CHAPTER ONE

INTRODUCTION

This introductory chapter of the study will be discussing the background of the study, research problem, research objectives, research hypothesis, the significance of the study, scope, and limitation of the research and the organization of the research.

1.1 Background Of The Study

The concept of microfinance originated from the field of informal finance in the years 1970 and 1980. Microfinance involves the provision of financial services such as savings, loans, and insurance to poor people living in both urban and rural settings who are unable to obtain such services from banks (Basley 2002).

Micro finance according to Otero (1999.p.8) is the provision of financial service to low income poor and very poor finance self-employed people. These financial services according to Ledger wood (1999) generally include micro-savings and microcredit, but can also provide other services like micro-insurance and money transfer or payment services.

Microfinance institutions also provide non-financial services like education, counseling, health, technical assistance training, and many others. They are nine approaches to providing micro-credit or finance to customers.

These ones are; the minimalist approach, the integrated approach, the institutional approach, welfarist approach, the commercial approach, the individual approach, the group lending approach, the existing business approach and the creation business approach(Messomo,2012).

When microfinance institutions perform services like microcredit, there is a high probability of default. This at times greatly affects the probability of microfinance institutions.

The concept of microfinance was pioneered in Bangladash by Muhammed Yunus in the year 1970s in the village of jobra. He experimented by lending to the poor women of the village of Jobra. He also found the Grameen bank and won the noble prize in 2006(Helms, 2005).

Since then, innovation in microfinance services has evolved. This evolution is aimed at alleviating poverty. Poverty has been the talking point of most political agendas worldwide especially in less developed countries like Cameroon.

According to International Monetary Fund (IMF)(2003) country report on poverty reduction strategy papers(PRSPS), poverty rate in Cameroon has about was 40.2% in 2001.According to Ayuk (2012), Cameroon has about 500 microfinance institutions of all categories actively participating in the alleviation of poverty.

If alleviation of poverty by MFIs through the granting of microcredit leads to default at times, there is a need to identify this problem. The evolution of microfinance has been the turning point in the financing of both entrepreneurial ventures and small businesses.

In a number of European countries microfinance evolved from informal beginnings during the 18th and 19th centuries as a type of banking of the poor, juxtapose to the commercial and private banking sector.

Almost from the unset microfinance meant financial intermediation between micro savings and micro credit and was powered by intermediation. In Germany, the former microfinance institution now accounts for about 50% of banking assets; the outreach is to about 90% of the population.

Microfinance in Asia has a much longer history, though little seems to know about the early history of hui in China, Chit funds in India, the arisen in Indonesia or the paluwagan in the Philippines to name a few. Financial institutions of indigenous origin, most of them informal are still exceedingly widespread but had been largely ignored in financial sector developments.

However, there are exceptions on a limited scale, as in India where chit funds are regulated like in Indonesia with its highly diversified rural microfinance sector where various forms of informal financial institutions have been registered and eventually regulated throughout the 20th century (Hans, 2005).

Over time, micro-credit programs all over the world improved upon the original methodologies and defied conventional wisdom about financing the poor. First, they showed that poor people, especially women, had excellent repayment rates among the better programs, rates that were better than the formal financial sectors of the most developing countries.

Secondly, the poor were willing and able to pay interest rates that allowed microfinance institutions to cover their cost. So, financial service providers have had a better understanding of the need for microfinance institutions and of the wide range of financial rates of low-income people in both urban and rural areas (Gateway).

These needs might be managing irregular income flows and coping with crises such as unexpected sickness, natural disasters, and death, many financial service providers have broadened their scheme of operations beyond their product of providing only credit services but also offer other services like; savings, insurance and money transfers, to help poor people manage their financial lives (Robert et al, 2004).

New technologies continue to create opportunities to broaden microfinance institutions financial services and to also provide those services at a lower cost to the poor.

In Cameroon, the idea of the credit union was introduced in1963 by a Roman Catholic priest Rev father Anthony Jansen from Holland who was then residing in a village residing in the northwest region called Njinikom.

