Abstract

Credit management is one of the most important activities in any company and cannot be overlooked by any economic enterprise engaged in credit irrespective of its business nature. As with any financial institution, the biggest risk in microfinance is lending money and not getting it back. The study sought to determine how credit management affects the financial performance of microfinance institutions in Cameroon. Case study Awing Central cooperative credit union limited (AWICCUL)

The study adopted a descriptive and analytical design based on the structured questionnaire in order to get an in depth understanding of credit management policy and their impact on financial performance of microfinance institution. The results were analyzed using tables and percentages. The data was also analyzed using the chi square mathematical model in order to come out with the test of association. The sample size of 20 respondents of AWICCUL was used for the study. Data was collected from primary sources with the use of questionnaire.

The results of the finding revealed that there was a strong level of association between client appraisal, collection policy, credit control and the financial performance of microfinance institutions this was indicated by the chi square test of association value 6.191>5.991 the critical value. This implies that efficient implementation of credit management policy will increase financial performance of microfinance institution. The study also found out that, client appraisal and collection policy were very essential in influencing the financial performance of AWICCUL.

The study recommends that AWICCUL should enhance their collection policy to a lenient policy for effective debt recovery by adding to its existing credit policies, policies such as credit rationing, restrictive covenant and monitoring of clients to ensure that they effectively use the credits for the intended purpose.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Credit is one of the many factors that can be used by a firm to influence demand for its products. According to Horne and Wachowicz (1998), firms can only benefit from credits if the profitability generated from increased sales exceeds the added costs of receivables. Myers and Brealey (2003) define credit as a process whereby possession of goods or services is allowed without spot payment upon a contractual agreement for later payment.

Timely identification of potential credit default is important as high default rates lead to decreased cash flows, lower liquidity levels, and financial distress. In contrast, lower credit exposure means an optimal debtor’s level with reduced chances of bad debts and therefore financial health.

According to Scheufler (2002), in today’s business environment risk management and improvement of cash flows are very challenging. With the rise in bankruptcy rates, the probability of incurring losses has risen. Economic pressure and business practices are forcing organizations to slow payments while on the other hand resources for credit management are reduced despite the higher expectations. Therefore, it is a necessity for credit professionals to search for opportunities to implement proven best practices.

The microfinance concept has operated for centuries in different parts of the world for example, “uses” in Ghana, “tandas” in Mexico, “tontines” in West Africa, and “pasanaku” in Boliva. One of the earliest and longest-serving micro-credit organizations providing small loans to rural poor dwellers with no collateral is the Irish Loan Fund system imitated in the early 1700s by Jonathan swift.

The principal purpose was to advance small loans with interest for short periods. However, the pioneering of modern microfinance is often credited to Dr. Moohammad Yunus, who began experimenting with lending to poor women in the village of Jobra, Bandladesh during his tenure as a professor of economics at Chittagong University in the 1970s.

Credit management is one of the most important activities in any company and cannot be under looked by any economic enterprise engaged in credit irrespective of its business nature. It is the process to ensure that customers will pay for the products delivered or the service rendered. Myers and Brealey (2003) describe credit management as methods and strategies adopted by a firm to ensure that they maintain an optimal level of credit and its effective management.

The higher the amount of accounts receivables and their age, the higher the finance costs incurred to maintain them. If these receivables are nit collectible on time and urgent cash needs arise, a firm may result in borrowing and the opportunity cost is the interest expense paid. Nzotta (2004) opined that credit management greatly influences the success or failure of commercial banks and other financial institutions. This is because the failure of deposit banks is influences by the quality of the risky assets. He further notes that credit management provides a leading indicator of the quality of deposit banks’ credit portfolios.

Proper credit management will lower the capital that is locked with the debtors and reduces the possibility of getting into bad debts. According to Edwards (1993), unless a seller has built into his selling price additional costs for late payment, or is successful in recovering those costs by way of interest charged, then any overdue account will affect his profit. Effective management of accounts receivables involves designing and documenting a credit policy.

Many entities face liquidity and inadequate working capital problems due to lax credit standards and inappropriate credit policies. According to Pike and Neale (1999), a sound credit policy is a blueprint for how the company communicates with and treats its most valuable asset, the customers. Scheufler (2002) proposes that a credit policy creates a common set of goals for the organization and recognizes the credit and collection department as an important contributor to the organization’s strategies.

Though the growth of microfinance truly began to escalate in the early 1990s, it has existed in Cameroon for almost 50years. During the early 1980s, banks in Cameroon became increasingly unable to support themselves as it became more difficult to receive international credit and largely unable to get internal resources within the country. In the late 1980s, it resulted in the government action completely restructuring all financial institutions, making many banks to close their doors with unpaid savings. The act articulated the expansion and intensity of microfinance in Cameroon.

1.2 Problem Statement

Sound credit management is a prerequisite for a financial institution’s stability and continuing profitability while deteriorating credit quality is the most frequent cause of poor financial performance and condition. According to Gitman (1997), the probability of bad debts increases as credit standards are relaxed. Firms must therefore ensure that the management of receivables is efficient and effective.

The collapse of most microfinance institutions in Cameroon has been attributed to ineffective management of credits, which has greatly down played on the financial performance of these institutions. The course of ineffective credit management is often attributed to poor loan appraisal by credit officers, which often lead to default on payment, loan delinquency and the accumulation of bad debt thus increasing the cost incurred in managing or erasing such debt as a result reducing the credibility of these microfinance institutions as well as their financial performance.

Also the influence of board of directors has contributed greatly to the ineffective management of credit within these financial institutions. The level at which loans are given to insiders without collateral or little or no interest on the loan has greatly affected the financial performance of microfinance institutions, as most of the members are unable to repay the amount and some disappear without paying the money and the institution is forced to face the loss since such loans are not backed by any collateral. In addition, ineffective follow up programs in most microfinance institution has also lead to their failure.

As a result of the above lapses faced by microfinance institution, this study aims at determining the impact that effective credit management policies will have on the financial performance of Awing Central Cooperative Credit Union (AWICCUL).

1.3 Research Questions

This study will help answer the main research question which is, what impact does credit management have on the financial performance of Awing Central Cooperative Credit Union Limited?

Specific research questions include;

1. What is the effect of credit collection policy on the financial performance of Awing Central Cooperative Credit Union?
2. How do credit risk controls affect the financial performance of Awing Central Cooperative Credit Union?
3. How does client appraisal affect financial performance of Awing Central Cooperative Credit Union?

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