Abstract

Current business trends have made it imperative for almost all organizations to maintain an internal control system.

This study focused on examining the effects of loan repayment method on loan delinquency in Micro Finance Institutions in Buea with a case study of 5 microfinance institutions (mutengene savings and loan, ntarinkon cooperative credit union, community Credit Company, UNICS Plc. and P& T credit union) all found in Buea.

The study employed quantitative and qualitative research technics as the research design. In achieving the research objective, primary and secondary data were used.

The primary data was collected through a well-structured questionnaire. Simple random sampling was used to select the 5 MFIs understudy and purposive sampling was used to select the 20 employees of each microfinance and investigate from them various loan repayment methods and their experiences on how these affect loan delinquency.

The study uncovered impactful effects on how the loan repayment method affects loan delinquency. In light of loan default, pure discounting and loan amortization revealed a significant effect on loan delinquency as compared to interest-only with no significant effect.

The study also evaluated the types of loans given out by MFIs with a majority being school fee loans and building loans followed by car loans. The study concludes that repayment methods can significantly affect the likelihood of a loan going delinquent as such; the researcher recommends that customer loan repayment methods be adopted for specific customers based on their ability, reputation, and collateral.

Also, the governmental units involved should establish credit rating agencies that rate loan buyers to ensure that their credibility can be evaluated.

CHAPTER ONE

INTRODUCTION

1.1 Background of The Study

The history of microfinance is closely linked with poverty reduction. Although the beginning of cooperatives, savings, and credit activities can be traced back as far as 1849 with the foundation in the Rhineland of the first cooperative society of saving and credit by Raiffeisen, it is truly with Yunus in 1976 with the creation of the Grameen Bank that one can situate the birth of “modern microfinance” (Blondeau, 2006).

Before the emergence of micro-financial institutions, most poor people could not benefit from commercial bank loans as they were not able to fulfill collateral or security requirements. Sometimes lack of credit history and creditworthiness was regarded as the main problem for not sanctioning loans to the poor.

Consequently, these people who could not obtain loans from commercial banks were being exploited by money lenders. Exploitation ranged from high-interest rates to complicated conditions of lending.

These are some of the reasons that led to the creation of microcredit as an alternative source for people to borrow money on favorable terms (Fotabong and Akanga, 2005; Dieckmann, 2007).

Microfinance was originally conceived as an alternative to banks, which in most developing countries serve only 5 to 20% of the population (Gallardo et al.,2003), and informal moneylenders. With the passage of time, the microfinance sector has evolved.

The evolution of credit unions started in the United States of America even before the outbreak of WW1 (Brook 2005). The Credit Union Extension

Bureau (CUNEB) was created in 1921 to provide the legislative, organizational, and operational services that enabled their growth. Credit unions have been among one of the fastest-growing enterprises in recent years.

Credit unions were organized originally to extend short-term credits at reasonable interest rates to their members. They have always been found extending credit to help business enterprises and individual customers.

The receiver of the credit is been helped with capital to run his or her own business (in the case of a business customer) and to improve on his or her standard of living (in the case of a household). The extents to which these credits are taken by customers depend on the credit policies which the union applies (Brook, 2005).

In the past micro finances were considered as a cluster of people who have little to offer in terms of development and economic welfare (Ross, Westerfield and Jordan, 2002 and 2003); but today, credit unions through their participative management approach and non-profit making motive, have remained distinct from other financial institutions.

They have succeeded in breaking socio-cultural, economic, and financial barriers and have instilled the idea of the communion of sharing in showing mutual assistance to their members (Ross, Westerfield and Jordan, 2002 and 2003).

The continent of Africa has experienced exponential growth in the last few decades, which has attracted attention and investments from several multinational firms and corporations. International corporations such as Facebook and Google have then concentrated on accessing this booming market of newly prosperous consumers. The World Economic Forum has

recorded the astronomical growth of African markets and outlined a very optimistic and trajectory for many of its developing nations.

The Forums findings revealed that the “continent demonstrated an average real annual GDP growth of 5.4% between 2000 and 2010, adding $78 billion annually to GDP. Growth continued annually at 3.3% from 2010 to 2015.” A major reason for Africa experiencing this high level of growth is the recent influx of microfinance institutions providing affordable loans to farmers across the continent (Anand Tayal).

