CHAPTER ONE

INTRODUCTION

Background of the Study

Due to the advancement in information modules throughout the years, most business organisations around the world have been pushed to put resources in this area in order to face stiff competition both within the territory and beyond. It is no longer the era where business organisations were simply required to make profits, survive and provide fair returns to investors.

Nowadays, there is more to this in the form of global uncertainties, cut throat competition locally and internationally and unprecedented change in the economy.

As such there is a pressing need on the managers of organisations to make pragmatic and informed decisions (lending, investment, purchases, marketing, financing and dividend decisions) in order to put up with these challenges since we know that the ability of a firm to breakthrough and sustain itself or even its failure is solely as a result of the quality of the decisions taken.

This must also be done taking into consideration the fact that resources are scarce and limited. These informed decisions cannot be made without the availability of good accounting information which varies depending on the domain and hence its relevance.

Accounting information is used for evaluating the results of the past and present activities and making decisions concerning future actions. The information is primarily financial and generally stated in monetary terms.

It is the process by which the profitability and solvency of an organization can be measured and also periodic information needed as a basis for making business decision and appropriate control that will enable the management to guide the organisation on a profitable and solvent course.

Accounting information may also help managers understand their tasks more clearly and reduce uncertainty before making their decisions (Chong, 1996). Stamford (1978) stated that accounting information has played a role as “a tool for management decision making” because it functions as “a historical record of contractual obligations between the outsiders with the end product in form of financial statements to report the financial status of an organization at a point in time”.

Reliable information is necessary before a sound decision involving the allocation of scarce resource (land, labour and capital) can be made, that is why accounting profession is dynamic and there is always the need for an accountant to continually update his/her knowledge of accounting portfolio (Danjuma, 2014).

An accounting system is one of the most effective decision-making tools of management as it provides an orderly method of gathering and organising information about the various business transactions so that it may be used as an aid to management in operating the business (Copeland and Dascher, 1978).

The accounting system is quite broad and could be divided into various units involving management accounting, cost accounting and financial accounting. The accounting information provided by each of the units differs so does its usefulness, relevance and application.

While cost accounting provides accounting information such as material cost, cost of inventory, labour cost, direct expenses and overhead cost which relates to decisions affecting the product or service in which the organisation deals, management accounting is concerned with information such as breakeven point, sales mix, variances between the actual and expected, the different budgets (sales, production, supply, cash) etc which affect decisions relating to the operation of the organisation.

Financial accounting is concerned with external reporting through the use of financial statements to investors, government authorities, creditors, stockholders, suppliers and customers. These financial statements include the income statement, statement of financial position (balance sheet) and even the cash flow statement.

These statements actually report the financial status of the organisation at a given time, its activities and resulting profit and loss during the same time. Financial accounting information (FAI) is the information derived from these financial reports which is used by management and other users to make decisions.

The type of information each of these users need whether internal or external users will depend on the kind of decisions they want to make. For example, managers need detailed information about their daily operating cost in order to control the operations of the business and in the determination of selling price, employees as well need this information to determine the ability of the company to pay their salaries and determine the going concern status of the company, investors need it to know whether the company is worthwhile, while creditors needs the information to determine the credit worthiness of the company.

This information should be complete in terms of the characteristics needed to make it fit as a base on which informed decisions can be made. It is important to mention that the usefulness and relevance of FAI varies from one industry to the other.

For example, the FAI used by financial Institutions in decision making differs from that of a manufacturing company. Our focus in this study will be bent towards the usefulness of FAI in micro banking decisions.

Over the past centuries, practical visionaries, from the Franciscan friars who founded the community-oriented pawnshops of the 15th century to the founders of the European credit union movement in the 19th century (such as Friedrich Wilhelm Raiffeisen) and the founders of the microcredit movement in the 1970s (such as Muhammad Yunus and Al Whittaker), have tested practices and built institutions designed to bring the kinds of opportunities and risk-management tools that financial services can provide to the doorsteps of poor people.

While the success of the Grameen Bank (which now serves over 7 million poor Bangladeshi women) has inspired the world, it has proved difficult to replicate this success. In nations with lower population densities, meeting the operating costs of a retail branch by serving nearby customers has proven considerably more challenging.

The history of microfinancing can be traced back as far as the middle of the 1800s, when the theorist Lysander Spooner was writing about the benefits of small credits to entrepreneurs and farmers as a way of getting the people out of poverty. Independently of Spooner, Friedrich Wilhelm Raiffeisen founded the first cooperative lending banks to support farmers in rural Germany. (Wikipedia, 2019)

In Cameroon, the concept of microfinance development can be traced back to the 19th Century when moneylenders were informally performing the role of new formal institutions. These informal lenders were mostly ‘‘Njangi’’ groups and Cooperative Credit Unions. The first micro-finance institution in Cameroon was created in 1963 by Janson, a Dutch Catholic Father in Njinikom, Bamenda of the North West Region of Cameroon.

