CHAPTER ONE

INTRODUCTION

In the competitive environment, more and more lines of business that need a huge investment are being opened. Some of these huge investments are financed through bank loans. With this respect, banks play a major role in the overall economic development of a country. However, in the process of extending credit to customers, a bank should have a way of scrutinizing its borrowers so that it would minimize the risk of default loans.

The effects of default loans are not limited to that of affecting the profit of one particular bank but it has a ripple effect that extends itself into the economy at large. Non-Performing Loans (NPLs) is a loan that is in default, or close to being the default. Loans become non-performing when they are not being paid, or default for 3 consecutive months, or depends on the contract term.

According to IMF (www.imf.org), “a loan is nonperforming when payments of interest and principal have passed due by 90 days or more, or at least 90 days of interest payments have been capitalized, refinanced or delayed by agreement, or payments are less than 90 days overdue, but there are other good reasons to doubt that payments will be made in full”.

This work or research is divided into five chapters. Chapter one is based on the introduction, background of the study, statement of the problem, objectives of the study, research questions, hypothesis of the study, the significance of the study, the scope of the study, and definition of terms.

Chapter two is based on a literature review that is, the conceptual, theoretical, and empirical literature. Chapter three is on the area of study, research design, the population of the study, research instrument(s), sources of data collection and data limitations, techniques of estimation, and validation techniques. Chapter four is talking about data presentation, data analysis, and discussion of results. And finally, in chapter five, the study discusses the summary of the major findings, conclusion, and recommendation(s).

1.1 Background of the Study

In Cameroon, Rural Banks are believed to have done creditably in their quest to provide services to the majority of the population in areas where banking is not part of their culture. Distribution of credit disbursement is one of the main activities of every Rural Bank as well as Financial Non-Governmental organizations (FNGO), Savings and Loan Companies, Credit Unions, and Microfinance Institutions in Cameroon and the globe as a whole, (Obuobi and Polio, 2010).

It is commonly demonstrated through the huge fraction the loans occupy in the total operational assets of the financial companies. Recovered loans are thus essential to financial companies in the sight of their effect on capacity in lending, liquidity, profitability as well as earnings of every rural bank.

It is believed that rural banks presently deliver financial services to an estimated 15% more than the commercial banking sector out of the Cameroonian population total as asserted by (Obuobi and Polio, 2010). Arko (2012) reported that a large proportion of the loans disbursed by these institutions, unfortunately, become non-performing and anally result in bad debts which have negative consequences on their overall financial performance.

Non-performing loans can be defined as those monetary assets from which financial institutions no longer receive interest and/or installment payments as initially or previously scheduled. They are referred to as non-performing loans due to the fact that the loans stop creating income for the financial institution.

The issue of non-performing loans is becoming a serious problem that impends the sustainability of the various rural banks. The main reason for the challenges is diverse which is not constant across diverse literature, this ascertain is supported by Mombo (2013) who also opined that the high increase of non-performing loans has been at the pivotal point of affairs of causing bank’s distress as well as economic crises in both developing and advanced economies. An example can be said of the 2008 global economic crisis.

In view of this, it is advisable for financial institutions to develop the means of checking the conduct of borrowers. It has been observed that since the 1990s, borrowers and lenders have significantly increased their management in credit risk, primarily in developing countries (Elsinger et al., 2006). Consequently, the specialists argued that financial institutions were obliged to review their lending policies.

Assessment of potential borrower’s credit risk is the basic efficient responsibility related to lending this include; monitoring borrower’s behavior and compiling management report gathering receivables as they decrease due and dealing with those who default loans, bearing the risk of default loans or bad debts, making the credit granting decision in line with credit terms and limits and financing the investment in receivables.

The Bank of Cameroon regulates these banks and thereby forms part of the regulated financial sector in Cameroon. The rural banks are believed to be the largest formal financial services providers in the rural areas. They represent about half of the total banking outlets in Cameroon (IFAD 2008). Rural banks are amalgamated and registered under the company’s code 1963 (Act 179) of Cameroon as limited companies and shareholders from tire local community where the banks operate are required to own it.

In the beginning, 43% of the shares in the rural banks were owned by the Bank of Cameroon (BoC) as preference. The shareholding levels for an individual were 10% whereas that of the corporate body was 30% in the early years of rural banks. The rural banks have elected board of directors that forms the governance structure. The Board of directors serves as shareholder’s representatives within the bank.

The board supervises the management of the bank funds. Shareholders of the bank elect the board of directors from the communities where it is situated. Board members are elected during the bank’s annual general meeting (AGMs). The election of directors is done based on their professional qualifications and status in the community.

