Abstract

The research aimed to assess the impact of credit management on the profitability of Microfinance Institutions in Buea. The research utilized a descriptive survey methodology. Data was collected with the use of a questionnaire. With client appraisal, credit control policy and collection policy as the independent variables and customer satisfaction as the dependent variable.

To achieve this objective, data was collected using questionnaires that were distributed to managers, and loan officers of MFIs. Seventy-five (75) copies of the questionnaire filled and returned by respondents were used as the sample size for the study. The data were analyzed utilizing the descriptive and ordinal logistic regression model. The model summary. The findings revealed a moderate correlation (R = 0.546) between the predictors related to credit management and the dependent variable of respondents’ level of responsibility, with an F-statistic of 5.875 and a p-value of 0.000, indicating that the overall regression model is statistically significant.

MFIs should invest in refining their client appraisal processes by implementing comprehensive assessment frameworks that include detailed evaluations of client creditworthiness, character, and repayment capacity. The study recommended that continuous training programs should be established for personnel involved in client evaluations to enhance their skills in credit assessment and risk management and MFIs should develop clear guidelines for assessing collateral, even when clients have limited financial assets.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Among the numerous elements a firm may employ to affect the demand for its products, credit stands out as a significant factor. Horne and Wachowicz (1998) assert that companies derive advantages from credit only when the profits garnered from enhanced sales surpass the additional costs associated with receivables. According to Myers and Brealey (2003), credit is described as a mechanism in which the immediate possession of goods or services is granted under a contractual agreement, deferring payment to a specified later time.

Credit management is a crucial function within any company and must not be disregarded by any economic enterprise involved in lending, regardless of the nature of its business. The procedure aims to guarantee that clients will remit payment for products provided or services rendered to them on credit.

The primary goals of loan management are debt financing and debtor management. Scheufler (2002).  Understanding the contributions of credit management is a must for financial institutions to enhance their development and remain competitive in today’s global and dynamic market. Credit management not only contributes to the development of these entities but also provides other financial services and products to financial institutions. (Mago & Modiba, 2022)).

Evolved into licensed financial institutions that provided microfinance services and have increased in number. They operate by offering loans and other financial services to low-income earners. Microfinance institutions are entities engaged in the provision of financial services such as savings and loans to low-income people living in both urban and rural areas who are unable to obtain such services from the formal financial sectors.

According to Messomo (2020), Microfinance has its roots in Bangladesh, as it emerged in the 1970s. This was based on the concepts of Muhammad Yunus and Grameen Bank. Microfinance evolved globally, with institutions such as Opportunity International and Pro Mujer in Latin America and Micro Ensure in Africa, among others, providing financial services to impoverished communities. The concept of microfinance spread to Africa in the 1980s, with NGOs providing microfinance services to the poor, as governments were unable to provide in the early 2000s. Africa has more than 300 MFIs providing financial services to millions of people, contributing to poverty alleviation and economic growth (Mwita, 2021).

In Cameroon, MFIs started around September 1963 with the St. Anthony’s Discussion Group, as noted by Singhe (2020). Jansen (a Roman Catholic priest from Holland), was the brain behind this idea. In Njinikom, in the North West Province of Cameroon, this concept was first presented by 16 members of a discussion group who made modest initial contributions.

Since then, microfinance institutions have begun gaining their ground within the country. In the late 1980s, commercial banks in Cameroon experienced a serious crisis, with many major banks becoming illiquid and/or insolvent, this gave microfinance institutions within the country to gain grounds from this period. Today, microfinance institutions have individuals and small businesses, to alleviate poverty and promote economic growth. The contributions of MFIs in Cameroon include job creation, poverty reduction, and increased access to financial services in developing countries like Cameroon (Ekumah and Esse, 2003).

Banking services and financial inclusion is an urgent issue. Yet, MFIs have played a crucial role in promoting financial inclusion in Cameroon for growing profitability in MFIs. Micro-finance organizations (MFIs) offer a variety of service of financial, primarily payment services, microinsurance, microcredit, and micro-savings. Many MFIs also offer social intermediation administrations, for example, monetary proficiency programs, capacity building, and financial advice, in addition to financial intermediation (Kinyua, 2020). This alone, has contributed immensely to the profitability of microfinance institutions.

