Abstract

The study sought to determine the effect of Loan management on the profitability of the micro-financial institution case study Tole Tea Cooperative Union. The study adopted a descriptive survey design. The population of the study consisted of 30 board members and staff of Tole Tea cooperative credit union.

A purposive sampling technique was used to carry out the research. Primary data was collected using questionnaires where all the issues on the questionnaire were addressed. Descriptive statistics were used to analyze data.

Furthermore, descriptions were made based on the results of the tables. The study found that loan conditions are carefully explained to members before they sign loan files, the use of credit checks on a regular basis enhances credit management, Penalty for late payment enhances customers’ commitment to loan repayment.

The study established that loan planning, client cleaning, loan control significantly affects the performance of the Tole Tea cooperative credit union also it was discovered that loan management has a significant effect on the profitability of the Tole Tea cooperative credit union. Loan screening was found to have a higher effect on performance.

The study recommends that Tole Tea cooperative credit union Buea should support monitoring of loans that are in arrear, also penalize clients for late payment and limit access to repeat loans for defaulters for this will discourage loan default.

CHAPTER ONE

 INTRODUCTION

1.1 Background of the Study

The micro-financial institution has a very loan history that can be traced back to the 19th century in Europe. Microcredit started in Europe at the end of the nineteenth century with the creation of the Raiffaisen example in Germany or the local case of mutual agricultural credit in France, and in Africa with the protective sackings, took truly its rise in the 1980s.

One of the earliest and longest-serving micro-credit organizations providing small loans to rural poor dwellers with no collateral is the Irish Loan Fund system initiated in the early 1700s by Jonathan swift. His idea began slowly in the 1840s and became a widespread institution of about 300 branches all over Ireland in less than one decade.

The principal purpose was to advance small loans with interest for short periods. However, the pioneering of modern microfinance is often credited to Dr. Mohammad Yunus, who began experimenting with lending to poor women in the village of Jobra, Bangladesh during his tenure as a professor of economics at Chittagong University in the 1970s.

The concept of microfinance development in Cameroon can be traced back to the 19th Century when moneylenders were informally performing the role of new formal institutions. These informal leaders were mostly ‘‘Njangi’’ groups and Cooperative Credit Unions. The first micro-finance institution in Cameroon was created in 1963 by Janson, a Dutch Catholic Father in Njinikom, Bamenda of the North West Region of Cameroon.

The law of 1990 which allowed for freedom of association and the creation of Common Initiative Groups (CIG) came to foster the powerful existence and manifestation of micro-finance institutions in Cameroon. For many years in Cameroon, the micro-finance sector has evolved and has been transformed into a system of provision of short-term loans, savings, credits, money transfers, etc thanks to various financial sector policies and programs undertaken by the government since independence.

MFIs now are the primary sources of funds to small and medium-size enterprises in Cameroon and other countries in the process of economic growth. Although finance literature explains the emergence of the micro-finance industry as an answer to an unfulfilled demand (Littlefield & Rosenberg, 2004), MFIs are not evenly spread around the globe and Cameroon in particular.

Hardy et al. (2002), by comparing Cameroon and Gabon concludes that even though the countries have similarities (common currency, comparable per capita income, etc.), the microfinance industry is more expanded in Cameroon than in Gabon.

The environment in which MFIs operate plays a vital role in the cross-country differences. While a lot has been written on factors influencing the development of the financial sector as a whole, almost nothing has been written on the factors determining microfinance profitability and its macro environment.

Most works on the microfinance industry focus on the institutional side of the organizations (Hudon, 2006). The impact of MFIs on poverty reduction, economic growth, and women empowerment has increasingly received greater attention in many developing countries like Cameroon. Conversely, much has not been done linking the development of the microfinance industry with macro-economic activities.

The Cameroon microfinance sector has made remarkable progress during the last ten years, due to the dynamism of the main actors who are the State, the MFI, and development partners (Fotabong, 2008).

The above progress is evident by the volume of microfinance activities, the proximity of the targeted vulnerable customers, and the flexibility of the access conditions to the services which help to fight against poverty. But currently, the sector faces serious problems since 1990 because of the economic crisis that made Cameroon devaluate its currency in 1994.

Also regarding specific prudential standards, many microfinance establishments failed to comply with the required standard for the solidarity fund. The difficulties can be outlined as problems involved in the control and supervision of the sector, in the regulatory framework, and in the establishment of microfinance enterprises.

The micro-finance sector in Cameroun remains exposed to illegal practices. All the establishments approved for the first category equally carry out unapproved operations patterning to the second category.

The insufficiency in the control of the microfinance sector due primarily to the insufficiency of financial, human, and material means at the disposal of the regulatory and control agencies remains a big problem.

The concept of loan management originated after the Second World War when it was largely appreciated in Europe and later in Africa. Bank in the USA gives loans to customers with high-interest rate which sometimes discourage borrower hence the concept of loan didn’t become popular until the economic boom in the USA in I885 when the bank had excess liquidity and wanted to lend excess cash (Ditcher, 2003).

In Africa, the concept of the loan was in the 5O’s when most banks started opening the credit section or department to give loans to white settlers. In Kenya loan was not popular with the poor. In I990’s loans given to customers who were not credible enough called for an intervention. Most suggestions Were for the evaluation of the customer’s ability to repay the, but this did work as loan default continued (Modurch, 1999).