The law of 1990 which allowed for freedom of association and creation of Common Initiative Groups (CIG) came to foster the powerful existence and manifestation of micro-finance institutions in Cameroon.

For many years in Cameroon, the micro-finance sector has evolved and has been transformed into a system of provision of short-term loans, savings, credits, money transfers, etc thanks to various financial sector policies and programs undertaken by the government since independence. MFIs now are the primary sources of funds to small and medium size enterprises in Cameroon and other countries in the process of economic growth. (Ofeh & Zangue, 2017)

MFIs face a good number of decisions which they have to make regularly throughout the course of their existence which include lending, investing, purchasing, marketing, finance, corporate governance and dividend decisions.

The FAI used for such decisions will vary for each but they generally include information relating to assets, loans (long- and short-term debts), deposits, and net income which can all be derived from financial reports.

Based on these activity figures derived from the banks’ financial reports, we can therefore compute financial accounting information being financial ratios like Liquidity Management Ratios, Interest Rate Risk Management Ratios, Credit Risk Management Ratios, Capital Account Management Ratios, Cost Management Ratios, and Profitability Management Ratios. Each group of ratios throws light on the differences in financial management practices of MFIs in the respective area. Our point of focus is in relation to the lending decisions of MFIs.

The issue of loan delinquency/default among banks and Microfinance Institutions has been discussed in many public lectures and fora as one of the reasons why commercial banks have not shown much interest in financing Small and Medium Enterprises (SMEs).

According to Balogun and Alimi (1990), loan default can be defined as the inability of a borrower to fulfil his or her loan obligation when due. High default rates in SMEs lending should be of major concern to policy makers in developing countries, because of its unintended negative impacts on SMEs financing. Microfinance institutions all over the world including Cameroon are faced with the challenge of loan default/delinquency.

The chance that a microfinance institution (MFI) may not receive its money back from borrowers (plus interest) is the most common and often the most serious vulnerability in a microfinance institution (Warue, 2012). According to her since most microloans are unsecured, delinquency/default can quickly spread from a handful of loans to a significant portion of the portfolio.

This contagious effect is worsened by the fact that microfinance portfolios often have a high concentration in certain business sectors. Consequently, many clients may be exposed to the same external threats such as lack of demand for client’s products, livestock disease outbreaks, bad weather and many others.

These factors create volatility in microloan portfolio quality, heightening the importance of controlling credit risk. In this regard, MFIs need a monitoring system that highlights repayment problems clearly and quickly, so that loan officers and their supervisors can focus on delinquency (repayment rate) before it gets out of hand.

It is on this basis that we seek to examine using the various parameters, the extent to which this FAI is useful in lending management decisions in the micro banking context.

Problem Statement

While it can be argued that management is decision making, half of the decisions made by managers within the organization fail (Forbes, 2017). Therefore, increasing effectiveness in decision making is an important part of maximizing your effectiveness at work. Individuals throughout organizations use the information they gather to make a wide range of decisions whose consequences they live to face.

Young (1982) even goes so far as to claim that “The road to bankruptcy is paved with poor decisions.” As such it is important not to act under pressure but rather gather the right information to make informed choices even when time is of the essence.

Time pressures frequently cause a manager to move forward after considering only the first or most obvious answers. However, successful problem solving requires a thorough examination of the challenge. And a quick answer may not result in a permanent solution.

Thus, a manager should think through and investigate several alternative solutions to the problem before making a quick decision.  In this process, the availability of too much information can lead to analysis paralysis, where much time is spent on gathering information and thinking about it but no decisions actually get made.

It may occur that the decision-making process is extremely short, and mental reflection is essentially instantaneous, in other situations the process can drag on for weeks or even months. As such this process is dependent upon the right information made available to the right people at the right time.

Microfinance has proved its worth as a weapon against poverty but is going through a critical phase, especially with the governance practices within these organisations (Labie, 2001).

Most Microfinance Institutions (MFIs) face the challenge of achieving sustainability, but are also faced with the problem of governance (Mersland and Øystein Strøm, 2009).

Mersland and Øystein Strøm (2009) argue that, in order to improve the performance of MFIs and make microfinance a much more effective weapon against poverty and hunger, it is important that we start by understanding the influence of governance on the industry.

Good governance of MFIs requires a clear strategic vision of the organisation, transparency and an efficient management strategy acceptable to all involved with the organisation (Lapenu and Pierret, 2006). African MFIs have structural weaknesses at several levels: governance, portfolio management, internal control, human resources and lack of financial sustainability.

