Abstract

Microfinance institutions play a significant role in Cameroon and the growth of the economy. The study sought to appraise the effect of interest rates on loan repayment in microfinance institutions. Community Credit Company (CCC) Plc, a microfinance institution in Buea was used as a case study for the study.

Specifically, it seeks to determine the factors influencing loan repayment by microfinance institutions in Cameroon, the effect of interest rate on loan repayment, and to identify the measures adopted to enhance the repayment of loans of MFIs in Cameroon.

The research was conducted using structure questionnaires to sample 30 employees of CCC and 20 loan customers of the microfinance institution. Data were analyzed using SPSS (21.0) were descriptive statistics and regression analysis was conducted to see the relationship that exists between the dependent and independent variable.

The findings of the research revealed that though interest rate plays a major role in loan repayment, other factors such as loan term and the repayment frequency also influence to a large extent the loan repayment.

Customers indicated that though a lower interest rate would enhance loan repayment, the issue of accessibility and availability of funds was paramount. Findings confirm that there exists a significant relationship between interest rate and loan repayment among microfinance in Cameroon. To enhance loan repayment, the researcher recommends a lower interest rate to ease the loan repayment burden, and loans granted should be amounts that customers can service. Again, micro-insurance could be established to protect the Institution and customers against any default.

CHAPTER ONE

INTRODUCTION

1.1 Background Of The Study

An efficient and well-functioning financial sector is essential for the development of an economy and for the achievement of high and sustainable growth of any country. One of the indicators of financial sector health is loan qualities. The most unsound financial sector shows a high level of non-performing loans, within a country.

The causes of loan defaults vary with different country and there are many reasons for loans fails to perform and thus affecting the financial performance of microfinance institutions. Some of which include, interest regulations, depressed economic conditions high real interest rate, inflation, lenient terms of credits, credit orientation poor credit monitoring, growth in loans, among others.

Loans are a part of the assets of a financial institution since they are meant to earn interest in the course of time (Kalani, 2009). This, however, is not always the case. Some loans do not perform as expected of them due to poor repayment rates and are thus termed non-performing loans (NPLs).

Repayment is the act of paying back cash previously obtained from a lender. Repayment more often than not appears as periodic payments that ordinarily incorporate part principal in addition to interest in each payment. Failure to keep up with repayments of debt can make a person be declared bankrupt and severely affect his credit rating.

According to Kimando (2012), sometimes customers fail to pay their loans and the charged interest on the loan which may result in the risk of paying the loans late or not paying at all. The greatest challenge facing MFIs and Banks today is the non-repayment of loans borrowed.

Microfinance institutions and even banks are supposed to ensure that the credit policy is secure to enable them to carry out their normal duties smoothly, this is according to Pandey (2010) where he recommended that most financial management systems are at a downfall.

In the same setting, the author pointed out that, given that most of the micro-finance institutions get their normal annual sales from the credit facilities loans interests given to certain individuals and persons with low incomes, the paying back of loans maybe not be certain.

However, it may be excused that lending decisions by the various banks and microfinance institutions are more and most of the time based on the feelings which are subjective in nature regarding risk in relation to borrower’s repayment abilities. According to Horne (2007) MFIs’ have been employing this kind of appraisal since it is inexpensive and simple (Horne, 2007).

Nowadays, a high percentage of loans that are in arrears is one of the key issues facing the microfinance industry. In order for microfinance institutions (MFIs) to reach scale and move towards operational and financial sustainability, the arrears rate must be reduced. High delinquency rates in credit programs for the poor were often blamed on poor market infrastructure, deficient business income, and client’s misallocation of loan funds to consumptions activities (Rural Financial Intermediation Program)

MFIs must reach the position of high repayment rate, as a high loan repayment rate benefits both MFIs and the borrowers. Every microfinance institution tries to maximize its repayment performance. Improving repayment rates helps reduce the dependence of the MFIs on subsidies, which would improve sustainability (Godquin, 2004).

Interest rate is the value a debtor pays for the utilization of money they acquire from a lender/financial foundations or expense paid on obtained assets (Crowley, 2007). It is “rent of money” crucial to an ‘industrialist society’ and regularly communicated as a rate over the time of one. Interest rate as a cost of cash reflects market information with respect to the anticipated change in the buying influence of cash or future inflation (Ngugi, 2001).

On the use of money in the institutions, a specific aggregate of cash paid or got is referred to as the rate of interest. Banks and financial institutions get interest income when they loaned cash and account holder pays interest when they get. The measure of interest that a lender gets is a level of the measure of cash they loaned and similarly, the measure of interest that a borrower pays is a level of the aggregate sum they obtained (Crowley, 2007).

Banks and Microfinance urge the general population to store their cash by offering interest rates which propel the general population to influence stores by opening diverse records with the banks and banks to utilize their resources for influencing loans to other individuals. For all intents and purposes, when a bank makes a loan to a client it charges a higher rate but pays bring down rates to the depositor. With this distinction of interest rates banks makes benefit consequently from giving these administrations.

