CHAPTER ONE

INTRODUCTION

1.1 Background

In the world the history of banking began with the first prototype banks of merchants of the ancient world, which made grain loans to farmers and traders who carried goods between cities. This began around 2000 BC in Assyria and Babylonia.

Later in ancient Greece and during the Roman Empire, lenders based in temples made loans and added two important innovations: they accepted deposits and changed money.

It is worth noting that in small society, some sort of banking exists and it was being carried out in a primitive manner, in thrift and loan society regulated by customs and the important role of bank and bankers. The conduct of business regulations focuses on how companies and other financial institutions conduct their business.

The evolution of today’s business organization which is effective and efficient management together with good technological state unfolds the complicated nature of ancient business. Nevertheless, most business organizations are still indistinctive of the dilemma of what procedures to use in effecting the growth of the business activities.

The movement of microfinance institution in Cameroon has its root in the year 60s through the creation of the first cooperative in 1963 by a Dutch catholic Father Alfred Jansen in Njinikom; North-west region of Cameroon.

This cooperative is the founding father of CAMCCUL (Cameroon Cooperative Credit Union League). CAMCCUL is the biggest Microfinance institution in Cameroon today (COBAC regulation, 2000- 2006).

Financial and economic crisis of the year 80s and early 90s in Cameroon was the real “spring-board” of the movement of the microfinance institutions in Cameroon. This crisis had social, regulatory, financial, economic and institutional impact on the microfinance environment in Cameroon. Socially, the crisis led to the lay-off of many qualified banking employees in Cameroon banking sector.

Being in quest of new jobs, these qualified employees set Savings and Credit Cooperatives (COOPEC). The COOPECs were dealing with micro lending and micro savings. Financially and economically, the crisis generated a dropping in confidence in traditional banking institutions by customers in Cameroon.

This lack of confidence in traditional banks made many customers to quit traditional banks for COOPEC. The crisis caused also the collapse of many traditional banking institutions. Legally, before 1998, the regulation of microfinance institutions in Cameroon was flexible. Before 1998 no distinction between rural cooperatives involved in poverty alleviation and commercial microfinance institutions involved in profit- making activities.

The flexibility in the law generated a free-entry in the micro lending and in the micro saving activities in Cameroon. Institutionally, the lay-off of qualified banking employees, the lack of confidence of customers in the traditional banking institutions and the free-entry of COOPECs in banking activities led to a great increase and creation of microfinance institutions.

The laws of 1998 and 2001 in relation to differences between profit-making microfinance institutions and non-profit making microfinance institutions did not stop that increase in creation of COOPEC in Cameroon.

But the CEMAC1/UMAC2/COBAC3 regulation on microfinance institutions set on April 2002 and implemented from 2007 restructured the sector of microfinance institutions in Cameroon and henceforth faced out illegal, unqualified and unprofessional microfinance institutions.

Thus, the number of microfinance institutions in Cameroon sphere started instead reducing. The microfinance movement began with the work of Dr Muhammad Yunus in Bangladesh in the late 1970s, spreading rapidly to other developing countries.

Most early microfinance institutions (MFIs), including Yunus’s own iconic Grameen Bank, relied on funding from government and international donors, justified by MFI claims that they were reducing poverty, unemployment and deprivation.  In the 1980s, however, the expanding microfinance model operated in a transformed political and ideological environment.

Market principles were in the ascendant, with growing emphasis on financial sustainability and the need to wean microfinance programmes off long-term donor support. It was felt that the poor should pay the full cost of any support received, rather than impose an additional tax burden on others.

Financial services play a vital role in the economic growth and development of cities and communities, as well as on a global level. These services provide businesses with access to credit and a means for saving and investing money.

Microfinance banks make these services accessible to individuals and businesses within underdeveloped communities around the world. Market principles were in the ascendant, with growing emphasis on financial sustainability and the need to wean microfinance programmes off long-term donor support. It was felt that the poor should pay the full cost of any support received, rather than impose an additional tax burden on others.

Microfinance, in simple terms, can be described as small loans offered to poor households to foster self-employment and income generations. The loans largely go to rural landless, disadvantaged women and marginal farmers who depend largely on selling their labour.

The terminology of Microcredit has undergone a change in recent time. Practitioners in many countries call it microfinance for its wider dimension. microfinance generally involves the following features: Small loans, for both working capital and assets, Collateral free, substituted by group guarantees or compensatory savings, Access to repeat and larger loans, Intensive supervision and close monitoring, Secure savings products, Loan period generally for one year, may go up to 3 years.

