Abstract

There are several micro-credit lending institutions in the Buea Municipality extending financial services to low income earners. Many folks take up small and easily repayable loans with the desire to improve on their household welfare, and that of their family members. This study examined micro-credit utilization and its impact on the household welfare in the Buea Municipality. The study explored saving services, human capital development, and potential challenges towards using micro-loans, the gender, age distribution and marital status relations in using micro-loans, borrowers’ academic, operational and organizational capacity to use credit facilities and outcomes of credit usage on the wellbeing of the household. The study which was centered on the Buea Municipality due to its remarkable increase in the number of MFIs, adopted a cross-sectional research design which included both descriptive survey research and ethnographic methods. Using this design, data were collected by use of questionnaires and the sample was drawn from the population through accidental and purposive sampling to effectively represent the population of the borrowers. Data were analyzed using descriptive and inferential statistical tools. Findings revealed that majority of the borrowers in the Buea Municipality get small loans from MFIs as opposed to commercial banks that require conventional collateral security which poorest people and low income earners lack. Social support in form of group solidarity is the main collateral security low income earners in the Buea Municipality present to MFIs in order to get a loan. Findings emphasize that relatively micro-loan usage improves on the welfare of poor people and that of the household members in general, amidst other several poverty reduction strategies.

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

The concept of Microfinance dates as far back as the 1950s, when the provisions of financial services by donors or governments were mainly in the form of subsidized rural credit programs, (Robinson 2001, Otero 1999). Micro-finance has existed in various forms for centuries, and even longer in Asia, where informal lending and borrowing stretches back to several thousand years. There are many past histories to microfinance or microcredit, which is a recently coined term that is applied to a diverse range of credit activities and types of institution. Locally managed credit arrangements have existed for hundreds of years and continue to serve small borrowers despite the advent of the “microcredit movement”. Examples are rotating savings and credit associations (ROSCAs) and savings and credit cooperatives (SACCOs), both of which are found in communities around the world. Small loans to poor borrowers have also been part of the rural development strategies followed by many agencies and organizations since the early 1970s. The World Bank, FAO’s, Rural Finance programmes, and major donors and other development agencies, including agricultural development banks, have incorporated small loan programmes and products in their rural finance strategies. Thus, microcredit is older than it appears at first blush, but the invention of the term “microcredit” as well as an organization to promote it globally and the high-level endorsement of specific outreach goals have recently elevated the movement to far greater prominence. Several events in the past have sparked a social movement that has led to the development of a microcredit industry. The movement has been led by people outside the mainstream of rural finance and development and has posed a strong challenge to orthodox approaches. In very few years, an assortment of established and startup credit providers, advocates, evaluators, researchers, trainers and donors have focused their energies on microcredit and – in some cases – have bet heavily on its success. Debates have emerged over fundamental philosophy and technical details of microcredit delivery. Adherents have produced a flurry of examples and studies to support their view that microcredit is a revolution in social and economic development that will pull people from the depths of poverty, while critics staunchly maintain that it is not a panacea for reaching rural (or urban) poor where other credit systems have failed.

However, the birth of ‘modern’ micro-finance is said to have occurred in the mid-1970s in rural Bangladesh. There, in the midst of a famine, Dr. Muhammad Yunus, professor of economics at the University of Chittagong, was becoming disheartened with the abstract theories of economics that failed to explain why so many poor people were starving in Bangladesh (Microcredit Summit Report, 2007). Determined to find a practical solution, Yunus began visiting local villages. In one nearby village, Jorba, he found a group of 42 women who made bamboo stools. Because they lacked the funds to purchase the raw materials themselves, they were tied into a cycle of debt with local traders, who would lend them the money for the materials on the agreement that they would sell the stools at a price barely higher than the raw materials. Yunus was shocked to find that the entire borrowing needs of the 42 women amounted to the equivalent of US$27. He lent them the money from his own pocket at zero interest, enabling the women to sell their stools for a reasonable price and break out of the cycle of debt (World Development Report, 2001).

