Abstract

This study investigated the effect of competition on the sustainability of some selected micro finance institutions in Cameroon. The researcher set out to examine and analyse the evolution of competition amongst MFIs in Cameroon over time, to determine the effect of such competition on their Financial sustainability as well as made policy recommendations on enhancing sustainability of MFIs in Cameroon. Secondary data from annual report of the Micro Information Exchange (MIX) was analysed using both descriptive and inferential statistics. Quantities. The Herfindhal-Hirschman Index (HHI) was used to measure the level of competition amongst the MFIs and a regression model used to assess the effects competition has on the profitability of MFIs. This was carried out using Generalized least square or Random effect estimation technique based on the Hausmann test. The research design was predominantly ex-post factor design characterised by an unbalanced panel of 10 different MFIs from the year 2005 to 2015. The estimated index for competition indicated that the level of competition in the MFIs is quite intense with almost no particular MFI dominating. It was observed that the level of competition within the sector was higher in 2010 than any other year. However, this study showed that such an intense level of competition has a positive and significant effect on the sustainability of MFIs in the country as it causes them to adopt innovative measures to maintain their sustainable growth. We recommend here that   competition can serve as a good incentive for sustainable growth as long MFIs would innovate and compete within the acceptable norms of the microfinance industry.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

The undeniable growth in microfinance industry in number and stature has become a point of concern to decision makers and statisticians, as they migrate from nonprofit making monopolistic institution into profit making competitive institutions. They offer a full range of attractive services independently to the same group of customers through ‘one stop’ banking but their competitive nature do reflect in the pricing and reduction in bargaining power as they struggle for survival.

The increasing number of financial institutions has captured the minds of researchers who try to know what will become of these institutions when confronted with competition, as they always chose riskier portfolio; raising the issue of sustainability if the stability of this industry is not met or competition not restrained. Each institution plays with prices of their products and services in order to undercut the others and acquire the ability to supply the product at lower cost than that of the competitor.  Hence major players try to squeeze competitors out of the market. This makes sustainability a call for concern in this sector.

The issue of sustainability or continuity is the heart beat of every financial house as they strive to attract customers with an overall proposition on a mixed of price and differentiation and keep their doors open at all times.  This is reflected in the quality of financial products and services, the efficiency in the production of financial products and services and the degree of innovation. These include branding, styling, special features or higher levels of customer service.  Competition is seen in the ability to bring a greater variety of products and services at lower prices to customers and still adding value through profit to these institutions; hence the link between competition and sustainability in microfinance industry. That is applying commercial principles to microfinance to ensure the long-lasting capacity of institutions to reach those previously excluded from financial services.

Microfinance institutions in the developing world since 1990s have grown spontaneously.  Spurred by an accord reached at the Microfinance Summit in 1997 to help 100 million of most households with credit, the growth rate has tripled.  In fact, the Microfinance Information eXchange (MIX) defines an MFI as “an organisation that offers financial services to the very poor” (MIX, 2005). According to the UNCDF (2004) there are approximately 10,000 MFIs in the world but they only reach four percent of potential clients, about 30 million people. On the other hand, according to the Microcredit Summit Campaign Report (Microcredit Summit, 2004) as of December 31st 2003, the 2,931 microcredit institutions that they have data on, have reported reaching “80,868,343 clients, 54,785,433 of whom were the poorest when they took their first loan”.

Widespread support for microfinance today as a better tool for fighting world poverty has triggered a worldwide foreign investment estimated to about 10 billion USD about twice the amount estimated in 2006 which tripled the amount in 2004.  The microfinance movement has been both praised and supported by a broad range of academic scholars, major development finance institutions such as the World Bank, and development practitioners themselves. The concept has taken several facets and names in different parts of the world. For instance, the “tontines” in west Africa, the “chit funds” in India, “tantdas” in Mexico, “arisan” in Indonesia, the “susus” of Ghana and “cheetu” in Sri Lanka.

Growth is driven by the growing number of members and customer acceptance of the activities of these MFIs, expansionary strategies and measures put in place to protect their client. For some years now, the commercialisation of microfinance has become a dominant activity due to the participation of profit oriented organizations in the microfinance sector. Given the tremendous expansion of the microfinance sector and given their increased competitiveness of the banking sector in Cameroon, which was an objective  of the program, 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 adaptive capacity.

The microfinance industry has realized an undeniable expansion and as the number of microfinance institutions continues 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), the profitability of microfinance may drop with growing competition. In the case of microfinance, some scholars and policymakers warn that increased competition could lead MFIs to “scale up” their services, Olsen (2010). 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 and sustainability is still lacking, whereas the sector keeps on expanding. This has got the attention of many researchers in many countries since microfinance plays an important part in economy development.

