Abstract

The basic aim of this research is to examine the effect of Budgeting on the profitability of  Financial institutions in Buea. The study was guided by 3 specific objectives which are to Examine the effect of budget planning on the profitability of financial institutions in Buea, to Examine the effect of budget implementation on the profitability of financial institutions and to Examine the effect of budget control on the profitability of financial institutions. The study Adopted a descriptive survey research design.

The primary data used for this study was obtained Directly from respondent Financial Institutions through the administration of structure Questionnaires to 30 Financial Institutions in Buea. The data was analysed by using the Regression technique. The research finding shows that budget planning and budget control have A positive effect of budgeting on the profitability of financial institutions. This effect is also Statistically significant at 5% level of significance.

The results also revealed that budget Implementation has an insignificant negative effect of budgeting on the profitability of Financial institutions. Therefore, the study concludes that budgeting has a significant effect of Budgeting on the profitability of financial institutions in Buea.

Based on this, the study Recommends that budgeting on the profitability of financial institutions should adopt a Budgetary control system of adequate planning and should make sure that set goals and Objectives are known and implemented by the accounting, finance, operations, and marketing Departments. Keywords: Budgeting, Profitability, Financial institutions.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

The subject of profitability has received significant attention from scholars in the various areas Of business and strategic management. It has also been the primary concern of business Practitioners in all types of organizations since profitability has implications on an Organization’s health and ultimately its survival (Onduso, 2013). Profitability refers to the Measure of an organization’s profit relative to its expenses. Extensive literature regarding the Firm’s objectives, places much emphasis on the maximisation of shareholder’s wealth.

Managers are thus concerned about maximising shareholder’s wealth as it connotes future Prospects, reflects steady growth, and provides a risk shield. In order to achieve this, Naser and Mokhtar (2004), argue that high performance reflects management effectiveness and efficiency In making use of company’s resources. According to (Lazaridis, 2006) the greatest dilemma in Financial management is to achieve desired trade-off between liquidity, solvency and Profitability, while seeking to maximise shareholder wealth.

Microfinance has been defined therefore as “a credit methodology that employs effective Collateral substitutes to deliver and recover short-term, working capital loans to micro Entrepreneurs” (CGAP1, 2003). The roots of microfinance lie in a social mission of enhancing Outreach to alleviate poverty.

More recently there has been a major shift in emphasis from the Social objective of poverty alleviation towards the economic objective of sustainable and Market based financial services (Rauf and Mahmood, 2009). The difference between Microfinance and commercial lending lies within the concepts of joint liability or group Lending, dynamic incentives that allow for an increase in size of loans over time, regular 1repayments schedules and alternative collateral through forced savings.

For example, joint Liability helps to overcome adverse selection (borrowers know who in their community is a Credit risk) and moral hazard (borrowers can monitor each other), and to enforce auditing (by Ensuring borrowers are honest in the case of default) and repayment as borrowers can impose Social sanctions on defaulters. These alternatives to collateral are especially important for Borrowers who do not have assets to pledge, and for lenders who operate in countries with Weak secured lending laws and enforcement.

On a global note, the microfinance industry has realised important growth rate and as the Number of microfinance institutions and customers continue to grow, regulation of the industry Becomes a question of interest since the sustainability of these institutions is highly debated.

A More efficient micro financial sector may eventually translate into higher rates of economic Growth and thus the ability of governments to alleviate poverty (Rauf and Mahmood, 2009). Substantial empirical evidence exists on budgetary control and performance. Akintoye (2008) Examined the relationship between budget and budgetary control and performance of selected Food and beverages companies in Nigeria and established that a significant relationship Between budget and budgetary control and profitability In many developing countries, one of the growing sectors of the economy is the financial Services sector.

In Ghana for example, Pimpong and Laryea (2016) found that Financial sector Stability is a priority and Ghana’s financial soundness indicators have all improved in recent Years. The banking sector has experienced rapid growth, as a result of credit expansion, changes In regulation, significant technological advances in the sector and more forceful risk Management policies by banks. It is for this reason that the Government of Ghana has shown Strong commitment to financial sector development.

This is evident with Cabinet’s approval of The Financial Sector Strategic Plan (FINSSP) in 2003, which aims at broadening and deepening 2the financial sector. The second phase of the Financial Sector Strategic Plan II (FINSSP II 2011-2015), approved in 2010 and launched in June 2011, aims at developing the financing Base of banking institutions, improving quality services through increased competition and Removing barriers to accessing finance and introducing innovative financial instruments. NonBank financial institutions form part of this financial service industry and play a critical role in Ensuring that the overall objective is achieved.