The concept of loan management became widely appreciated by Microfinance Institutions (MFI) in the 9O’s, but again this did not stop loan default to this date (Modurch, 1999). The loan is one of the major sources of funds for investment, it is the major source of earning of financial institutions most especially for microfinance institutions and thus loan management is one of the most important activities in every financial institution and cannot be overlooked.

The success of lending out loan depends on the methodology applied to evaluate and award the loan (Ditcher, 2003) and therefore the loan decision should be based on a thorough evaluation of the risk condition of lending and the characteristic of the borrower. Numerous approaches have been developed in client appraisal process by financial institution (Horn, 2007).

Many lending decisions by Microfinance institutions are frequently based on their subjective feeling about the risk in relation to expected repayment by the borrower. Microfinance institutions commonly use this approach because it is both simple and inexpensive.

While other company would have their own method to determine the risk and quality of the client depending on the target group the following evaluation concept are useful for most occasions. These concepts are referred to as the 5C’s of credit appraisal (Edward, 1997); these elements are Character, Capacity, Collateral, Capital, and Condition (Edward, 1997). Loan policies should be well documented so that the loan officer will be able to know the area of prohibition and the area where it can operate.

Also, such policies should be subjected to periodic review to make the credit union kept abreast with the dynamic and innovative nature of the economy as well as competing with another changing sector (Fernando, 2006).

Some risks can be measured with historical and projected financial data, while others such as those associated with the borrower’s character and willingness to repay a loan is not directly measured (Butteworth. 1990).

As with any financial institution, the biggest risk in microfinance is lending money and not getting it back. Loan risk is a great concern for MFI’s because most micro-lending is unsecured. Many banks do not extend loans to people without securities and guaranties due to the high default risk for repayment of interest and in some cases the principal amount itself.

Therefore, these institutions are required to design sound loan management that entails the identification of existing and potential risks inherent in lending activities.

Timely identification of potential loan default is important as high default rates lead to decrease cash flow, lower liquidity level, and financial distress (Butterworth, 1990).

1.2 Statement of the Problem

Sound loan management is a prerequisite for a financial institution’s stability and

continuing profitability while deteriorating loan quality is the most frequent cause of poor financial profitability and condition. According to Gatuhu (2011), the probability of bad debts increases as credit standards are relaxed. Firms must therefore ensure that the management of receivables is efficient and effective.

Such delays in collecting cash from debtors as they fall due have serious financial problems, increased bad debts, and affect customer relations. If payment is made late, then profitability is eroded and if payment is not made at all, then a total loss is incurred. On that basis, it is simply good business to put loan management at the “front end” by managing it strategically.

The potential that microfinance has as a tool for alleviating poverty by providing financial services to underprivileged members of society is well documented (UN, 2013). Through MFIs, the poor have been able to grow their savings, rural and remote areas have been reached and cooperatives have been strengthened.

Nonetheless, despite the potential benefits that accrue from microfinancing, the profitability of some of these microfinancing institutions has been found wanting. Although factors such as structural fragility, supply of credit not being able to meet demand, and limited ability to meet demand from enterprises have been associated with MFIs’ poor profitability, poor loan management features prominently in discourse as the major challenge.

Loan management play a vital role in the profitability of every microfinance institution with regards to this study there are problems that seek answers. Some of the problems faced in loan management are poor screening methods in knowing unsuitable or bad business ideas, poor method of accessing the borrower’s ability to manage project, and failure to document available collateral sources.

What some MFIs do concerning loan management is not working, they fail to evaluate fully if the creditor is capable of paying back the loan. For example, they may check if the creditor has collateral for his loan and fail to check the past financial record of the creditor.

Another thing MFIs is doing concerning loan management that is not working is that they wait till when the loan is due before they start calling the creditor to come and complete the payment of the loan.

This will cause the institution not to recover its loan on time since it took them a long time to tell and make their creditor know that he has to complete the payment of the loan on time and this may cause the institution to face the problem of loan delinquency which can also lead to bankruptcy of institution.

There have been attempts in the past to study Micro financing and Microlending but much focus has been on the impact of MFIs in poverty alleviation, especially in Cameroon but much less has been done to investigate the effect of loan management on the profitability of MFIs institutions in Cameroon, therefore this research addresses that gap. The research question of this study is: What is the effect of loan management on the profitability of Microfinance institutions?

1.3 Research Question

The Main Research Questions of this study are: What is the effect of loan management on profitability of Tole cooperative credit union Buea?

In line with the main research question here are some specific research questions

1. To what extends does loan planning affect the profitability of Tole cooperative credit union Buea?
2. What is the effect of client screening on the profitability of Tole cooperative credit union Buea?
3. How does loan control affect the profitability of Tole cooperative credit union Buea?

1.3 Research Objectives

Main Objective

To investigate the effect of loan management on profitability of Tole cooperative credit union Buea

Specific Research Objectives

1. To examine to extends to which loan planning affects the profitability of Tole cooperative credit union Buea.
2. To evaluate the effect of client screening on the profitability of Tole cooperative credit union Buea.
3. To assess the effect of loan control on the profitability of Tole cooperative credit union Buea

1.5 Hypotheses

The study will be guided by the following hypothesis

H1: Loan planning has a significant effect on the profitability of Tole cooperative credit union Buea.

H2: Client screening has no significant effect on the profitability of Tole cooperative credit union Buea