Abstract

In Africa, studies on the effects of corporate governance on banks’ performance have provided interesting results. A critical review of CamCCUL and its affiliates in recent years shows that one of the problems confronting CamCCUL is that of weak principles of corporate governance which have resulted in the disaffiliation of major affiliates.

This study thus seeks to assess the impact of corporate governance on the financial performance of MFIs affiliated to CamCCUL using the Fako chapter of Credit Unions as a case study.

Data for the study is collected from both primary and secondary sources. Primary sources include questionnaires and interviews, while secondary sources include internet links and published accounts that cover the 25 credit unions in a consolidated form.

Profitability and Liquidity were used as a proxy for Financial Performance meanwhile Board role and composition, Transparency and disclosure, Auditing and compliance, and Risk management were used as a proxy for Corporate Governance.

The study employed the descriptive method of analysis using the Statistical Package for Social Sciences (SPSS) Version 21. To this effect, Frequencies, Percentages, Means and Standard Deviations, Person product-moment correlation coefficient were employed where the Regression analysis technique is used to test the relationship between the variables of interest.

In evaluating the results, the t-statistics, the F-statistics, and the Pairwise correlation matrix were all used. Based on the results, it is concluded that there exists a positive relationship between corporate governance indicators and financial performance of MFIs affiliated to CamCCUL in the Fako chapter of Credit Unions.

Therefore, it is strongly recommended that MFIs of the Fako chapter should strengthen their corporate governance practices and principles with emphasis on Board size, Gender diversity, timelines of delivering the financial reports to the regulators (COBAC and MINFI), and presenting the details of loan advances.

Also, the Ministry in Charge of Finance and COBAC should encourage MFIs to set up powerful management information systems to facilitate monitoring and supervision, internal control system to ensure that internal policies are strictly followed, and institute strong capacity-building programs to train those that will be able to take over management.

CHAPTER ONE

INTRODUCTION

This chapter deals with the Background to study, the evolution of the Microfinance sector dating from the post-independence era, and an overview of Credit Unionism in Cameroon. An assessment of the role of the main actors in the industry is also examined in a bid to shed light on their contribution towards the systematic transformation of the industry. The Chapter also discusses issues relating to the demand for MFIs services and their classification.

It further highlights the various legislations put in place to regulate the activities of MFIs in the Fako Division, the statement of the problem, the main and specific objectives of the study, research questions and hypothesis, the scope of the study, justification for the study, significance and conceptual framework.

1.1 Background to Study

The concept of micro-credit-the extension of small loans without any collateral, based on joint liability was pioneered by Dr. Muhammad Yunus in 1976 in Bangladesh.

The remarkable outreach of this movement which presently covers not only credit but also other financial and non-financial services suggests that extending credit and financial services to the poor is feasible and profitable.

Access of the poor to credit is recognized as an important strategy in achieving the Millennium Development Goals (MDGs) of promoting gender equality, women’s empowerment, and poverty reduction.

The World Development Report of 2000/2001 widely recommended microcredit for poverty reduction and as a social safety net for the poor of developing countries (World Development Report, 2001). As of the end of December 2006, it had served more than 465 million poorest family members (mostly by providing savings accounts) and extended credit to more than 133 million borrowers (Microcredit Summit Report, 2007).

Microfinance is high on the public agenda after the UN Year of Microcredit in 2005 and the awarding of the Nobel Peace Prize to Dr. Yunus and the Grameen Bank in 2006.

In Cameroon, the growth of microfinance is evidenced by the National Financial Credit (NFC) Bank, which started as a Microfinance institution and has now acquired the status 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 the efficient use of loans.

The main goal of microfinance is to create social benefits and promote financial inclusion by providing financial services to low-income households. This is often referred to as the “double-bottom line” of Microfinance institutions (Tulchin, 2003).

The increasing emphasis in recent years on financial sustainability rather than on social mission has led to allegations of mission drift among Microfinance institutions (Armendariz and Szafarz, 2009).

It is in this context that the issue of corporate governance of Microfinance institutions becomes increasingly relevant. Corporate governance usually refers to the relationships between the Board of Directors and the management of a Microfinance institution. However, the good functioning of the Board of Directors is not enough to guarantee the mission and assets of a Microfinance institution.

Microfinance institutions must achieve a balance between operating as a financially sustainable business and pursuing a mission of general interest such as reducing financial exclusion.

Corporate governance in microfinance is situated at the crossroads of two approaches: political and ethical, which emphasize the strategic direction of Microfinance institutions. Corporate governance is related to an institution’s internal operating and control procedures.

It is important to an institution because it plays a key role in creating transparency and trust for investors and in attracting capital for an institution.

Good corporate governance contributes to efficient management and promotes stakeholder interests, thus boosting the microfinance institution’s reputation and integrity and fostering customer trust.

On the other hand, inefficiency in corporate governance standards for example limited board size, gender inequality, inadequate financial reporting among others is the main challenges facing the sector in Cameroon.

1.1.1 Evolution of the Microfinance Sector in Cameroon

Data from the Banking Commission of Central African States (COBAC) and industry sources 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 Microfinance institutions (MFIs) in Cameroon (down from the 656 MFIs previously identified in 2000) with about 1,052 outlets against 700 in 2000 (COBAC, 2006).