It is in this light that the first credit union started in Njinikom. Before embarking on the information of credit union, Rev Father had noticed and witnessed a problem amongst the villagers.

Most villagers held that act of hoarding to a high esteem as a means of securing their liquidity to no avail, insect usually ate them. It is in vain that they saw the need for villages to regroup themselves as well as their resources to meet their productive need. This idea extended to Bamenda town as well as other parts of the country.

In 1969 there were already 34 credit union in existence organized jointly by the mission and the government department in charge of cooperatives. 34 credit union the joint to form the league known today as CAMCULL acting as a regulating organ to its affiliate’s credit union.

It operates in all the region of Cameroon with it’s headquarter in Bamenda. Today, it’s an umbrella organization for over 200 credit union with a total of 196922(urban and rural) members. Its provides a wide range of services to its members, it also manages savings that is an amount of over 41000million FCFA its network consolidated balance is over 49840589FCFA.

It is worth mentioning that credit unions are also subjected to law number 921006 of 14180106 and decree number 21455pm of 23/11/92 relating to rules and regulations governing cooperative societies as well as initiative groups.

Another credit union network named Renaissance cooperative credit unions RECCU-CAM ltd now exits in Bamenda, north west regional chief town, according to the local English language newspaper, the SUN. It was officially registered on May 30, 2013 but its constituent assembly held earlier in Bamenda on Saturday May 11.    Mohammed Yunus founded the Garment bank whose research pioneered the concept of providing micro banking services and non-collateralized loans or the poor in order to alleviate poverty

A credit union is a financial cooperative created for and by its members who are its depositors, borrowers and shareholders. Credit unions offers many banking services such as consumer and commercial loans (usually at lower than market interest rate), time deposit (usually at higher than market interest rate).

Their financial services are low income earners and for small business owners. It offers different type of services in practice; the terms are often used more narrowly to refer to loans and other services from providers that identify themselves as microfinance institutions.

The turn to use new members to deliver very small loans to unpaid borrowers taking little or no collaterals. There are 3 types of microfinance which include;

Category one microfinance institution are financial institutions that collect savings and deposits and lends them out to their members this category includes; associations, cooperatives, and credit unions.

There is no stipulated capital for category 1 institution instead COBAC(BANKING COMMISSION OF CENTRAL AFRICAN STATE) text required the capital to be sufficient to cover and meet up with the stipulated prudential norm. An example of a category 1 institution is TIKO BANANA PROJECT COOPERATIVE CREDIT UNION LIMITED (TBPCCUL)

Category two microfinance institutions are financial institutions that collect savings and deposits and later on-lend them out to their third parties.

These category groups are limited liability companies that function more like micro banks. The minimum capital for such category 2 institutions are stipulated by the text is 50millionFCFA prove of such must be shown by the use of a bank statement from a commercial bank

Category three microfinance institutions are other microfinance institutions that give out loans to everyone who ones it (they are not affiliated to CAMCUULL). This is made up of lending institutions that do not collect savings and deposits they include microcredit and project financial institutions.

The minimum capital required for such is over a 25millionFCFA for category 3. The amount must be fully paid and evidence to show in the form of a bank statement from only commercial banks at the time of application for accreditation.

This microfinance institution has an objective which is divided under article 5 of the uniform act include the following; Firstly, to finance small and medium-size enterprises in order to boost the economic growth of the nation. Secondly, reducing poverty by granting loans to households, will go a long way to improve the living standards of the citizens.

Tiko banana project cooperative credit union limited (TBPCCUL) falls under category 1 microfinance institutions. This is because it is owned and controlled by its members.

Every financial institution is required to meet up with their desire for cash by keeping enough cash whenever there is any possible operation by the institution. According to Macon, Harris and Davidson (2012) cash is any medium of exchange that is immediately negotiable. It must be free of restrictions for any business purpose.