In 1976, Muhammad Yunus founded the Grameen Bank, the world’s best-known provider of microcredit. Some trace the origins of microcredit in its recent form to this event. Through the Grameen Bank, Yunus was able to institutionalize features that provide a model for many – although not all – microcredit providers today. Microfinance organizations (MFOs) and programmes have since flourished, including “Grameen replications” in 45 countries. Today there are more than 1,200 institutions providing microcredit at a national level,   26 major institutions leading international microcredit programmes and    7,000 to 10,000 local and regional organizations providing microcredit as all or part of their development efforts.                                                                                                                                                                               In 1997, two decades after Yunus began experimenting with loans to women in poor South Asian villages, more than 2,900 individuals, representing 1,500 organizations and 137 countries, gathered at the Microcredit Summit in Washington, DC. Headlined by Heads of State and dignitaries from the global development community, the Summit launched a campaign to reach 100 million of the world’s poorest families by the year 2005. The significance of the Summit was to bring a certain aura of celebrity to the goal of poverty alleviation through microcredit, and to create an institution whose mission was to promote this goal at the global level (Yunus, 1999), (Sanyang and Huang, 2008).

Throughout the world, the poor are excluded from the formal financial system.  One of the most irrefutable problems for poor countries has been the high price or outright unavailability of credit to rural communities. The financial institutional infrastructure in rural areas and formal  banks  have seemingly  faced  challenging information irregularities and  consequently,  experienced  persistently  high  costs and  default rates. The  argument  has  been  that screening  potential  borrowers  and  monitoring  their behavior  as  well  as  enforcing  credit  contracts  are extraordinarily  costly.  This situation of the poor being excluded from the formal financial system is  backed  by  a business  environment  in  which  credit  histories  are inexistent,  entities  are  very  small,  and  the  legal system  very  much  under-developed,  unreliable  and inaccessible.  As a result, formal lenders ration loans and leave a large portion of potential borrowers without access to credit.  Although  local moneylenders have sometimes been willing to fill the gap  left  by  banks,  interest  rates  charged  by  these organizations are extremely high, at times due to their local  monopoly.  Consequently,  the  very  poor  are typically  left  either  with  no  credit  or  with  credit available  at  exorbitant  rates.  This  situation  is detrimental  to  economies  in  most  developing countries  for  they  encompass  an  important  informal sector that needs funds to finance their growth.  Due to  the  absent  access  to  formal  financial  services  or access  to  credit  at  exorbitant  rates,  the  poor have developed  a  wide  variety  and  community-based financial  arrangements  amongst  others  to  meet  their financial needs.

Microfinance  is  the  term  that  has come to refer to such financial arrangements offering financial  services  to  the  modest  population. Microfinance promises both to combat poverty and to develop the  institutional  capacity  of  financial systems,  through  finding  ways  to  cost-effectively lend  money  to  poor  households  (Morduch,  2000). Three features  distinguish  microfinance  from  other formal  financial  products: (1) the  smallness  of  loans offered  or  savings  collected,  (2) the  absence  of  asset based  collateral  and (3) the  simplicity  of  operations (Seyed  I. et al.,  2011).  Interest  rates  are  usually somewhat  higher  than  those  charged  by  banks,  but are  substantially  lower  than  those  charged  by  local moneylenders. The last three decades of microfinance have  been  characterized  by  an  increased  interest  by academicians  and  policy  makers  in  that  activity (Morduch,  1999),  (Brau  and  Woller,  2004) and  (Niels Hermes and R. Lensink, 2007). The industry has been growing in a significant rate and has become a subsector of the formal financial market in some countries (Niels Hermes et al, 2010).

During the past few years  the  growth  rate  of  microfinance  has  been unprecedented:  between 1997 and 2005, the number of  microfinance  institutions  (MFIs)  increased  from 618 to 3,133, the number of people served increased from  13.5  million  to  113.3  million  during  the  same period  (Niels  Hermes  and  R.  Lensink, 2007).  More so, between 2006 and 2008, the annual growth rate jumped from 70 to 100% (Niels Hermes et al., 2010) in some countries.