In the SWR, financial institution profitability has become a major factor in both economic expansion and the fight against poverty.

They have gained recognition for their potential to promote inclusive development, create employment opportunities, and stimulate local economies. The growth of microfinance institutions in Buea can be attributed to factors such as urbanization, population growth, technological advancements, and policy reforms aimed at promoting entrepreneurship and private sector development. According to the African Development Bank, MFIs in Africa account for about 90% of all businesses and contribute to approximately 50% of employment opportunities.

The idea of microfinance has existed for millennia in many regions of the world, such as Ghana’s “susus,” Mexico’s “tandas,” West Africa’s “tontines,” and Bolivia’s “pasanaku.” The Irish Loan Fund system, which was started by Jonathan Swift in the early 1700s, is one of the oldest and most established microcredit organizations that offers modest loans to impoverished rural residents without collateral.

In less than ten years, his concept—which had started modestly in the 1840s—grew into a large institution with over 300 branches throughout Ireland. The main goal was to provide short-term, interest-bearing modest loans.  However, Yunus (2006) is frequently given credit for being the forerunner of contemporary microfinance. He started experimenting with loans to impoverished women in the Bangladeshi town of Jobra while he was an economics professor at Chittagong University in the 1970s.

The largest danger in microfinance, like in any other financial institution, is making a loan and not receiving it back. Since the majority of microlending is unsecured, MFIs are especially concerned about credit risk. The individuals covered are those who are unable to obtain credit from banks and other financial organizations because they are unable to offer security or a guarantee for borrowed funds. Many banks refuse to give loans to these individuals due to the significant default risk of repaying interest and, in certain situations, the principal amount. As a result, financial institutions must develop effective credit management strategies that include identifying present and future risks associated with lending activity. (Nassuna, Jeppensen, and Balunywa, 2022).

The history of microfinance in Africa may be traced back to the origins of civilization itself; recorded loan contracts from Mesopotamia dating back more than 3000 years demonstrate the formation of a credit system that incorporated the notion of interest. Banks in Africa began lending to white settlers in the 1950s; however, by the 1990s, loans given to customers were failing, necessitating intervention; most suggestions were for the evolution of customer’s ability to repay the loan, but this did not work as loan delinquencies continued. (March 1999).

In Cameroon, the history of microfinance extends back more than a century in traditional form and has operated for more than fifty years under the common name “Njangi”. Modern microfinance was first introduced in Cameroon in 1963, at Njinikom, in the country’s northwestern region. Credit unionism developed throughout Cameroon’s North-West and South-West regions, and by 1968, 34 existing credit unions had merged to become the Cameroon Cooperative Credit Union League (CAMCCUL) Limited.

As a result, CAMCCUL serves as the umbrella organization for cooperative credit unions, Cameroon’s largest microfinance institution, and the Communaute Economique des Etas de L’Afrique Centrale (CEMAC). The total amount of more than 258 billion FCFA, which has been amassed via deposits and loans from almost a million clients, is held by more than 46 registered microfinance institutions in Cameroon (Gwasi and Ngambi, 2014).

The league provided lending services to microfinance affiliated with the network. Loans are granted at a favourable rate. Through these services, the league also implemented recovery strategies to minimize loan delinquency in the network. CAMCCUL provides technical advice to affiliates on issues relating to organizational structure and the management of human resources.

Loan delinquency has posed a problem for credit unions and microfinance institutions in Cameroon, Africa and the World at large, such as the winding up and closure of some credit unions. Another problem caused is the traditional cost, which is implemented on loan contracts and or agreements in the situation of default. An example is the cost of enforcement of the loan contracts, for instance, the legal cost of hiring a lawyer. Liquidity problems also occur because the bank does not have the resources that could enable it to meet its short-term expenses. The institution also faces reputational costs following the default because it cannot meet the payments of the deposits collected from savers whenever they want to withdraw their savings.

Nearly 1.1 million MSEs employ close to 2 million people, or 20% of the nation’s workforce, and they account for 18% of the GDP overall and 25% of the GDP from non-agricultural sources. Even with this significant contribution, loans and other financial services are only provided to 10% of MSEs. According to Omino (2005), the official banking industry in Cameroon has long seen the informal sector as hazardous and unprofitable.