The Bank of Cameroon validates the individuals that have been nominated by the shareholders before their responsibilities are given to them. The board of directors in their own jurisdiction elects a chairman and a vice-chairman from among them.

The chief executive officer of the bank in most times serves as the secretary of the board. The fixed-term in office for a board member is three years but can be reelected for an unlimited number of terms by the shareholders. One-third of the board members need to go on retirement at every ACM but are qualified for re-election, in agreement with the Cameroonian company code.

Historical Background of TOLE TEA Cooperative credit union

Tole Tea Cooperative credit union is a category one microfinance institution that was made up of a group of persons of like minds who came together to put their Resources together for Mutual Benefits. This institution was created in the year 1970 and their first building was constructed in 1996 and has 3000 members with 2500 members been active members. It provides financial focus on Products and Services like; shares, loans, savings, overdraft, akawo loans’, group savings, salary account, business counseling, insurance scheme, cheque clearing, and contract financing.

This financial institution started like a ”Njangi” with little or no capital from its founders who were the workers in Tole Tea Plantation at Tole. Now, the firm operates on income from its short-term professional products and services work undertaken. The following are some of the products and services of this financial institution.

1.2 Statement of Problem

It is asserted that all over the globe, financial institutions face the enormous risks of non-performing loans (NPLs). Financial institutions particularly rural banks are very important not only in providing financial assistance to the low-income earners in the society but also in granting credit facilities to them. However, just like other financial institutions, rural banks experience numerous cases of non-performing loans.

The non-performing loans negate the profitability of the rural banks. Non-performing loans are not only argued to harmfully affect the financial performance of rural banks, but they also have other far-reaching repercussions. This is due to the fact that; other potential borrowers may be denied to access credit facilities since part of the funds that could be extended as loans by the rural banks are still knotted to non-performing loans.

The non-performing loans also affect the economy of a country which explains the rationale behind the settings of guidelines by the central bank for enabling financial institutions to alleviate NPLs. The importance of NPLs to the financial performance has necessitated this study which aims at finding the effects that NPLs have on the financial performance of TTCCUL in Cameroon.

This is because nonperforming loans can bring down investors’ confidence in the banking system, piling up unproductive economic resources even though depreciations are taken care of, and impeding the resources allocation process. In a bank-centered financial system, nonperforming loans can further thwart economic recovery by shrinking operation margin and eroding the capital base of the bank to advance new loans. This is sometimes referred to as a credit crunch (Bernanke et al, 1991).

In addition, nonperforming loans if created by the borrowers willingly and left unresolved, might act as a contagion’s financial malaise by driving good borrowers out of the financial market. Muniappan (2002) asserts that a bank with a high level of nonperforming loans is forced to incur carrying costs on non-income yielding assets that are not on y strike at profitability but also at the capital adequacy of a bank, and in consequence, the bank faces difficulties in augmenting capital resources.

1.3 Research Objectives

The prime objective of the study is to assess the effects of non-performing loans on the financial performance of TTCCUL in Cameroon

Specific Objectives

The specific objectives of this study are;

1. To determine the effects of agricultural loan default on the profitability of Tole Tea Cooperative Credit Union.
2. To identify the effects of school fees loans on the profitability of Tole Tea Cooperative Credit Union.
3. To examine the effects of mortgage loan default on the profitability of Tole Tea Cooperative Credit Union on loanable income.

1.4 Research Questions

1. To what extent does agricultural loan default affect the profitability of Tole Tea Cooperative Credit Union?
2. To what extent does school fees loan default the profitability of Tole Tea Cooperative Credit Union?
3. To what extent does mortgage loan default affect the profitability of Tole Tea Cooperative Credit on loanable income?

1.5 Hypothesis of the Study

Ho: There is no statistically significant effect of agricultural loan default on the profitability of Tole Tea Cooperative Credit Union.

HI: There is a statistically significant effect of agricultural loan default on the profitability of Tole Tea Cooperative Credit Union.

Ho2: There is no statistically significant effect of school fees loan default on the profitability of Tole Tea Cooperative Credit Union.

H2: There is a statistically significant effect of school fees loan default on the profitability of Tole Tea Cooperative Credit Union.

Ho3: There is no statistically significant effect of mortgage loan default on the profitability of Tole Tea Cooperative Credit Union

H3: There is a statistically significant effect of mortgage loan default on the profitability of Tole Tea Cooperative Credit Union

 

Further Readings

THE EFFECTS OF NON-PERFORMING LOANS ON THE FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN CAMEROON