The (Microfinance Campaign  Summit, 2006) estimates  that  there  are  over  3000  MFIs,  serving more  than 10 million poor people in developing countries. The total cash turnover of these institutions worldwide is  estimated  at  about  2.5  billion  U.S Dollar  (USD)  and  the  potential  for  new  growth  is outstanding.  The United  Nations  General  Assembly passed a resolution on December 2009 declaring the year 2012  as  the  International  year  of  Cooperatives (Onafowokan, 2012).  This was to showcase the contribution and impact of microfinance to the socio-economic well being of the society. Their growth is visible,  not  only  in  terms  of  number  of  active borrowers  but  also  in  gross  loan  portfolio  and  total assets.

Globally, the  microfinance  industry  has  realized  an undeniable  expansion  and  as  the  number  of microfinance institutions continue to grow, the level of competition in the industry becomes a question of interest since the sustainability of these institutions is highly debated. According to (McIntosh et al, 2004), (Petersen  and Rajan, 1998),  (Marquez, 2002), and  (Hoff and Stiglitz, 1998), the benefits of microfinance may be  eroded  with  growing  competition  in  the  sector. The flip side of course, is that imperfect competition can result in serious drawbacks for sector growth. In the case of microfinance, some scholars and policymakers warn that increased competition could lead MFIs to “scale up” their services, or stop targeting the poorest of the poor (Olsen, 2010). This, some  argue, is  likely  since  the  poorest borrowers  generally  borrow  less  and  require  more staff time than middle-income borrowers (Tucker and Miles  2004). However,  if  the  literature  on  impact assessments  of  microfinance  is  a  bit  advanced  (Richman and Aseidu, 2010), that on competition and  performance,  more  specifically  financial performance is still lacking, whereas the sector keeps on expanding. This therefore calls for more attention given that many countries have started integrating microfinance in their poverty alleviation strategy.

Just like other African countries, the microfinance sector’s spring board in Cameroon was the banking system restructuring engaged by the Ministry of Finance (MINFI) and the Banking Commission for Central Africa (COBAC). The expansion of MFI in Africa during the 1980s can be explained by the gap left by the restructuring of the banking sector in most developing countries, which was characterized by restraining of credit opportunities.

In the  ECCAS  zone (Cameroon, Gabon, Central Africa  Republic, Chad, Equatorial Guinea and Congo), out of the 1021 MFIs registered, Cameroon accounts for 64%, with 67% of savings and 86% of credit  operations  (George  Kobou  et  al.,  2009).  The microfinance  model  in  Cameroon  is  also characterized  by  the  fact  that  the  activity  is concentrated  in  the  hands  of  certain  networks.  In effect  in  2005,  68%  of  MFIs  belonged  to  CVECA (Caisses Villageoisesd’Epargne  et  de  Crédit Autogérées),  CamCCUL  (Cameroon  Cooperative Credit  Union  League)  and  MC2 (Mutuelle Communautaire  de  Croissance).  More so, the geographical repartition of the sector remains unequally distributed (Moulin and Nkeuwo, 2012), (Kobou et al, 2009) and (Fotabong, 2012), with less than 48% of these MFIs located in rural areas. In  addition, the  constant  increase  in savings  within the  sector  is  not  accompanied  by  a corresponding increased in the volume of credit. For some  years  now,  the commercialization  of  microfinance  has  become  a dominant  activity  due  to  the  participation  of  profit oriented  organizations in  the  microfinance  sector. With  the  tremendous  expansion  of  the  microfinance sector and given the  increased competitiveness of the banking sector in Cameroon, which was an objective of  the  restructuring  program  (Wanda, 2007), (Moulin and Nkeuwo, 2012), certain banks saw the microfinance activity as a possibility to  capture  new markets.  The structure of the microfinance industry revealed its attractiveness through its proximity vis-à-vis clients, simplicity of its operations and adaptative capacity.

In Cameroon, the microfinance sector has evolved from small informal industry to become a key component of the country’s emerging financial sector, providing badly needed financial services to a significant segment of the population. Cameroon microfinance represents a large portion of the country’s financial sector.

