financial services, products and programs to meet the members’ needs and to encourage them to make good use of their membership rights which include: high interest on savings, low interest rate on loans to members, you have secured place where you save your money, you become a share holder of highly rated financial cooperative, your affairs are treated very confidentially, you can borrow three times your savings, if elected into the board, you earn Board sitting allowance.

NPACCUL Ltd operate in Limbe mile one, Mile four, Douala Mbopi branch, Daido branch, Kribi branch and Yaounde branch. NPACCUL provides basic financial services for both rural and urban citizens who cannot obtain these services through full-banking services. It started in 1970 as a microfinance institution with aim of providing savings and credit to micro and small scale business people promote growth under poverty eradication programs and also respond to the resource gap in the market. To become a member in NPACCUL, you need to pay a sum of 133,500 FRS and savings have no limit after you have made the first requirements. Once a member, always a member. You may remain a member no matter where you move throughout the county as long as you remain in good standing with the credit union.

NPACCUL is open to Employees of all sea Ports in Cameroon, Spouses and children of employees of all sea Ports in Cameroon, Groups and Associations, and to the general public. What makes NPACCUL different from other microfinance institutions is that, as soon as you register you become a shareholder not just a customer, you have voting rights in Annual General Meetings which customers do not have, at NPACCUL, the members are kings. Major MFIs in Cameroon include: NPACCUL Limbe, TOLE Tea Cooperative credit Union LTD, Buea Police cooperative credit union LTD, Cameroon Cooperative League Ltd (CAMCCUL), Bamenda Police Cooperative Credit Union (BAPCCU), SOCAPALM TILLO, Cameroon Development Corporative Credit Union (C.D.C).

1.2: Statement of the Problem

It is generally accepted that credit, which is put to productive use, results in good returns. But credit provision is such a risky business that, in addition to other reasons of varied   nature, it may involve fraudulent and opportunistic behavior. MFIs should rather depend on loan recovery to have a sustainable financial position in this regard; so that they can meet their objectives of alleviating poverty.

Whether default is random  and influenced by emetic behavior or whether it is influence by certain factors in a specific situation, therefore needs an empirical investigation so that the findings can be used by micro financing institutions to manipulate their credit programs for the better performance of microfinance institutions (Mwangi; et la, 2009).

Microfinance Institutions (MFIs) over a couple of decades have moved from the giving of subsidized credit that depends on the benevolence of donors to a self sustainable financial company that gives credit to clients at a cost and to be able t recoup all funds that it gives to its clients. The repaid funds are subsequently given to other SMFs and self employed individuals as MFIs seeks to reach as many clients as possible in pursuance to the objective of alleviating poverty in the society.

Repayment of loans by clients ensures sustainability of microfinance institutions and therefore default by clients to repay loans (credit) tends to affect the operational performance of every viable microfinance institution. This loan default had its consequences to investigate the effect of loan default on the operational performances of microfinance institutions taking a case study of National Ports Authority microfinance Limbe Mile One branch.

1.3: Research Questions

1.3.1 Main research questions

To evaluate the loan granting process on the operational performances of NPACCUL Limbe.

To analyze the effect of customers character and collateral on the operational performance of NPACCUL Limbe.

1.3.2 Specific research question

1. To evaluate the factors responsible for loan default in NPACCUL.
2. To analyze the relationship between loan granting and collateral security on the operational performances of NPACCUL.

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