Abstract

This study assessed the effect of microfinance institution’s services on poverty reduction in the Limbe Metropolis. Three research objectives were formulated to guide and direct this study. Data were collected with the help of a well-validated structured questionnaire. Collected data was analyzed using descriptive anal of simple percentages presented in tables, bar and pie chart, and multiple regression statistics techniques.

Findings revealed that: there exist a significant relationship between saving services of MFIs and poverty reduction in Limbe Municipality (t=5.872, p=0.000). This implies that an increase in serving services provided by MFIs to the inhabitants of Limbe will lead to a corresponding increase in poverty reduction of the inhabitants of Limbe.

The finding also revealed that the loan and credit service of MFIs directly varies with poverty reduction of inhabitants of Limbe Municipal council (t=7.418, p=0.000). This implies that as the loan and credit service offer by MFIs in Limbe increases the level of poverty of the beneficiaries of the service will equally increase. And there exist a significant relationship between the consultancy service offer by MFIs and the poverty reduction of the beneficiaries of the service in Limbe Municipal council (t=2.418, p=0.000).

The study recommends that microfinance institutions to continuously improve their outreach to enable them reach more deserving low-income earners in all parts in Limbe in particular and Cameroon in general. To achieve this, the institutions should effectively market themselves and also fasten on service delivery as in the case of ensuring that loans applied for are disbursed on time.

CHAPTER ONE

INTRODUCTION

1.1 Background to the study.

The olden times of micro financing can be sketched reverse as long to the hub of the 1800s when the theorist Lysander Spooner was scripting over the profits from small credits to entrepreneurs and farmers as a mode of getting the people away from poverty (Himanshu, 2011). Microfinance is regarded as a powerful tool in combating poverty. The optimism over the role and the movement of micro finance as a poverty reduction intervention is increasingly becoming stronger evidenced by the micro credit summit campaign (Latifee, 2006).

In the same manner access to financial services can help poor people take control of their lives. It stresses that financial services can put power into the hands of poor households, allowing them to progress from hand-mouth survival to planning for the future, acquiring physical and financial assets, and investing in better nutrition, improved living conditions, and children health and education (CGAP, 2006).

Also, Microfinance has become an industry that attracted the attention of various people. For decades, microfinance is a good tool to use as a poverty eradication program, especially for people who are under the poverty line (Morduch and Haley 2002). The microfinance industry is increasingly growing because it gives hope of a poverty alleviation worldwide. Meanwhile, the ability of microfinance in reducing poverty still being debated. Morduch (1998) shows that poverty reduction indicators such as income and consumption expenditure have not improved after getting a loan from microfinance.

The difference of opinion led to doubts for the government, donors and policy makers about the positive effects of microfinance. Then, they tried to understand what factors are making microfinance successful and what factors impede the success of microfinance.

Furthermore, for many developing countries, microfinance continues to be considered as a very important instrument for poverty reduction. The widely held assumption is that providing financial services to poor households enables them to become micro entrepreneurs, accumulate savings, improve their income, smooth consumption, manage risks and eventually escape the vicious cycle of poverty. Yet, there is great controversy as regards the poverty reducing effect of microfinance. Critics argue that microfinance has not improved incomes, but has led to increased indebtedness of the poor, even leading to suicide in some cases (Reed, 2013).

Also, with the youth demographic bulges, existing high levels of youth underutilization and limited job creation occurring in many developing countries, governments and development actors are actively exploring new approaches to enabling youth to obtain sustainable livelihoods. There is a growing consensus that increasing the ability of youth to access financial services and strengthening their ability to use these services for their future life needs can play a direct role in supporting the transition to employment and better livelihoods through poverty alleviation (Reed, 2013).

Robinson (2002), microfinance enables clients to protect, diversify and increase their incomes as well as to accumulate assets and reduce vulnerability to income and consumption shocks. Seibel (2001) sees microfinance institutions in a wider term as comprising banking and non-banking, formal and non-formal financial institutions with financial services of a small scale mostly to low income people and that the term micro banking is used for regulated microfinance institution belonging to the banking sector.

Given the scope of poverty in urban areas, the financial institutions strategy was to promote sanitation, rehabilitate school and socio-health infrastructure, and promote income-generating activities. Lastly, the Bank intended to provide support to technical and vocational education so as to increase the productivity of workers and improve the country’s competitiveness. Consequently, the Bank had to allocate resources through the PPF mechanism to implement a programme for the development of this sector and facilitate the coordination of the interventions of donors, including the financial institutions themselves.

Moreover, empirical evidence shows that, access to microfinance for poor people helped in improving the wellbeing of the family through poverty alleviation (Hulme and More, 2006; Armendariz and Morduch, 2005). Microfinance is the provision of financial services to people who are financially excluded from the mainstream financial market (Otero, 1999). Thus, at the heart of microfinance finance is the provision of credit to the marginalised who are unable to access finance due to their inability to provide physical collateral.

Microfinance is a broader concept, unlike microcredit (provision of loan); it encompasses the provision of financial products such as, savings, insurance, training (Armendariz and Morduch, 2010). The existence of finance barriers in the credit market have impacted on the ability of the poor to access credit from conventional financial institutions (D’Espallier, 2009; Kamunge, 2014). Thus, the role of microfinance is to facilitate access to credit for productive purposes thereby, alleviating poverty of the family.

According to Robinson (2002), microfinance enables clients to protect, diversify and increase their incomes as well as to accumulate assets and reduce vulnerability to income and consumption shocks. Seibel (2001) sees microfinance institutions in a wider term as comprising banking and non-banking, formal and non-formal financial institutions with financial services of a small scale mostly to low income people and that the term micro banking is used for regulated microfinance institution belonging to the banking sector. Given the scope of poverty in urban areas, the financial institutions strategy was to promote sanitation, rehabilitate school and socio-health infrastructure, and promote income-generating activities.

