Abstract

This study was conducted in order to find out the effects of interest rate on loan repayment in micro-financial institutions in Cameroon using Tiko Central Saving and Loan Cooperative Credit Union(TCSLCCU) as a case study. This study specifically focused on finding out the effects of interest rate and loan repayment in Cameroon financial institutions, to analyze the impact of interest rates fluctuation (rising and falling interest rates) on loan repayment, and also to analyze the effect of interest rate on the supply of loans. Research design used was case study design.

The study was carried out in Tiko and sample size comprised of 30 clients who benefit from TCSLCCU service include 3 loan officers of TCSLCCU. Sampling techniques adopted was simple random sampling technique used for loan officers and purposive sampling technique used in sampling MFIs clients. Data was analyzed through descriptive statistics and presented in the form of percentages and tables and also questionnaires to help test the validity of research hypothesis.

The study findings revealed that; inadequate follow up of loan repayment, loans not requiring collateral, poor supervision on loan utilization, lack of training on use of loans, multiple borrowing and poor sales have a direct impact on repayment and the contribute as causes of loan delinquency. The study also concluded that, interest has a positive effect on loan repayment of TCSLCCU through the increase of profitability which is as a result of interest of increase in the number and amount of loans repaid and that the major thing is to keep the interest rate constant and not to fluctuate it as it makes most members not willing to go for loans as they might know the current interest rate.

Furthermore, there should be efficient and effective communication between and among all categories of employees as well as customers in TCSLCCUL so as to reduce conflicting situations between loan collectors and customers of TCSLCCU.

CHAPTER ONE

INTRODUCTION

1.1 Background To The Study

Interest rates are classified as short and long term. For example, you can take out a loan with the interest rate for 10 years. This is considered a long term interest rate. Over these years, you will make the same payments regardless of whether interest rates rise or fall. Also, when you use your credit card or when you take out a personal loan, you are borrowing money at an interest rate that can change in the short run. It is generally known that, short term interest rates tend to be higher than long term interest rates.

Traditional finance theory argues that as the size of a loan expands, the interest rate on that loan rises to accommodate the increased risk associated with the loan. However, utilizing firm level data of the banking industry, it is observed that, the smaller the loans size, the greater the interest rate applied and vice versa. Yet, using a fixed effect panel data framework, this article also shows that the interest rates differences among loan sizes can be mainly explained by the borrowers’ characteristics are the most important factors.

In the banking and lending industry in Cameroon, interest rates are a major concern. Here, Financial Institutions have been accused of charging high interest rates and exploiting the consumers. The Finance Ministry controls all Banking activities in Cameroon especially!

Terms and conditions for Banking services, receives applications for licensing and the appointment of General Managers for banks and financial institutions and passes same to COBAC for approval and rejection. The Government passes a financial institutions act through the ministry of finance with the main aim of protecting the consumers.

The act imposes interest rates ceilings on loan finance provided by money lending and financial institutions. An interest rate ceiling is a regulatory measure that prevents banks or other financial institutions from charging more than a certain level of interest. It is also the maximum interest rate that a lending institution can charge a borrower on a loan. It highlights the effects of interest rate charged on loan repayment. It argues that, the biggest cost component of loaning financial institutions is administration cost and not the cost of capital.

Interest rate is the cost the debtor pays for taking a facility from financial bodies or fees paid for on loan assets (Crowley 2007). Interest rates helps in determining the current market and provides information about future inflation. Classical theory of interest, Keynes liquidity theory, Rational Expectations theory and Loanable funds theory.

These theories contributions were discussed in the understanding of interest rate. In classical theory, interest rate is price paid for supply of savings, Keynes theory states that interest rate cost paid for borrowed funds whereas in Loanable funds theory, interest rate is equated to intersection between supply of loanable funds and credit demand.

Repayment is the act of paying back money previously borrowed from a lender. Typically, the return of funds happens through periodic payments which include a portion of the principal plus interest. Failure to keep up with debt repayments can force an individual to declare bankruptcy, which will negatively affect their credit rating. Common types of loans which many people need to repay are auto loans, mortgages, education loans, and credit card charges which are also a type of loan.

When consumers take out loans, the expectation by the lender is that they will ultimately be able to repay them. Interest rates are charged to account for the time that passes between when a loan was given out and when the borrower returns the money in full. Interest is what is charged in exchange for borrowing money, usually expressed as an annual percentage (APR).

Some borrowers who cannot repay loans may turn to bankruptcy protection. However, borrowers should explore every alternative before declaring bankruptcy as doing so can affect a borrower ability to obtain financing in the future.

Alternatives to bankruptcy are earning a additional income, refinancing and negotiating with creditors. Individuals may also work with a professional to set a reasonable budget and commit themselves to keep within the budget. The structuring of some repayment schedules may depend on the type of loans taken out and the lending institution.

The small print on most loan applications will specify what the borrower should do if they are unable to make a scheduled payment. It is best to be proactive and reach out to the lender to explain any circumstances. Let the lender know of any setbacks such as health events or employment problems which may affect your ability to pay them back. The longer it takes to pay back your loan, the more interest will accrue and increase the overall cost of your loan.

1.2 Problems Statement

The number of micro financial institutions in Cameroon has continued to increase day by day at a high rate, which has aggravated the competition between government and the private sectors for loanable funds. Despite the increased competition especially amongst many financial institutions, interest rates have remained high, with Tiko Central Saving and Loan Cooperative Credit Union not being an exception. This has reduced the customers borrowing and loan repayment capacity leading to an increased number of loan defaulters. The intent of this study therefore is to examine the effect of interest rates on loan repayment and why customers fail to repay back their loans in time.

  Problems Associated With Interest Rate

1.Liquidity Preference. This means investors prefer cash now than later and will want compensation now than later in the form of higher returns for being able to use cash now. Long term interest rate therefore not only reflect investors assumptions about future interest rate but also a long term profit holding for bonds.

2.Risk. High risk borrowers must pay for higher risk on their borrowings to compensate lenders for re-lenders for the risk involved.

3.Lone Size. Deposits above a certain sum with the bank, may attract higher interest rates than smaller deposits.

4.Financial Asset. Different type of financial asset attract different rate of interest. This is largely because of the competition for deposits between different type of financial institutions.

Research Questions

The study was guided by the following hypothesis(Questions),

• What is the effect of interest rate on the supply of loans?
• What is the effect of interest rates ceiling on loan repayment in Cameroons financial institutions?
• What is the impact of interest rates fluctuation (rising and falling interest rates) on loan repayment in Tiko central saving and loan cooperative credit union and the general commercial banking industry or financial institutions?

1.3 Objectives Of The Study

The main objective of the study was to establish the relationship between interest rates and loan repayment in micro financial institutions in Cameroon with Tiko Central Saving and Loan Cooperative Credit Union being a case study.

The specific objectives of the study were,

1. To study the effect of interest rates ceiling on loan repayment in Cameroon financial institutions with specific regard to Tiko central saving and loan cooperative credit union.
2. To analyze the impact of interest rates fluctuation (rising and falling interest rates) on loan repayment in Cameroon financial institutions with a case study of Tiko central saving and loan cooperative credit union.
3. To analyze the effects of interest rates on the supply of loans

1.4 Hypothesis Testing

This consist of both the null and the alternate hypothesis as seen below.

H0: Interest rate has an effect on loan repayment in micro financial institutions.

H1: Interest rate has no effect on loan repayment in micro financial institutions.