Data from the Banking Commission of Central Africa States (COBAC) and industry sources confirmed by various focus groups show that the activity of microfinance is growing rapidly in Cameroon. In the phase of growing consolidation and restructuring in 2006, there were about 490 MFIs in Cameroon (down from the 56 MFIs previously identified in 2000) with about 1,052 outlets (against 700 in 2000).The customers/members then stood at about 849,030 which were up compared to the less than 300,000 customers registered in the year 2000. Growing interest, closer supervision and monitoring resulted into strengthening equity base that rose from FCFA 3 billion in 2000, to FCFA 19.9 billion in 2006 and today, according to market intelligence and industry sources total equity sits around FCFA 23.5 billion. Capitalization ratio for MFIs continues to grow although; CamCCUL the market leader is disproportionately represented (COBAC, 2008).  The banking crisis in Cameroon that occurred in the late 1980s and resulted to the closure of branches of commercial and developmental banks in rural areas and some cities was the remarkable contributing factor to the growth and development of microfinance industry.  Many top executives lost their jobs, some were dismissed. Some of these executives and employees formed cooperative credit unions that function like mini banks. As microfinance activities gained heavy weight in the financial system of the country, the roles of different stakeholders became clearly defined as the supervisory authorities configured MFIs within the national territory.

In Cameroon, the growth of microfinance has been witnessed by National Financial Credit (NFC) bank which started as a microfinance institution to the level of a bank. Microfinance institutions provide credit and other financial services to the poor, encourage them to save in order to improve their standard of living, and provide institutional support (training and counseling regarding financial expenses) for efficient use of loans.

According to (Angrist and Pischke, 2009), microfinance in Cameroon makes up over 44% of the financial sector and covers 287 localities. According to the Minister of Finance, the sector serves 520,000clients in 8 of 10 regions, with deposit totaling CFA 95 billion (USD 231.9 million) and an aggregate loan portfolio CFA 61 billion (USD 148.9 million) (Richard and Aseidu, 2010) and (Olsen, 2010)

1.2 Statement of Problem

Like many other African countries, there are huge informal sector’s economic agents in Cameroon, who are unable to access credit and other financial services from the formal financial sector. As a result, there have been recent attempts to expand and regulate the microfinance sector through the implementation of a series of new legislations, resulting in a proliferation of microfinance institutions to meet the increased demands of the public.

Still with the rapid increase in the number of micro finance in the country and also going by the Institutional theory of micro finance summarized as, increasing the number of microfinance, increases the number of under privilege and poor people served by these financial institutions, (Elsa and Stina, 2006), therefore reducing the level of poverty and unemployment in Cameroon. But on the contrary the poverty level is on the rise, from 3.80 percent in 2012 to 4.0 percent in 2013. Unemployment rate is also forecasted to increase up to 4.3050 in 2016 and standard of living forecasted to drop by within the same period, (National Institute of the Statistics of Cameroon, update on January 2016), Why?

Also going by the Welfarist theory of micro finance, which brings forth the fact that poverty is eradicated by granting of credit to poor borrowers, (Robinson, 2001) and the Neo- classical Growth Model which centers on fact that increase in the amount of savings and deposits increases standard living and consequently welfare, (Todaro and Smith, 2003). The loan portfolio in Cameroon has increased from 19.9 billion in 2006 to 61 billion in 2010, (Richard and Aseidu, 2010) and (Olsen, 2010), resulting in a fall in poverty level of the country, but the poverty level of our country is on an increase as above. Statistics also show that there have been a significant increase in the level of savings/deposits of members, that is from 29 billion in 2006 to 95 billion in 2010, (Richard and Aseidu, 2010) and (Olsen, 2010), but aggregate standard of living drops continually as explained above why?

The question would then be the extent to which micro-credit has been utilized and whether or not it has empowered its beneficiaries. Unfortunately, many studies stress the financial aspects of micro-credit ignoring the social aspects which affect access and utilization of small loans such as; the borrowers’ perceptions, attitudes, and human capital development. Important to note is that, knowledge about the outcome of micro-credit initiatives remains only partial and contestable. Consequently, a sociological analysis of micro-credit programs remain an important field of study: to point out whether the intended beneficiaries of micro-credit facility actually benefit or not (James and Zangue,2009). Therefore, this study is going to address the following questions!

1.3 Research Questions

1. What is the impact of microcredit on households’ welfare in the Buea municipality?
2. To what extent does saving services offered by microfinance institutions affect household welfare in the Buea Municipality?
3. What is the effect of microfinance loans on human capital development in the Buea municipality?
4. What are the potential challenges encountered when accessing and utilizing micro-credits in the Buea municipality?