ABSTRACT

Regardless of the type of business, credit management is one of the most crucial tasks that must be completed by any organisation that uses credit. The most significant danger in microfinance, as with every financial organisation, is lending money and not getting it back. The goal of the study was to ascertain how credit management impacts the monetary success of microfinance institutions in Cameroon. The research used a descriptive survey methodology. 30 MFIs in the South West Region made up the study’s population.

The investigation was conducted using data from a census. Primary data were gathered using questionnaires that answered every question on the list. To analyse the data, descriptive statistics were employed. Additionally, descriptions were created using the data from the tables.

The study discovered that the financial performance of MFIs in Cameroon was impacted by client evaluation, credit risk management, and collection policies. The study discovered a significant correlation between the financial success of MFIs and client evaluation, credit risk management, and collection policies. According to the study, the financial performance of MFIs in Cameroon is highly influenced by client evaluation, credit risk management, and collection policy.

It was discovered that the collection policy had a greater impact on financial performance and that a strict policy was more successful in recovering debt than a lax policy. According to the survey, MFIs should improve their collection practices by switching from a stricter to a softer approach to ensure efficient debt recovery.

The study concluded that microfinance institutions’ financial performance had significantly increased due to increased consideration of client appraisal, credit risk control, and collection policy.

CHAPTER ONE
INTRODUCTION

1.1 Background of the study

One of the many variables that a company can employ to affect the demand for its products is credit. According to Horne and Wachowicz (1998), businesses can only profit from credit if their increased sales lead to more profitability than their rising receivables costs. According to Myers and Brealey’s definition from 2003, credit is the procedure by which possession of goods or services is permitted after a contractual arrangement for eventual payment.
It is crucial to identify probable credit defaults as soon as possible because high default rates result in diminished cash flows, decreased liquidity, and financial difficulty. Lower credit exposure, on the other hand, denotes a debtor’s level that is optimal with fewer chances of bad debts and consequently better financial health. According to Scheufler (2002), managing risks and enhancing cash flow is exceedingly difficult in the current company environment.
The likelihood of suffering losses has increased as bankruptcy rates have climbed. Organizations are being forced to slow payments by economic pressures and business practices, yet resources for credit management are being cut back despite the increased expectations. Therefore, it is essential for credit professionals to look for chances to use tried-and-true best practices. You may avoid five frequent problems by updating your procedures. These pitfalls are summarised by Scheufler (2002) as failing to identify potential frauds, underestimating the contribution of current customers to bad debts, being caught off guard by bankruptcies, failing to fully utilise technology, and devoting an excessive amount of time and resources to credit evaluations that are unrelated to lowering credit defaults.

The notion of microfinance has been in use for centuries in many regions of the world, including “susus” in Ghana, “tandas” in Mexico, “tontines” in West Africa, and “pasanaku” in Bolivia. The Irish Loan Fund system, established in the early 1700s by Jonathan Swift, is one of the earliest and longest-running microcredit organisations, offering small loans to rural poor residents without collateral. His concept took off gradually in the 1840s and in less than ten years had 300 branches throughout Ireland. The main goal was to advance brief, interest-bearing modest loans. But Dr Mohammad Yunus, who began experimenting with lending to underprivileged women in the Bangladeshi town of Jobra while serving as an economics professor at Chittagong University in the 1970s, is frequently regarded as being the father of contemporary microfinance.

Microfinance is the provision of savings, loans, and other essential financial services to the underprivileged. The name “microfinance” serves to distinguish these financial services from those offered by traditional banks because they typically involve little sums of money—small loans, small savings—and are therefore referred to as such. Compared to other forms of funding, microfinance institutions offer a dependable source of financial assistance and support. A common informal relationship between sources outside the microfinance sector and borrowers is that neither party has any genuine legal or significant ties to the other. As a result, loan conditions frequently come at a hefty cost, and there is no assurance that lenders will stick around for very long. In contrast, microfinance institutions frequently collaborate with government agencies and have connections to bigger international organisations.

No matter the form of the business, credit management is one of the most crucial tasks that must be handled by any corporation that uses credit. It is the procedure used to make sure clients would pay for the goods or services are given. According to Myers and Brealey (2003), credit management refers to the procedures and strategies used by a company to maintain an ideal amount of credit and effectively manage it.

The costs required by the company to maintain its accounts receivable increase with both the volume and age of those accounts. A company may borrow if they need money urgently and these receivables are not collected on time; the opportunity cost of this is the interest expense paid. According to Nzotta (2004), credit management has a significant impact on whether commercial banks and other financial organisations succeed or fail. This is so that credit decisions and consequently the quality of risky assets might have an impact on deposit banks’ ability to succeed. He adds that credit management offers a leading indicator of the calibre of the credit portfolio of deposit institutions.

The capacity to wisely and effectively manage customer credit lines is a crucial component of effective credit management. Companies must gain more knowledge about consumer financial health, credit score history, and shifting payment patterns to reduce exposure to bad debt, over reserving, and bankruptcies. Credit management begins with the sale and continues through receipt of the complete payment. It is just as crucial a component of the agreement as finishing the sale. In actuality, until payment has been received, a sale is not technically complete. Since the profit from interest earned is reduced or even eliminated by the bad debt when the customer eventually defaults, principles of goods lending must be concerned with ensuring, to the extent possible, that the borrower will be able to make scheduled payments with interest in full and within the required time. Debtor management and debt finance are the main topics of credit management. The goals of credit management can be summed up as protecting the investments that businesses have made in their debtors and maximising operational cash flows. Credit must be extended to clients, payment must be collected, and nonpayment risk must be minimised all through the application of policies and processes.

