Abstract

The study seeks to determine the effect of loan management on the loan performance of Micro-Finance Institutions in Cameroon. The study adopted a descriptive survey design. The population of study consisted of 59 MFIs in Cameroon that are members of COBAC. A census study was used to carry out the research. Primary data was collected using questionnaires where all the issues on the questionnaire were addressed. Descriptive statistics were used to analyse data. Furthermore, descriptions were made based on the results of the tables. The study found that the client appraisal, credit risk control and collection policy had effect on financial performance of MFIs in Cameroon. The study established that client appraisal, credit risk control and collection policy significantly influence financial performance of MFIs in Cameroon. Collection policy was found to have a higher effect on loan performance and that a stringent policy is more effective in debt recovery than a lenient policy. The study recommends MFIs should enhance their collection policy by adapting a more stringent policy to a lenient policy for effective debt recovery.

CHAPTER ONE

GENERAL INTRODUCTION

1.0 Background of the Study

The concept of loan can be traced back in history and it was not appreciated until and after the Second World War when it was largely appreciated in Europe and later to Africa. Bank in USA give loans to customer with high interest rate which sometime discourage borrower hence the concept of loan didn’t become popular until the economic boom in USA in I885 when the bank had excess liquidity and wanted to lend excess cash (Ditcher, 2003). In Africa the concept of loan was in the 5O’s when most banks started opening the credit section or department to give loan to white settler. In Kenya loan was not popular to the poor. In I990’s loan given to customers who were not credible enough called for an intervention. Most suggestion Were for the evaluation of customer’s ability to repay the, but this did work as loan default continued (Modurch, 1999). The concept of loan management became widely appreciated by Microfinance Institutions (MFI) in the 9O’s, but again this did not stop loan default to this date (Modurch, 1999). Loan is one of the major sources of fund for investment, it is the major source of earning of financial institution most especially for microfinance institution and thus loan management is one of the most important activities in every financial institution and cannot be overlooked.

Nzotta (2004) said that loan management greatly influence the success of failure of commercial banks arid other financial institutions. This is because the failure of deposit bank is influence to a large extent by the quality of loan decision. He further notes that loan management provides a leading indicator for the quality of deposit banks credit portfolio. Stoltenberg and Anderson (1995) assert that performances are measured by how efficient the enterprise uses its resource in achieving it objective. It was believed that many firms low performance is as a result of poor performance.

A key requirement for effective loan management is the ability to intelligently and efficiently manage customer ability to pay back loans. In order to minimize exposure to bad debt and bankruptcies, companies must have greater insight into customer financial strength, credit score history and changing payment patterns. Loan management start with the grants and does not stop until the full and final payment has been received. It may be difficult to establish an optimal loan policy as the best combination of the variables of loan policy is quite difficult to obtain (Pandey, 2008).

The success of lending out loan depend on the methodology applied to evaluate and to award the loan (Ditcher, 2003) and therefore the loan decision should be based on a thorough evaluation of the risk condition of lending and the characteristic of the borrower. Numerous approaches have been developed in client appraisal process by financial institution (Horn, 2007). Many lending decisions by Microfinance institution frequently base on their subjective felling about the risk in relation to expected repayment by the borrower. Microfinance institutions commonly use this approach because it is both simple and inexpensive. While other company would have its own method to determining risk and quality of the client depending on the target group the following evaluation concept are useful for most occasions. These concepts are referred to as the 5C’s of credit appraisal (Edward, 1997); these elements are Character, Capacity, Collateral, Capital and Condition (Edward, 1997). Loan policies should be well documented so that the loan officer will be able to know the area of prohibition and the area where they can operate. Also, such policies should be subjected to periodic review to make the credit union kept abreast with dynamic and innovation nature of the economy as well as competing with other changing sector (Fernando, 2006). Some risk can be measured with historical and projected  financial  data, while other such as those  associated with the borrower’s character and willingness to repay a loan are not directly measured (Butteworth. 1990).