Moreover, it is safe to say that the discourse in the literature has moved beyond the criticism that the reality is at odds with the ‘purist approach to microfinance’, as it is now widely accepted that microfinance is not the ‘miracle’ it was claimed to be. However, the international development community remains optimistic about propagating microfinance as an effective tool for poverty reduction, and it appears that it is here to stay as a proclaimed sustainable instrument for poverty alleviation. This relies on the claim that microfinance has shown huge success in effectively and efficiently providing sustainable financial services to the poor who are otherwise excluded from mainstream financial services (Johnson and Rogaly, 1997; Armendariz de Aghion and Morduch, 2005; Copestake et al., 2005).

In the context of Africa; in the fight against poverty and increasing inequality, since 2000, the Rwandan government has embarked on poverty reduction strategies. Current poverty reduction strategy paper emphasises that poverty reduction could not be achieved without access to financial services by the poor. To this effect, the government places much emphasis on microfinance as one of the tools to poverty reduction. It is believed that it would help to generate employment and to diversify sources of income, thereby contributing to the improvement of the Rwandan economy and the sustainable reduction of poverty (Republic of Rwanda, 2007).

In Ghana, microfinance has been recognized as an effective tool because of its poverty reducing effect (Dzisi and Obeng, 2013).  However, there is a paucity of studies in relation to the effect of microfinance on the wellbeing of farmers and their families in Ghana (Afrane and Adusei, 2014). Furthermore, where there are such extant studies, they either focus on women or men in the impact evaluation studies (Dzisi and Obeng, 2013). Empirical evidence regarding access to finance by farmers showed that, their ability to benefit from credit is impeded because of the nature and characteristics of their agricultural activities (Salami et al., 2010).

In Cameroon, The Financial institution sector in Cameroon is still in its infancy and is dominated by the proliferation of foreign banks. By December 2009, there were twelve Financial institutions operating in Cameroon, with only three names, National Financial Credit, Afriland First Bank, and Financial institution of Cameroon as indigenous banks. This makes up about 75% of foreign dominance. The financial landscape of Cameroon has however experienced some evolution over the past decades, particularly in the financial institution’s sector, where many microfinance institutions have surfaced.

According to Njimanted et al (2017) From 400 to about 652 microfinance establishments in the country at the end of 2008, a progress of 10% compared to 2007Of this number, the Cameroon Cooperative Credit Union League (CamCCUL) occupies a relatively large proportion; 177 credit unions. However, by 2015, there were 418 accredited microfinance institutions in the country (Ministry of Finance (MINFI), 2015). Financial institution activities have equally increased in coverage and depth with the number of banks increasing from 9 in 1999 to 12 by January 2010 and to 14 in 2016 with branches all over the urban centers in the country. Capital market development has in addition increased the intermediation role of banks within the financial landscape of Cameroon although, with only two companies quoted in the capital market, Financial institutions in Cameroon are gradually getting involved in the process of enabling companies to go public through the Initial Public Offering (IPO).

1.2 Statement of the Problem.

The key to ending extreme poverty and unemployment is to enable the poorest of the poor to get their foot on the ladder to development. The ladder of development hovers overhead and the poorest of the poor are stuck beneath it. They lack the minimum amount of capital necessary to get a foothold and therefore need a boost up to the first rung. Over time, inadequate supply of credit has been an important constraint on production in many developing countries where majority of the population lack access to financial services from formal institutions, either for credit or for savings. A serious problem however confronting many developing countries is the savings gap, which essentially means that these countries find it difficult to finance investments needed for growth from domestic saving (Walker, 1999).

Despite that very few studies could have been done on microfinance and poverty reduction, developmental activities in Cameroon, literature and researches from elsewhere indicate inconclusive results on the effectiveness of microfinance as a poverty reduction tool. Momoh (2005) points out that despite the fact that many developing countries, such as Bangladesh in Asia and Cameroon in Africa, have scored relative successes in using microfinance as an instrument for alleviating poverty, increases employment through their activities thus to boost economic development it has not been so for many other developing countries especially in Africa and some Asian countries. Rather than improve the conditions of the poor, most of the microfinance programmes operated in these countries have left the so-called beneficiaries in debts.

The availability of such services can be constrained by a range of factors, such as physical accessibility, affordability, eligibility and legislative frameworks. In poorer economies, the challenges of access are accentuated. Remoteness, weak transportation links and underdeveloped communication infrastructure coupled with low population densities all combine to exacerbate supply difficulties. The exponential growth in the uptake of digital payment technologies (in particular mobile financial services) has had a significant impact on increasing access to financial services by addressing some of these “hard” infrastructure challenges. However, even where services are now available, certain population cohorts and businesses often still face difficulties in meeting the eligibility criteria stipulated by financial service providers, such as documentation and collateral requirements.

Furthermore, high transaction fees or excessive interest rates also restrict access to finance for the working poor. Youth face the additional challenges of having minimal or no savings to serve as collateral for a loan, and a limited track record of engaging in business. This insufficient current state of knowledge problematizes the confident allocation of public resources to microfinance development. This study is therefore intended to examine the effect of microfinance on poverty reduction in Cameroon with the case of microfinance institutions in Fako Division.

1.3 Research Question.

1.3.1 Main Research Question.

What is the effect of microfinance institution services on poverty alleviation in Cameroon?

1.3.2 Specific Research Questions

1. What is the effect of microfinance credit or loans services on poverty reduction in Limbe Metropolis?
2. What is the effect of microfinance savings services or deposit-taking services to members on poverty eradication in Limbe Metropolis?
3. What is the effect of consultancy services offered by microfinance on poverty eradication in Limbe Metropolis?

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