According to Warue (2012), the most common and often the most serious vulnerability in microfinance institutions is the chance that a microfinance institution (MFI) may not receive its money back from borrowers (plus interest). The sustainability of microfinance institutions depends largely on their ability to collect their loans as efficiently and effectively as possible.

In other words, to be financially viable or sustainable, microfinance institutions must ensure high portfolio quality based on 100% repayment, or at worst low delinquency/default, cost recovery, and efficient lending (Addae-Korankye, 2014).

Nowadays, a high percentage of loans that are in arrears is one of the key issues facing the microfinance industry. In order for microfinance institutions (MFIs) to reach scale and move towards operational and financial sustainability, the arrears rate must be reduced. High delinquency rates in credit programs for the poor were often blamed on poor market infrastructure, deficient business income, and client’s misallocation of loan funds to consumptions activities (Rural Financial Intermediation Program, 2005).

MFIs must reach at the position of high repayment rate, as a high loan repayment rate benefits both MFIs and the borrowers. Every microfinance institution tries to maximize its repayment performance. Improving repayment rates helps reduce the dependence of the MFIs on subsidies, which would improve sustainability (RUFIP, 2005).

One indicator of the effectiveness of MFIs is the loan repayment performance of the borrowers (Addisu, 2006). It is also argued that a high repayment rate reflects the adequacy of MFIs’ services to clients’ needs and restricts the cross-subvention of the borrowers (Godquin, 2004).

For borrowers, a high repayment rate helps to obtain the next higher amount of loan (Bond and Rai, 2009). Contrary to this, if there is a low repayment rate, both the borrowers and the MFIs will be affected. In this case, the borrowers will not be able to obtain the next higher loan and the lenders will also lose their customers.

In order to maintain the sustainability of those MFIs, examining determinant factors influencing loan repayment is important, because if borrowers do not repay, then there may not be sufficient funds to ensure that the liquidity position of the MFI is maintained. When there is a loss in the MFI liquidity due to high levels of non-repayment, the cyclical flow of funds between the MFI and the borrowers will be interrupted (Nawai and Shariff, 2013).

1.2 Statement Of The Problem

Microfinance institutions play a significant role in Cameroon and the growth of the economy. With continuous economic growth, it is important there is a need for finance to help in the enhancing and growth of the business. The poor need financing to help them be able to grow their business and this can only be achieved through microfinance funding. Loan payment ability is normally the driver of microfinance and other financial institutions’ financial performance.

The interest rates charged by financial institutions such as microfinance institutions and other financial institutions in Cameroon have been high. This has caused a lot of criticism with people shying away from financing options due to the high-interest rates (Tchakounte, 2018).

The loan repayment capabilities are the ones that contribute to the profit margin size in every single transaction between microfinance and other financial institution and their clients. Despite all this, there are several stated cases of high loan repayment defaults in microfinance institutions (Wanjau, 2011).

It is acknowledged that the amount or level of non-performing loans (NPLs) is frequently connected with microfinance failures and financial crises in both third worlds and developed nations (Caprio and Klingebiel, 2002).

When individuals loaned fail to pay the principal amount and interests facilities advanced to them, the financial institution concerned will be adversely impacted. If this happens, then, there will be fewer finances to run its normal businesses’ and also to advance as loan facilities to other borrowers who have potential. If the effect of non-repayment continues to persist for long, microfinance will have very huge bad debts; an encounter that would result in the general workforce being cut and branches closure as a means of cutting costs.

These may also result in the stall in its market expansion and ultimately collapse of microfinance (Atieno, 2012). The microfinance like other financial institutions plays a significant role in enhancing loan accessibility and other financial services especially to the poor and persons with low incomes. This indicates that any constraints affecting these banks and financial institutions are more likely to have far-reaching effects on the households and the whole economy.

Studies into microfinance in Cameroon did not concentrate on the effect of interest rate on loan repayment of Microfinance Institutions even at the time when MFIs are finding it very difficult to collect loans that have been given to beneficiaries is receiving much attention (Tchakounte, 2018). This creates a serious research gap into microfinance of which this study seeks to close.

The foregoing explains why this study is necessary to be conducted with the aim of examining the extent to which interest rates charged by MFIs in Cameroon affect their loan performance. Because of the above issues, the following research questions were raised;

1.3 Research Questions

1. What are the factors influencing interest loan repayment in microfinance institutions in Cameroon?
2. What are the effects of interest rates on loan repayment in microfinance institutions in Cameroon?
3. What are the measures adopted by Microfinance Institutions to enhance repayment of loans in Cameroon?

 

1.4 Objective of the study

1.4.1 Main objective

The main objective of this study is to examine the effects of interest rates on loan repayment in microfinance institutions in Cameroon.

1.4.2 Specific objectives

1. To determine the factors influencing loan repayment by microfinance institutions in Cameroon.
2. To determine the effect of interest rate on loan repayment by MFIs in Cameroon.
3. To identify the measures adopted to enhance the repayment of loans of MFIs in Cameroon.

 

Further Readings

THE EFFECTS OF INTEREST RATE ON LOAN REPAYMENT IN MICROFINANCE INSTITUTIONS IN CAMEROON: THE CASE OF COMMUNITY CREDIT COMPANY (CCC) PLC