Financial performance, as defined by the business dictionary, is the process of valuing the outcomes of a company’s operations and policies. The return on investment, return on assets, and value-added figures for the company represent these outcomes. Financial performance is the capacity to carry out operations economically, survive, expand, and respond to environmental opportunities and risks, according to Stoner (2003), as stated in Turyahebya (2013). In keeping with this, Sollenberg and Anderson (1995) say that an organization’s effectiveness is determined by how effectively it uses its resources to accomplish its goals. According to Hitt, et al. (1996), underperforming assets are the cause of many organisations’ poor performance.

MFIs receive money in the form of interest, fines, and commissions for providing loans and other financial services. Income from other financial assets, such as investment income, is also a form of financial revenue. The financial operations of an MFI also result in a variety of costs, such as general operating costs, borrowing costs, and reserving for potential loss from failed loans. Successful institutions have a positive net income (i.e., operating income exceeds total expenses).

Microfinance organisations are looking for financial stability today. To attain financial sustainability and finance their growth, many MFIs underwent restructuring. Sustainability is the ability of a programme to continue operating profitably even after receiving no further financial support (Woolcock, 1999). “Generating sufficient profit to cover costs while eliminating all subsidies, even those less visible subsidies, such as loans issued in hard currency with payback in local currency,” is what it supports (Tucker and Miles, 2004). For the time between March 1999 and March 2001, Tucker and Miles (2004) examined three data series and discovered that self-sufficient MFIs are more successful and perform better in terms of return on equity (ROE) and return on assets (ROA) than developing-world commercial banks and MFIs that have not yet attained self-sufficiency. MFIs are attempting to become more commercially oriented and place a greater emphasis on increasing their profitability, which will lead to self-sustainability, to maximise their performance.

Your method for collecting and managing customer payments is called credit management. According to Myers and Brealey (2003), credit management refers to the procedures and strategies used by a company to maintain an ideal amount of credit and effectively manage it. Credit analysis, credit rating, credit classification, and credit reporting are all part of this financial management function.

A good credit management strategy will decrease the capital that is tied up with the borrowers and lessen the likelihood of accruing bad debts. According to Edwards (1993), any past-due account will reduce a seller’s profit unless he has included additional costs for late payments in his selling price or is successful in recovering those costs through interest charges. In some competitive markets, businesses may be enticed by the possibility of increased sales if more credit is extended, but the practice is risky unless it can be determined that the extra profits from the increased sales will outweigh the increased costs of credit or that the costs can be recovered by raising prices.

Creating and preserving a credit policy is essential to managing receivables effectively. Due to low lending standards and bad credit rules, many organisations experience liquidity and working capital issues. A strong credit strategy, in the opinion of Pike and Neale (1999), serves as a guide for how a business interacts with and manages its most important resource: its customers. According to Scheufler’s (2002) theory, a credit policy establishes a shared set of objectives for the company and acknowledges the credit and collection department as a significant contributor to the company’s initiatives.

Although microfinance has been around in Cameroon for about 50 years, its expansion started to accelerate in the early 1990s. Early in the 1980s, banks in Cameroon found it harder to obtain external loans and were mainly unable to obtain resources from within the nation. As a result, they were unable to support themselves. The government fully restructured all financial institutions in the late 1980s as a result, forcing several banks to close their doors while still owing money. The statute described how microfinance had grown and intensified in Cameroon.

1.2 Research Problem

A financial institution’s stability and ongoing profitability depend on good credit management, and bad financial performance and condition are typically caused by declining credit quality. According to Gitman (1997), as credit rules are loosened, the likelihood of problematic loans rises. Therefore, businesses need to make sure that receivables management is effective and efficient. Delays in collecting money from debtors as it becomes due to lead to increased bad debts, major financial issues, and strained relationships with customers. If a payment is received after the due date, profitability will suffer; if it is not received at all, a complete loss will result. Therefore, putting credit management at the forefront and managing it strategically is just good business.
The largest danger in microfinance, as with every financial organisation, is lending money and not getting it back. MFIs are particularly concerned about credit risk because most microloans are unsecured (i.e., traditional collateral is not often used to secure microloans) Churchill and Coster, Craig (2001). The people covered are those who are unable to obtain credit from banks and other financial organisations because they are unable to offer a guarantee or security for the borrowed funds. Due to the significant default risk for interest and, in some situations, the principal amount itself, many banks do not grant credit to these types of persons. As a result, financial institutions must develop solid credit management strategies, which include identifying current and future risks associated with the lending activity.

1.3 Research Questions

This study will help the researcher answer the main research question which is, how does credit management affect the financial performance of Microfinance Institutions

 Specific research questions include;

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

1.4 Research Objectives

The main objective of the study is;

To establish the effect credit management affects the financial performance of Microfinance Institutions

Specific objectives include:

1. To determine the effect of credit collection policy on the financial performance of Microfinance institutions
2. To assess how client appraisal affects the financial performance of MFIs
3. To examine how credit risk controls affect financial performance of MFIs
4. To make necessary recommendations.

1.5 Research Hypothesis

H₀: There is no significant effect of credit management on the financial performance of MFIs

H₁: There is a significant effect of credit management on the financial performance of MFIs