The success of MFIs largely depends on the effectiveness of their credit management system because these institutions generate most of their income from interest earned on loan extended to small and medium entrepreneurs. The Central Bank Annual Supervision Report (20l0) indicated high incidence of credit risk reflected in the rising level of non- performing loan by the MFIs in the last 10 years, a situation that has adversely impacted on their profitability. This trend not only threatens the viability and sustainability of the MFIs but also hinder the achievement of the goal for which they were intended which are to provide credit to the rural unbanked population and bridge the financing gap in the mainstream financial sector.

Micro-finance concept has operated for centuries in different part of the world for example ―susus‖ in Ghana, ―tandas‖ in Mexico, ―tontines‖ in West Africa and ―pasanku‖ in Bolivia. One of the earliest and longest serving micro-credit organization providing small loan to rural poor dwellers with no collateral is the Irish Loan Fund initiated in the early l700s by Jonathan swift. His ideas began slowly in 1840’s and became a widespread institution of about 300 branches all over Ireland in less than one decade. The principal purpose was to advance small loan with interest for short periods. However, the pioneering of modern microfinance is often credited to Mohammad, who began experimenting with lending to poor Women in the village of Jobra. As these financial service usually involve small amount of money — small loan, small saving, the term

―microfinance‖ helps to differentiate these services form those which formal banks provide. Microfinance institutions provide a reliable source of financial support and assistance compared to other source for financing.

Microfinance was originally conceived as an alternative to banks which in most developing countries serve only 5-20% of the population. It was initially developed by and is today still primarily developed by non- government organization (NGOs) who received donor funds and lend to microfinance clients (often at subsidize rate). In many cases government also play a critical role in setting policy for the microfinance industry, providing sum grants to NGOs or other microfinance institutes (MIFs) or lending directly to the poor credit unions, cooperatives, commercial banks and small information groups and important players in microfinance. The model of non-market base micro lending has had mixed success in term of financial performance (Amankwah, 2011).

As with any financial institution, the biggest risk in microfinance is lending money and not getting it back. Loan risk is a great concern for MFI’s because most micro lending is unsecured. Many banks do not extend loan to people without securities and guaranties due to the high default risk for repayment of interest and is some case the principal amount itself. Therefore, these institutions required to design sound loan management that entails the identification of existing and potential risk inherent in lending activities. Timely identification of potential loan default is important as high default rates leads to decrease cash flow, lower liquidity level and financial distress (Butterworth, 1990).

1.1 Problem Statement

Loan management play a vital role in the performance of every microfinance institution with regards to this study there are problems that seek answers. Some of the problems faced in loan management are poor screening method in knowing unsuitable or bad business ideas, poor method of accessing the borrower’s ability to manage project and failure to document available collateral sources.

What some MFIs do concerning loan management which is not working is that they fail to evaluate fully if the creditor is capable of paying back the loan. For example, they may check if the creditor has collateral for his loan and fail to check the past financial record of the creditor.

Also another thing they fail to do or work on is to identify the loan term that is short term loan or long term loan which is more favourable to them. They do not know which loam term yield more interest to them so as to concentrate on it and this may lead to mismanagement.

Another thing MFIs is doing concerning loan management that is not working is that they wait till when the loan is due before they start calling the creditor to come and complete the payment of the loan. This will cause the institution not to recovery its loan on time since it took them a long time to tell and make their creditor know that he has to complete the payment of the loan on time and this may cause the institution to face the problem of loan delinquency which can also lead to bankruptcy of institution.

1.2 Objectives of the Study

The main objective of the study is to examine the effect of loan management on the performance of micro finance institution. In line with the main objective the following specific objectives are developed in other to better carry out this study.

To establish the effect of loan risk control measure on the loan performance. To determine the effect of client appraisal on the loan performance of NC4D.

To evaluate the effect of loan recovery policies on the loan performance of NC4D.

1.3 Research Questions

What are the effects of loan risk control measures adopted by NC4D?

To what extend does client appraisal impact the loan performance of NC4D? How loan recovery polices affect the loan performance of NC4D?

1.4 Research Hypotheses

The study will be guided by the following hypothesis

H0: Loan management has no significant effect on the performance of NC4D H1: Loan management has a significant effect on the performance of NC4D