As the number of MFIs continues to grow and competition becoming inevitable in the industry, concerns for the survival and long-term sustainability of these institutions also continue to grow. Petersen and Rajan (1998), McIntosh, Janvry, and Sadoulet (2004), Marquez (2002) and Hoff and Stiglitz (1998) have suggested that the benefits of microfinance may be eroded with growing competition in the sector. They argued that high attrition rates, low portfolio quality, repayment rate, collection methods due to growth in MFI numbers threaten their sustainability. McIntosh et al. (2004) also argued that increased competition induces a decline in repayment performance and in savings deposited with the incumbent MFIs, suggesting multiple loan-taking by clients.

On the contrary, Greenwood and Jovanovich (1990), King and Levine (1993) and Pagano (1993) have maintained the opposite view. They argued that financial deepening and for that matter competition promotes innovation and higher return on investment which ultimately lead to long-term growth and survivorship. Rosenberg (2009) also argues that as MFIs compete for clients there is also competition on price, in terms of interest rate, which usually will push the MFIs to become more efficient.

Within the global context still, MFIs adopt policies that are often aimed at ensuring their sustainability over time. Such policies are targeted towards increasing the number of depositors while reducing delinquency rates, increasing returns on both their assets and on their equity amongst others. Such policies yield positive fruits for MFIs across the globe. For instance, according to the Microfinance Global Valuation Survey 2010, in 2009 MFI portfolio delinquency levels across the world deteriorated rapidly, with loans past due over 30 days (portfolio at risk [PAR30]) jumping from a median of 2.2% to 4.7% during the first five months of 2009, while profitability dropped from a median return on equity (ROE) of nearly 18% at year-end 2008 to 6% by May 2009.

From a continental perspective the microfinance sector in Africa is quickly expanding, and institutions have increased their activities. In fact, African MFIs are among the most productive globally, as measured by the number of borrowers and savers per staff member with those in West Africa also generate positive returns, whereas MFIs in the Central Africa, Southern Africa, and Indian Ocean regions generate negative returns (Lafourcade et al., 2005). MFIs in Africa also demonstrate higher levels of portfolio quality, with an average portfolio at risk over 30 days of only 4.0%. However, MFIs in Africa tend to report lower levels of profitability, as measured by return on assets, than MFIs in other global regions. Among the African MFIs that provided information for this study, 47% post positive unadjusted returns; regulated MFIs report the highest return on assets of all MFI types, averaging around 2.6% (Lafourcade et al., 2005).

Notwithstanding their current growth, African MFIs face many challenges amongst which are the fact that their operating and financial expenses remain quite high, and on average, revenues remain lower than in other global regions and their efficiency in terms of cost per borrower is low. With these, technological innovations, product refinements, and ongoing efforts to strengthen the capacity of African MFIs and ensure sustainability are needed to reduce costs, increase outreach, and boost overall profitability.

In Cameroon, Microfinance in its traditional form (tontine) dates back more than a century. It started in the formal form in 1963 with the creation of the first savings and credit cooperative (“credit union” or caissepopulaire) in Anglophone Cameroon area under the leadership of Dutch missionaries. These credit unions are now consolidated within the Cameroon Cooperative Credit Union League (CamCCUL). Established in 1968, it is the largest network of microfinance institutions in Cameroon. The banking crisis of the late 80s and restructuring that followed led to the liquidation of several banks, the closure of almost all branches of banks in rural areas and small towns, and the dismissal of many executive banks. The latter will, in favor of Act of 1990 on freedom of association, and the 1992 law on cooperative societies and common initiative groups, revert creating many savings and credit cooperatives (Coopec) functioning as quasi-banks. The 90s will experience many innovations and diversifications in the microfinance sector.

The financial reforms that ensured the liberalization of its financial sector in 1990 had as aim the development of a strong and efficient financial system that would be able to meet the financing needs of an economy that will henceforth be controlled by market forces (Noula, 2012).  Before the nationalization of the banking sector in 1973, the Cameroonian financial banking system was made up only of the branches of foreign banks from the colonial masters. These banks therefore served the interest of these masters. It is as such that Cameroon in developing its development strategy considered the financial sector a very important tool and decided to nationalize all the banks that existed. Since then, entry was granted only on the condition that the state was the majority shareholder (NCC, 1973 and Noula, 2012). Today the sector is gradually being dominated by Microfinance institutions (MFIs) whose spread and number of customers is superseding the number of

1.2 Problem Statement

Microfinance institutions, like any other business enterprises are established to pursue and achieve set goals and objectives, especially those to do with market penetration, winning a competitive edge, revenue growth, and maximization of profits and shareholder value (Alkali, 2012; Hull and Rothenberg, 2008). Realizing these objectives depends, however, on the ability of the enterprises to attain their key performance indicators in a sustainable manner (Wan andYiu, 2009; Wang, 2005; Simerly andMingfang, 2000). The ability is itself determined by a number of factors, including the manner in which the management of the enterprises not only plans for, implements and controls the enterprises’ activities but also deals with the impact of the external environment (Kwagala, 2011 and Porter, 2008).