In Cameroon, the microfinance sector still lacks the capacity to match the huge needs of the poor; this is because of the challenges relating to their growth. Microfinance gives out loans to the very poor and in most cases do not collect collateral, as such they face a lot of difficulties for customers to reimburse their loans.

Also, the microfinance community has experienced some major failures because of inadequacies in its operation including corporate governance (Labie, 2001), given its tremendous outreach, its future growth and sustainability depend on how it is governed and attracts further fresh capital into this industry requires a thorough understanding of corporate governance practices of MFIs.

Given the fact that there exists a lot of asymmetry of information between the principal and the agent, and that the interest of the principal (revenue) is different from that of the agent (power, prestige, job security), there exist a conflict of interest between these two parties and in order to solve this problem and bring the two together, management has to be accountable to the board in every aspect of the company (corporate governance).

The Cameroon microfinance sector has made remarkable progress during the last ten years, due to the dynamism of the main actors who are the State, the MFI and development partners (Fotabong, 2008).

The above progress is evident in the volume of microfinance activities, the proximity of the targeted vulnerable customers and the flexibility of the access conditions to the services which help to fight against poverty. But currently, the sector faces serious problems partly due to the 1990s economic crisis that made Cameroon devaluate its currency in 1994.

Also regarding specific prudential standards, many microfinance establishments failed to comply with the required standard for the solidarity fund. The difficulties can be outlined as problems involved in the control and supervision of the sector, the regulatory framework, and in the establishment of microfinance enterprises.

The micro-finance sector in Cameroun remains exposed to illegal practices. All the establishments approved for the first category equally carry out unapproved operations patterning to the second category. The insufficiency in the control of the microfinance sector due primarily to the insufficiency of financial, human and material means at the disposal of the regulatory and control agencies remains a big problem.

Concerning the MFI crisis, Mutual Savings bank was the third financial institution to be put under provisional administration in 2017 after Credit Mutuel in December 2016 and Cecec SA.

In 2017, the volume of defaulted loans in Cameroon MFIs portfolio was 106.4billion (quite higher than all other CEMAC countries) revealed in June 2018 during the official launch of the of the Microfinance credit risk division in Yaounde.

As to what concerns the collapse or failure of MFIs, COFINEST which was one of the biggest microfinance institutions in Cameroon collapsed and her failure was accounted for by the mismanagement of funds due to the lack of transparency in the management system of this institution.

Other microfinance institutions like FIFFA, Dominion finance, Raven green finance and Global finance (which went operational between 2008 and 2010) have also gone bankrupt and this actually affected the growth of MFIs in Cameroon due to the lack of confidence by customers and investors.

But what could be the main issue causing diminishing trust and confidence in Cameroon`s MFI sector? As can be shown in related literature loan delinquency is one of the main causes of high MFI`s financial distress in Cameroon.

It is impossible to have loan delinquency and default with survival. Efficient management can help to recover part or some delinquent loans before they turn into bad debt. Also, survival is possible provided there is a source of funding (both internal and external sources) to cover shortages. However, it cannot be disputed that some major financial distress and bankruptcy are the result of loan delinquency.

This alone cannot be the sole reason for the “ghost” nature of MFIs in Cameroon. Some of these institutions have good reputations and stable financial records. For Example, Credit community de Afrique (CCA), Advance Cameroon, Camccul, Azeri credit union and many others.

Their stable nature with many other services (micro-insurance and micro-transfer) makes many customers and members to believe they are unavoidable. But is very easy to realize others MFIs that open their doors today and close one, two or three years later. This was the case of dominion finance, Raven green finance, and global finance that went operational between 2008 and 2010 and by 2011 went bankrupt.

The deteriorating customer confidence in this sector is caused by only one thing, “frequent news of bankruptcy”. Recovering deposits in case of bankruptcy is never possible considering limited intervention from authority.

Despite the difficulties, the Cameroonian micro-finance institutions occupy currently, an appreciable range in the field of micro-finance at the continental scale.

It is on these premises that this study wishes to analyze the usefulness of Financial Accounting Information on the Lending decision making process of CAMCCUL Credit Unions of Fako

Research Questions

Following our problem, the research questions below were raised;

Main Research question

Is Financial Accounting Information useful in Lending Management Decision in Fako Chapter?

Specific Research questions

1. Does Return On Asset affect Non-Performing Loans ratio in CAMCCUL Credit Unions of Fako?
2. Does Return On Equity affect Non-Performing Loans ratio in CAMCCUL Credit Unions of Fako?
3. What is the relationship between the Return On assets and Non-Performing Loans ratio in CAMCCUL Credit Unions of Fako?
4. What is the relationship between Return On Equity and Non-Performing Loans ratio in CAMCCUL Credit Unions of Fako?

Read More: Accounting Project Topics with Materials