The customers/members then stood at about 849,030 which was up compared to the less than 300,000 customers registered in the year 2000. Growing interest, closer supervision, and monitoring resulted in a 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 at about FCFA 23.5 billion.

The capitalization ratio for MFIs continues to grow although CamCCUL which is considered the market leader is disproportionately represented (COBAC, 2008).

The banking crisis in Cameroon that occurred in the late 1980s and which resulted to the closure of branches of some commercial and developmental banks in rural areas and cities was a remarkable contributing factor to the growth and development of the Microfinance industry.

Also, many top executives lost their jobs, while some were dismissed. As a result, some of these executives formed cooperative credit unions that functioned like mini banks. As Microfinance activities gained ground 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.

The unmet demand for financial services and growing interest in the sector by investors in the absence of an effective governance mechanism prompted the Ministry in charge of Finance to take over control of the sector initially placed under the auspices of the Ministry in charge of Agriculture.

This paved the way for a series of texts relating to sub-regional integration, supervision, and control of microfinance activities. The Council of Finance Ministers from the Economic and Monetary Community of Central Africa (CEMAC) in 2005, unanimously adopted the texts.

Consequently, the new regulation which became effective as of April 14, 2005, organized the sector and classified MFIs into three categories namely: Category 1, Category 2, and Category 3.

The commercial bank’s involvement in microfinance in Cameroon after the classification has increasingly become visible. Starting with Afriland First Bank which created MC2, the microfinance brand in 1992, BICEC, another giant in the banking sector created ACEP and CVECA, while from the opposite direction CamCCUL network created UBC, a commercial bank that outrightly failed to take advantage of the pool of competitive advantage offered by CamCCUL.

New players in the sector include SGBC that introduced the Advans micro-credit brand and Ecobank that brought in EB-ACCION the latest player in the market in 2009.

1.1.2   Credit Unionism in Cameroon

The roots of Credit Union activities in Cameroon can be traced back to 1963 following the creation of the first Credit Union Establishment at Njinikom, a village in the North West region of Cameroon by a Roman Catholic Priest, Reverend Father Anthony Jansen.

The idea of Credit Unionism spread all over the northwest and southwest regions of the country and by 1968, 34 credit unions that were already in existence joined together to form the Cameroon Cooperative Credit Union League (CamCCUL) Limited. CamCCUL is therefore the umbrella organization of cooperative credit unions and the largest MFI in Cameroon and the CEMAC sub-region in general (www.camccul.org).

Since then, the development of Credit Union establishments and their activities remain blurred until the early 1990s when President Paul Biya passed the remarkable Law No. 90/053 of 19 December 1990 relating to freedom of Associations and Law No. 92/006 of 14th August 1992 relating to Cooperatives, Companies, and Common Initiative Groups (CIG).

The Cameroon Microfinance industry is no longer reserved for the social Non-Governmental Organizations (NGOs) as the boundary between Microfinance and Commercial banking activities is becoming blurred.

The first-class or Category 1 Microfinance institutions (Cooperative Credit Unions) control close to 86% of the market in terms of a number of institutions in the Cameroon Microfinance sector with CamCCUL as the market leader controlling up to 55% of the overall market (COBAC, 2006).

In 2010 and 2011, the Category 1 MFI constituted about 510 of the 589 microfinance institutions existing in Cameroon at the time.

The fast growth in the number of Credit Unions can be attributed to their easy formation due to lower capital requirements and the fact that they can easily affiliate to a network (CamCCUL) which is the umbrella organization and benefit from the many advantages offered.

The case of CamCCUL, Credit du Sahal, and MC2 are good examples. However, in 2010/2011, category 2 institutions experienced the fastest growth, registering more than 35% of value and volume growth in value terms and overall market growth, This could be attributed to their strong positioning in most urban areas and target of the mid to richer portion of the deprived segment of the population.

1.2 Statement of the Problem

The Microfinance industry in Cameroon has experienced some major failures due to inadequacies in its operation, including corporate governance (Labie, 2001). Given its tremendous outreach in recent years, its future growth and sustainability depend on how well it is governed.

It is worth noting that if its corporate governance characteristics such as institutional framework (board role and composition), legal framework (auditing and compliance), transparency and disclosure, risk management, gender diversity, and ethnic differences of board members are not followed, it will result to collapse and closure of most of the Microfinance institutions.

The Credit Union network in Cameroon with CamCCUL at its apex has recent, experienced a lot of governance problems which have resulted in rampant disaffiliation of some of its major affiliates such as the Aziri and Ntarikon Cooperative Credit Unions in the Bamenda Chapter, just to name a few.

The rampant disaffiliation that CamCCUL has experienced in recent years is attributed to corporate governance characteristics which have been poorly followed and/or neglected for the past years.

This situation has brought chaos and curiosity within the CamCCUL network and this study seeks to provide answers to the following questions:

1. What is the effect of Board role and Composition on the financial performance of Credit Unions in the Fako Chapter of Credit Unions?
2. To what extent does transparency and disclosure impact on the financial performance of Credit Unions in the Fako chapter?
3. What is the effect of Auditing and Compliance on the financial performance of Credit Unions in the Fako chapter?
4. To what extend does Risk management impact the financial performance of Credit Unions in the Fako chapter?