Cash has to meet the prime requirement of acceptability and availability for instant use in purchasing and payment of debts. Acceptability to a bank or any financial institution for deposits is a commonly applied to cash items.

This is a process of planning, controlling, and accounting for cash transactions and cash balances. To attain sound management and cautious cash, all financial institutions must have a certain position of active elements, assets conserve in excellent quality security which can easily be transformed to cash without great losses.

Cash is essential in all financial institutions to compensate for expected and unexpected balance sheet fluctuations and to provide funds for growth.

The recent cash crisis faced in financial institutions which led to the closure of some microfinance institutions such as First Investment for Financial Assistant (FIFFA) and Companies Financier de l’Estuaire(COFINEST) had brought to the forefront the need to review their existing cash management policies, practices, and procedures.

Globalization today is more perceived through finance which marked the birth of microfinance institutions that spread experientially in serving the needs of all social classes, but in the same familiar way sometimes faces bankruptcy.

This can be justified by mismanagement of cash as cash management is not limited to receipt and disbursement. If it is easy to receive or to cash it is difficult to manage cash flow so as to avoid customer dissatisfaction.

Although it is easy to manipulate employees, customers are strong partners and for this reason, require a lot of attention. This is why good cash management is a necessary condition for resistance or for business growth.

So generally cash management is to ensure the company’s liquidity. In tough economic times where operating funds have become increasingly limited interest rates, the interest rate is subjected to frequent changes in cash position causing it therefore to be mastered properly. It is in this perspective that the theme of our work focuses on “the role of cash management on the profitability of microfinance institutions”.

1.2 Statement of the Problem          

The key to the survival of any microfinance institution is cash flow because, if cash does not flow in the institution at an adequate rate to maintain a level of working capital, then the company will struggle to survive as a result; the company might close down completely. Micro Finance Institutions have been facing cash management problems.

Many MFIs do not perform many cash management policies and techniques simply because they feel the ones they adopt are ok. Cash management is the lifeline of every business. The lack of cash management knowledge and skills prevents MFIs to adequately managing their cash flow. Over the years, TBPCCUL has been faced with the problem of not managing cash and cash payment problem to their members.

For example, TBPCCUL can give out 500,000 FCFA cash to their members as loans and as a result, the customer pays 300,000 FCFA instead of 500,000 FCFA thereby leading to a decrease of cash by 200,000 FCFA thereby leading to delinquency meaning the customer did not repay the entire cash amount.

For TBPCCUL, to be able to recover all its loan amount TBPCCUL need to put in place strategies or procedures by both the loan officer and the board of directors to recover overdue loans amount granted to members.

The gap identified was that MFIs are not performing the basic cash management practices to foster their profitability. This practice is omitted in business largely due to a lack of knowledge and skills to perform the task.

Therefore the purpose of the study is to investigate the relationship between cash management and profitability in TBPCCUL and if they face challenges in implementing cash management techniques.

1.3 Research Questions

The study, therefore, seeks to provide answers to the following questions; What are the effects of Cash management on the profitability of Microfinance in Cameroon?

In-Line with the study of William Baumol (2003), stated that cash should be managed and reflect the cost of volume relationship as well as the cash flows, this study specifically answers the following research questions;

1. What are the effects of cash management on the financial profitability of MFIs in Cameroon?
2. What are the effects of Cash management on the economic profitability of MFIs in Cameroon?

1.4 Objectives of the Study

 Main objective

The main objective of the study is to determine the effects of Cash Management on the Profitability of Micro Finance Institutions in Cameroon.

 Specific objectives   

The study is guided by the following specific objectives:

1. To examine the effects of Cash management on the financial profitability of MFIs in Cameroon.
2. To determine the effects of Cash management on the economic profitability of MFIs I’m Cameroon.

1.5 Hypotheses

In other to meet the aforementioned objectives, the hypothesis of these studies is;

H1: Cash management affects the financial profitability of microfinance institutions in Cameroon

H2: Cash management affects the Economic profitability of microfinance institutions in Cameroon