The number of MFIs has grown to over 150 in 2008 and continues to surge as the industry appears profitable and is considered a conduit to the attainment of the Millennium development goal of poverty alleviation and women empowerment. The spread and proliferation of MFIs in Cameroon is quite remarkable and their services keep expanding from the tradition savings and loans operations they use to provide to some conventional banking activities so as to attract more customers. Following the consolidation and restructuring that took place in the MFI sector in Cameroon in 2006, there were about 490 MFIs in Cameroon (down from the 656 MFIs previously identified in 2000) with about 1052 outlets (against 700 in 2000). The customers/members then stood at about 849030 which were up compared to the less than 300 000 customers registered in 2000. Growing interest, closer supervision and monitoring resulted into strengthening equity base that rose from FCFA 3billions in 2000, to FCFA 19.9 in 2006 and today, according to market intelligence and industry sources total equity sits around FCFA 23,5billions (Fotabong, 2012).

At the same time, the presence of increased competition MFIs may be forced to search for new clientele and/or sustain or increase market shares. Some tend increase focus on cost efficiency which may instead reduce efforts to monitor and screen new clients. This may result in reducing the quality of their loan portfolio as they increasingly approve loans to riskier borrowers (Vogelgesang, 2003). As such, repayment rates may fall thereby adversely affecting the efficiency levels of these MFIs. In addition, increased competition makes it easier for borrowers to take up multiple loans from different MFIs, leading to increasing levels of indebtedness and repayment problems. The phenomenon of clients taking multiple loans due to increased competition is a fundamental cause of loan defaults. Again, reduced repayment rates lead to decreased financial performance, having adverse consequences for the efficiency of MFIs. The pressure on reducing costs may also lead to a reduced focus on outreach, since providing small loans to poorer clients is generally more expensive than providing loans to better off clients.

On the contrary, long term sustainability requires MFIs to manage delinquency, keep their cost of capital low (by mobilizing savings), rotate their portfolio efficiently, keep operating costs to a minimum and most importantly, set interest rates to cover all these costs. Buried in fierce competition, MFIs may tend to compromise certain canons of borrowing and branching as they bid to please customers, new and old. During competition,  some MFIs tend to lower borrower selection standards as well as charge unrealistically low interest rates resulting to loan recovery and poor internal rate of returns and this can have adverse effects  financial sustainability.

Moreover, MFIs adopt policies that aim at improving the productivity of their staff so as to attract more customers. In fact, over the past few years, a large percentage of microfinance institutions have switched from a fixed salary compensation scheme to one that includes a pay-for-performance compensation component based upon various performance indicators. This shift has been accompanied by another trend towards a “commercialization” of the microfinance industry that is characterized by increased competition and a shift from donor assistance towards a greater focus on sustainability and profitability. Despite the perceived importance of staff incentive policies for the performance of MFIs, little is known about the effectiveness of such policies across different MFIs in the country.

With increasing MFIs and even bank concentration in most parts of Cameroon, there is need to bring to closer focus the fact that unchecked competition can lead to not only poor financial performance but closure. Such growing and unhealthy competition could eventually lead to poor financial sustainability. This probably is amongst the problems faced by some MFIs such as COFINES, FIFFA, and FINANCIAL SECURITY amongst others which have eventually closed down due to the unsustainable nature of their existence.  This study therefore seeks to provide answers to the following research questions;

1. What has been the evolution of competition amongst MFIs in Cameroon over time?
2. To what extent does competition influence the sustainability of MFIs in Cameroon?

1.3 Objectives of the Study

1.3.1 Main Objective

The main objective of this study is to investigate the effect of competition on the financial sustainability of microfinance institutions in Cameroon.

1.3.2 Specific Objectives

The specific objectives include;

1. To analyse the evolution of competition amongst MFIs in Cameroon over time;
2. To determine the effect of competition on the financial sustainability of MFIs in Cameroon;
3. To make policy recommendations on enhancing the sustainability of MFIs in Cameroon.