The microfinance industry in Africa currently has a gross loan portfolio of $8.5 billion and attracts a customer base of 8billion people. According to mixed market microfinance institutions data, the African continent has developed one of the fastest-growing MFI bases (Anand Tayal, The benefits of microfinance institutions in Africa).

In Cameroon, the history of microfinance dates back to more than one century in its traditional form popularly known as “Njangi or Tontine”. The introduction of “modern” microfinance in Cameroon started in 1963 by a catholic priest Father Alfred Jansen, in Njinikom in the North West Region of Cameroon (Creusot, 2006).

This idea of credit unionism spread all over the North West and southwest regions of Cameroon 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 (www.Camcccul.org).

As of December 31, 2017, 700 accredited microfinance institutions were operating within CEMAC. According to their aggregated data, these institutions’ assets are CFA 1.158 billion. This was revealed by COBAC, the banking sector regulatory agency within CEMAC. The total deposit in those institutions was CFA 907 billion and the total loan was CFA582 billion

The Cameroon Cooperative Credit Union League (CAMCCUL) Ltd is a network of Credit Unions in Cameroon. It is like governing organization for about 191credit unions in Cameroon and has a total of 196992 members both in de urban and rural areas. It manages savings worth over 41thousand million (41 billion) FCFA (www.CamCCUL.org/services.html).

The fundamental issue that frequently results in instability and further to the collapse of MFI, is illiquidity caused mostly by loan delinquency. Loan delinquency is a cankerworm that is and continues to be a nightmare in the microfinance sector in Cameroon. Reducing loan delinquency is crucial for a microfinance institution’s survival.

In MFIs, loan delinquency is a continual problem which when left unsolved, delinquency becomes the institution’s nightmare. A loan is delinquent if installments are delayed and in default if one or more installments are never repaid (Fotabong, 2011).

Proper analysis and measures of specific delinquency ratios could serve as an appropriate tool for institutions to put things under control. In this light set up a meaningful delinquency monitoring is an important control tool.

1.2 Statement Of Research Problem

In yesteryear, lenders have faced difficulties with collecting their debts from borrowers. This became an issue so much that even humans were been used as instruments to repay loans.

In the finance world, institutions go through a lot to analyze the creditworthiness of borrowers. As if this is not enough, to collect or see to it that borrower pay on time or past time limit is even more strenuous.

This has been an issue so much that solutions such as discounting, factoring, refinancing were introduced in a bit to pipe down the rate of delinquency and default. The question which remains is; do these institutions not take into consideration collateral security from the borrowers?

As practical as it is, we know that collateral is the least aspect to consider in analyzing a borrower’s creditworthiness. It is so difficult to sell a customer’s asset and use proceeds to repay their loans but if the case may be then financial institutions would rather not prefer a default.

In trying to solve the problem of delinquency and subsequent default, supervisory bodies of financial institutions as MINFI, COBAC, OHADA have laid down certain conditions to be regarded by these institutions before carrying out a lending.

As stated, Repayment terms of a loan should be realistic (Tegwi P N), so are those instituted by the supervisory bodies. The methods of loan repayment that exist within the finance world today are; lump sum, interest-only, amortization, and payment on demand.

The above explanation brings us to the problem statement

What effect does the loan repayment method have on delinquent MFI LOANS?

From the above, we can come out with the following research questions.

Research Questions

1. What are the types of loans given at microfinance institutions?
2. What are the types of loan repayment methods?
3. Aside from the method of loan repayment what are other controls put in place to reduce delinquency.
4. How do these repayment methods affect delinquency?
5. What are the effects of delinquency on MFIs?

1.3 Objective Of The Study

The main objective of the study is to examine the effects of loan repayment methods on loan delinquency in MFI.

The specific objectives are;

1. To investigate the type of loans and loan repayment methods available at MFIs.
2. To know the other controls put in place to reduce delinquency.
3. To evaluate the effects of loan repayment method on loan delinquency.
4. To evaluate the effects of delinquency on MFIs.

1.4 Hypothesis Testing

On the basis of the specific objectives of the study, the hypothesis is formulated. All other things being equal;

Ho; Loan repayment method has no significant effect on delinquent micro finance loans.

H1; Loan repayment method has a significant effect on delinquent micro finance loans.