Options available for weekly/monthly installment payment, Can combine social development with financial intermediation. Ultimately, the goal of microfinance is to give low income people an opportunity to become self sufficient by providing a means of saving money, borrowing money and insurance.

Micro financing is not a new concept. Small microcredit operations have existed since the mid-1700s. Like conventional banking operations, microfinance institutions must charge their lenders interests on loans.

While these interest rates are generally lower than those offered by normal banks, some opponents of this concept condemn microfinance operations for making profits off of the poor. The World Bank estimates that there are more than 500 million people who have directly or indirectly benefited from micro finance operations.

Dichter T. (2006) finds that microfinance has often been used to cover basic consumption needs rather than fuel enterprise. In the face of such evidence, the microfinance sector now portrays consumption ‘smoothing’ as a new argument for microfinance (Collins et al., 2009). Consumption smoothing can certainly reduce risk and vulnerability, but it can lead poor individuals to substitute microcredit for non-existent income in an unsustainable way.

Growing dependency upon microcredit, coupled with high interest rates, means that a growing proportion of the unstable income of the poor is siphoned off to cover interest charges. A key claim for microfinance was that it would help to detach the poor from local loan sharks charging higher interest rates a claim made by Muhammad Yunus when promoting microfinance to international donors.

In fact, by conferring social legitimacy upon microfinance, rather than loan sharks, the stage was set for the poor to become open to the idea of going into debt.

The poor have to rely on loans from either moneylender, at high interest rates, or friends and family, whose supply of funds will be limited.

Microfinance institutions attempt to overcome these barriers through innovative measures such as group lending and regular savings schemes, as well as the establishment of close links between poor clients and staff of the institutions concerned. Microfinance institutions provide small loans to marginalized individuals in developing regions and help elevate them out of poverty.

Millions have utilized these loans to start self-employed businesses, send their children to school, and feed their families. Microfinance institutions boast near perfect repayment rates of loans and keep their practices sustainable.

Microloans are more beneficial to borrowers living above the poverty line than to borrowers living below the poverty line. This is because clients with more income are willing to take the risks, such as investing in new technologies that will most likely increase income flows.

Poor borrowers, on the other hand, tend to take out conservative loans that protect their subsistence, and rarely invest in new technology, fixed capital, or the hiring of labor. Microfinance banks exist in a variety of forms that provide needed financial help in underdeveloped economies.

Microfinance banks exist in different forms, some of which include nongovernmental organizations, credit union type businesses, wire services, commercial and state banks.

These banks specialize in providing small loans also known as microloans to people who would otherwise have limited or no access to financial assistance. Both individuals and businesses within underdeveloped countries can use micro financing to fund small business enterprises within their local communities.

1.2 Problem Statement

Cameroon economy in the early 70s and 80s was on a good footing with every sector performing at its best. Agriculture was the main contribution to the gross domestic product (GDP). In the 1980s, with the discovery of oil, petroleum became the highest contribution to the Gross Domestic Product, pushing agriculture to the second position.

The economic wellbeing at this time attracted so many foreign investors who invested in the banking sector as well as other sectors in the economy. Towards the last quarter of 1980s and 1990s the country began to face a recession due to devaluation of a country’s currency folding up most of Cameroon’s Commercial banks including National Development Bank.

This was caused by the excess fraud and corruption in the banking system, with many none performing and profitable loans given out by these banks leading into serious liquidity.

The impact of this failure was felt badly directly by the economy as many Cameroonians companies were folding up due to lack of funding. This lead to the raise of microfinance institutions (CAMCCUL) which started in Cameroon in 1968 with the aim of providing financial services and products such as very small loans, savings, micro leasing, micro insurance and money transfer to assist the poor in expanding or establishing their business.

It is on this bedrock that we evaluated if microfinance institutions provide credit facilities to the poor.

1.3 Objective of the study

The main Objective of this study is,

To critically examine the functions of Micro finance institutions in providing credit facilities to the poor.

Specific Objective Includes:

1. To analyze the aims of Microfinance Institutions towards nearness to small businesses.
2. To measure the interest rates charges of Micro finance institutions.
3. To examine the effects of Micro finance to small businesses.
4. To make recommendations

1.4 Research Questions

The main question is what is the impact of providing credit facilities to the poor?

Sub questions are;

1. What is the aim of microfinance institutions?
2. What are the interest rates charges of Microfinance institutions?
3. Has credit facilities of micro finance institutions been helpful to the poor?

1.5 Hypothesis

H0; Micro finance institutions has no significant impact in providing credit facilities to the poor.

H1; Micro finance Institutions has a significant impact in providing credit facilities to the poor.