The Microfinance Act of 2006 and the Microfinance Regulations established under it establish the legal, regulatory, and supervisory framework for microfinance institutions in Cameroon. Effective May 2, 2008, the Microfinance Act went into force. The main goal of the Microfinance Act is to govern the formation, business, and operations of microfinance institutions in Cameroon through licensing and monitoring. The Act allows deposit-taking microfinance institutions regulated by the Central Bank of Cameroon (BEAC) to raise funds from the general public, encouraging competition, efficiency, and access.

Therefore, it is anticipated that the microfinance industry will be crucial to the growth of financial markets and to expand the majority of Cameroonian residents’ access to financial services and products (BEAC, 2013). Commercial borrowing is a common way for MFIs to finance their portfolios. Additional financing for financial and operational activities is provided by international NGOs and aid organizations.

Although several studies such as that of (Carlin and Mayer, 2003) and Wachowicz (1998), Kisala and (Omino, 2005), have investigated the contributions of credit management on the profitability of microfinance institutions. Most of these studies have been carried out in Ethiopia, Nigeria and other parts of the world. Even in some of these studies that have been carried out in Cameroon, like that of Ngwa (2019), special attention has not been given to the context of credit management on the profitability of microfinance institutions in Buea.

This is a huge gap that leaves unanswered questions about the relationship that exists between credit management and the profitability of microfinance institutions. Thus, the necessity of this study was, to ascertain if credit management contributes to the profitability of microfinance institutions in Buea.

1.2 Statement of the Problem

According to Gitman (2017), the likelihood of problematic debts rises when credit rules are lowered. Firms must guarantee that receivables management is efficient and effective. Such delays in collecting payments from debtors when they come due cause major financial issues, create bad debts, and harm customer relations. Late payments reduce profitability, while nonpayments result in a total loss. Therefore, strategically controlling credit at the front end is just smart business. The largest danger in microfinance, like in any other financial institution, is making a loan and not receiving it back. Credit management is a significant challenge for MFIs because the majority of microlending is done without collateral.

The persons covered are those who cannot get loans from banks and other financial organizations owing to their inability to offer guarantees or security against the money borrowed. As a result, financial institutions must develop effective credit management strategies that include identifying present and future risks associated with lending activity. (Craig Churchill and Dan Coster (2016).

The success and profitability of MFI largely depend on the effectiveness in the management of their credit risk. These institutions generate more than 80% of their income from loans extended to small and medium-sized entrepreneurs. The Central Bank Supervision Report (2010) showed a high incidence of credit risk which was reflected in the increasing amount and number of nonperforming loans by the MFIs in the past ten years.

While some credit unions have succeeded in managing their credits and bringing down loan delinquency, most MFI in Buea Municipality continue to face greater challenges in controlling their delinquent credit portfolios, some of the challenges coming from competition in the market, addition of credit products with long term structures, environmental factors, and geographical expansion.

After consulting the annual reports of some MFIs in Buea, it was observed that most MFIs have been facing a loan downturn in their financial performance. It was equally observed that some of them experience increased loan delinquency rates, poor liquidity holding rates, poor income realisation, poor net results, a drop in the level of interest provision to net savers as well as an increase in provisions for bad and doubtful debts which only indicate poor performance.

Given the poor situation aforementioned, it leads to the pertinent question of what is the effect of loan management practices on the performance of MFI in Buea Municipality. The majority of research that has tried to look at the relationship between loan management procedures and microfinance firms’ financial success is centred in industrialized nations. Very few of such studies exist in developing countries.

For instance, Ndiviga (2012) investigated the role of credit risk management in the financial performance of MFIs in Cameroon. To the best of our knowledge, no research has specifically examined how loan management procedures affect MFIs’ financial performance in Buea Municipality. This study seeks to bridge this knowledge gap in Cameroon. Credit management is therefore essential in every financial institution, especially in profitability.

1.3 Research Questions

1.3.1 Main research question

What is the effect of credit management on the profitability of MFIs in Buea?

1.3.2 Specific Research Questions

1. What is the effect of client appraisal on the profitability of MFIs in Buea?
2. To what extent does credit control policy influence the profitability of MFIs in Buea?
3. How does collection policy affect the profitability of MFIs in Buea?

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