Abstract

This study investigates the effect of loan recovery on the financial performance of microfinance institutions, specifically focusing on the Mustard Seed Investment Credit (MUSIC) Bonaberi Branch. The primary objective is to evaluate how effective loan recovery strategies influence the financial sustainability and profitability of MFIs. Specific objectives include assessing the impact of collateral management, customer capacity, and customer’s character on loan recovery and financial performance.

The research employs a mixed-methods approach, utilizing both qualitative and quantitative data. A sample size of 30 respondents, consisting of loan officers and clients of MUSIC Bonaberi, was selected through stratified random sampling to ensure diverse representation. Data collection methods included structured questionnaires and in-depth interviews, enabling a comprehensive understanding of the factors affecting loan recovery.Data analysis was conducted using statistical tools to quantify the relationship between loan recovery practices and financial performance indicators such as return on investment (ROI) and loan default rates.

Findings indicate that effective loan recovery practices significantly enhance financial performance, reduce bad debts, and improve cash flow. The study concludes with actionable recommendations for improved credit management strategies within MFIs, emphasizing the importance of robust loan recovery processes to ensure long-term sustainability and operational efficiency. This research contributes valuable insights to the field of microfinance, offering guidance for policymakers and financial institutions aiming to optimize their performance and service delivery.

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Globally, the idea of coming up with a bank – like institution which will be able to accept micro savings from the poor, grant micro loans to low-income earners with little or no collateral and under less stringent conditions was due to the fact that most low-income earners in the society were unable to collect bank loans from banks.  This led to the creation of micro financial institutions.

In Cameroon, most micro finances originated from small tribal “njangi” groups who came together to form a forum where tribesmen can save money, then invest this money in business projects and can also grant micro loans to members. Some originated from workers of large organizations, for example Tole Tea cooperative credit union, Buea Police Cooperative Credit Union.

Tole Tea cooperative credit Union which was formed by Tole tea estate where workers contribute money into a fund and grant micro loans and micro credit to members who will repay the loan with interest. These small tribal njangi groups promoted economic developments in some villages and in the society as a whole and so the government through Ministry of Finance (MINFI) encouraged that these groups should be registered legally and should have a company name. CAMCULL was then formed to govern microfinance creation and operations (Simo 2020).

After gaining the status of a company and a registration number, most microfinance now focus on their financial performance and sustainability by providing one or a combination of micro loans, savings, business advice and training to Micro and Small Enterprises. The financial performance of microfinance is directly related to the going concern which is the ability of the company to operate in the foreseeable future. For them to be able to operate for the provision of a financing option to those who could not meet the standard of obtaining finances from banks was the main purpose of microfinances. They aimed at financing the poor so as a means to alleviate poverty. The poor and less privileged take loans from micro finances for reasons classified as economic and social. In MUSIC Bonaberi Branch, their members take loans for building and construction, business, agriculture school fee loans just to name a few reasons why MUSIC Bonaberi offers the following types of credits to its members: utility loans, line of credit, business loans, agricultural loans, salary advances, school fee loans, financing of public contracts and bills discounting.

The following services offered by MUSIC Bonaberi is been rendered to their members. MUSIC Bonaberi has the following types of members: civil servants and salaried persons (who use MUSIC as a means of payment of their salaries), business persons (who obtain loans from MUSIC Bonaberi to finance their businesses), private companies and individuals (who seek financial services from MUSIC Bonaberi for diverse reasons).

1.2 Problem Statement

According to Shekhar, 1985, credit plays an important role in the lives of many people and in almost all industries that involve monetary investment in some form. Credit is mainly granted by banks and other financial institutions including to several other functions like mobilizing deposits, local and international transfers, and currency exchange service. Hence, the issue of credit management has a profound implication both at the micro and macro level.

Despite the growth of microfinance industry, micro finances are faced with default and delinquency problems as a result of poor credit management which pose a serious threat to their financial performance, sustainability and some reasons for the default can be attributed to spending on unnecessary things by clients, poor record keeping and inadequate monitoring by loan officers and lack of planning ahead by clients.

Moreover, it was observed that the implication of loan default to micro finances includes: reduction in operating profits, inability to disburse more loan in future and reduction in loanable funds and undermining the liquidity and overall financial performance. Credit management involves more than just reminding customers to pay; rather it involves gaining a thorough examination and process of detecting possible reasons for nonpayment. Its advantages include: detecting late payments in advance; since when the credit officer starts reminding the client early about his monthly payment of the loan and the client starts reacting in a negative way the credit officer can easily detect that the client might not be willing or ready to pay the loan as at the accepted time when he applied for the loan.

Credit management ensures financial health of MFI since effective credit management prevents the occurrence of loan defaults and bad debts and so prevents liquidity problems which can be faced by the bank.

Absence of loan recovery leads to a fall in cash flow since it has negative effects such as bad debts which further turn the cash flow to a negative value. If payment is made late, then profitability is eroded and if payment is not made at all, then a total loss is incurred. In other words, it may disturb the normal inflow and outflow of fund a bank has to keep staying in sustainable credit market on that basis, it is simply good business to put loan recovery and credit management at the “front end‟ by managing it strategically.

It is therefore important to investigate the effects of loan recovery on the financial performance of microfinance activities using MUSIC Bonaberi branch as a case study. The aim is to identify the effects of effective loan recovery that has influenced the financial performance of microfinance so as to come out with a means to reduce delinquent and bad loans in microfinance.

1.3 Research Questions

1. To what extent does collateral management affect the financial performance of microfinance?
2. What is the effect of customer capacity on the financial performance of microfinance?
3. Can customer character affect the financial performance of microfinance?

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