In Kenya, according to Onduso (2013), there has been an underperformance of commercial Banks over the last five years. Several amendments have been made in the banking sector since The early 90‟s with an aim of maximizing performance, ensuring financial availability, Financial stability and efficiency. Nevertheless, the banks have been recording inconsistent Average profit before tax. From 2009 to 2013, the average increase in profit before tax has Always been below 20 percent. This is not remarkable given that several amendments have Been implemented with an aim of improving the performance of the lending sector (Onduso, 2013).

The banking sector in Kenya operates in a relatively deregulated environment governed By the companies’ Act, the Banking Act, the CBK Act and the various prudential guidelines Issued by the CBK. Before 1983, the formal banking system in the country was dominated by State owned banks that had a monopoly in terms of their spread and operations. With the Passage of the universal banking law however, all types of banking can be conducted under a Single corporate banking entity and this greatly reorganises the competitive scopes of several Banking products in Kenya (CBK, 2017).

Thus, reforms and deregulation has brought the Banking sector into the competitive arena in terms of customers and products. Kisaata (2019) states that in Uganda, budgeting serves management to coordinate in several Ways as follows; a clear, explicit and attainable plan is considered. Top management is Compelled to relate individual operations to the firm as a whole. Budgets assist in getting rid Of unconscious biases engineers, sales managers and production the empire building efforts of 3executives.

The microfinance industry in Uganda began in earnest after the country’s return to peace and macroeconomic stability and after the 1 993 financial sector reform, which created A relatively free operating environment. All the microfinance programs in Uganda remain. Strongly backed by donors and include both banks and ngos.

In Cameroon, despite the increasing regulation of the microfinance sector and the constant Efforts being made by the government authorities to enhance the profitability of financial Institutions, the sector still faces a lot of challenges. Regular news about the microfinance Sector in Cameroon is the constant close down of several microfinance establishments or the Sudden and spectacular bankruptcy of some financial institutions which reduce customers’ Confidence. We still have in mind the COFINEST and FIFFA cases.

The sector is also criticized. For providing services only to bankable customers and on almost same conditions as banks. Forgetting their social responsibility of providing financial services to those who are excluded From the traditional banking system. This can be explained by the fact that these financial Institutions are mostly emanations of banks and therefore operate with their mother bank Conditions. According to the COBAC report on the microfinance sector (2008), the level of notPerforming loans and default rate are still very high in the sub-region (Gwasi and Ngambi, 2014).

Accordion to the International monetary fund ([IMF], 2009), the banking system in Cameroon, Which dominates the financial sector, has recently exhibited higher revenues and improved Provisioning but npls are high. The observance of regional prudential regulations has Improved significantly, but several banks still do not comply with the capital adequacy and risk Exposure ratios. Compliance with prudential regulations differs based on bank’s ownership: Foreign-owned banks are better capitalized than domestic banks, which are also more

Vulnerable to credit risk. Profitability and solvency of the latter are under pressure due to Decreasing interest margins.

1.2 Statement of the Problem

Many microfinance institutions in Cameroon have shown poor performance which can be Attributed to poor or inefficient budgeting practices though not leaving out other factors like Internal control on resources (Tambe, 2017). This as a factor has kept a lot of shareholders and Other investors wondering if there exists any relationship between budgeting and the Profitability of the institutions. It has often been considered as wastage of resources for Financial resources to be diverted for the use of such control (Tambe, 2017).

As some major microfinance institutions like COFINEST, FIFA closed down, others continue To battle in the competitive market with commercial banks since they have no clear cut Distinction in the market in addition to the ongoing crisis in the area causing many shareholders To doubt an investment in this sector. Hence triggering the argument that there is a need for Effective budgeting practices in microfinance institutions to impact their profitability

The main research question will be; The effect of budgeting on the profitability on financial Institutions. In clearing this doubt, the need to prove the correlation between budgeting and its effects on these microfinance institutions. The research on this is vital so as to know if resources can be Employed in the budgeting process to improve profitability since the microfinance institutions. Serve as the number one means of funds to most smes in Buea. This research will therefore

1.3 Objective of the Study

1.3.1 Main Objective

The main objective of this study is to evaluate the effect of budgeting on the profitability Of commercial banks in Buea

1.3.2 Specific Objectives

1. To investigate the effect of budget planning on the return on investment on Commercial banks
2. To examine the effect of budget implementation on return of investment on Commercial banks
3. To examine the effect of budget control on return of investment on commercial banks

Check out: Accounting Project Topics with Materials