The Effects of loan Default on the Financial Performance of Microfinance Institutions in Cameroon

Project Details

Department
Banking and Finance
Project ID
BF02
Price
5000XAF
International: $20
No of pages
60
Instruments/method
Quantitative Method
Reference
YES
Analytical tool
Descriptive statistics
Format
 MS word & PDF
Chapters
1-5

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Abstract

This study seeks to bring out the effect of loan default on the financial performance of microfinance institution in Cameroon. The quantitative and qualitative research design was used in the study and the sample size used in the study was 10 employees. Research study shows that loan default has a significant impact on the financial performance of microfinance institution in Cameroon. Also, the findings show that Unics plc Limbe branch has put in place various strategies to overcome loan within the institutions. The research design used was descriptive survey design. Sampling technique adopted was a convenient sampling technique. Data were processed through SPSS, presented the form of frequencies, percentages and tables and analyzed using Regression Analysis. The study findings revealed that NPLs and Capital Adequacy have a significant impact on Loan default as well as loan delinquency on the performance of MFIs. The research reveals some of the causes of loan default in MFIs, they include poor monitoring of loans, inadequate training of staff and multiple borrowings by members. The study concluded that MFIs should provide appropriate training to their staff and supervision to their members regarding the use of their loans. Furthermore, MFIs should have clear and effective credit or lending policies and procedures and regularly reviewed.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

International organizations are coming to the realization that Microfinance Institutions are veritable and effective channels to ensure programme implementation effectiveness, particularly in poverty alleviation projects and firsthand knowledge of the needs and interest of the poor (Okumadewa, 1998). According to Chossudovsky (1998), the World Bank Sustainable Banking with the Poor project (SBP) in mid-1996 estimated that there were more than 1,000 microfinance institutions in over 100 countries, each having a minimum of 1,000 members and with 3 years of experience.

Microfinance Institution may be defined as any financial institution which offers not only small loans to microenterprises, SMEs, groups and individuals but also provides other financial services like savings, insurance, and investment advice including even training programmes to its clients.

The issue of loan delinquency/default among banks and Microfinance Institutions has been discussed in many public lectures and fora as one of the reasons why commercial banks have not shown much interest in financing Micro, Small and Medium Enterprises (MSMEs). According to Balogun and Alimi (1990), loan default can be defined as the inability of a borrower to fulfil his or her loan obligation when due. High default rates in MSMEs lending should be of major concern to policymakers in developing countries, because of its unintended negative impacts on MSMEs financing. Microfinance institutions all over the world including Cameroon faced with the challenge of loan default/delinquency.

The chance that a microfinance institution (MFI) may not receive its money back from borrowers (plus interest) is the most common and often the most serious vulnerability in a microfinance institution (Warue, 2012). According to her since most microloans are unsecured, loan default can quickly spread from a handful of loans to a significant portion of the portfolio. This contagious effect is worsened by the fact that microfinance portfolios often have a high concentration in certain business sectors. Consequently, many clients may be exposed to the same external threats such as lack of demand for client’s products, livestock disease outbreak, bad weather and many others. These factors create volatility in microloan portfolio quality, heightening the importance of controlling credit risk. In this regard, MFIs need a monitoring system that highlights repayment problems clearly and quickly, so that loan officers and their supervisors can focus on delinquency (repayment rate) before it gets out of hand. In lending services, default is the failure to pay back a loan.

The Microfinance Institutions in the Republic of Cameroon including the private microfinance institutions, rural and community banks, and some Commercial banks are faced with loan delinquency/default, which may have long-term consequences if not addressed.

1.2 Statement of the Problem          

The sustainability of microfinance institutions depends largely on their ability to collect their loans as efficiently and effectively as possible. In other words, to be financially viable or sustainable, microfinance institutions must ensure high portfolio quality based on 100% repayment, or at worst low default, cost recovery and efficient lending.

However, of late, there have been complaining by the microfinance institutions regarding the high rate of default by their clients; which presupposes that most microfinance institutions are not achieving the internationally accepted standard portfolio at risk of 3%, which is a cause for concern because of its consequences on businesses, individuals, and the economy of Cameroon at large. Default has started creeping deeply into the operations of microfinance institutions in Cameroon hence the study into the causes and control of loan default in microfinance institutions in Cameroon.

1.2.1 Objectives of the Study

The study generally investigated the causes and control of loan default in microfinance institutions in Cameroon. The study also seeks to come out with the means by which MFI such as Unics plc will reduce the level of loan default to the barest minimum (below 5%) if not to eliminate it.

The objectives to achieve are;

  • To assess the level of loan default in MFIs.
  • To investigate the impact of NPLs on the performance of MFIs.
  • To find out the impact of capital adequacy on MFIs performance.

1.2.2 Research Questions

The study attempted to address the following questions:

  • What is the level of loan default in MFIs?
  • To what extend does non-performing loans affect MFIs performance?
  • How does capital adequacy affect MFIs performance?

1.2.3 Hypothesis

For the purpose of this work the following hypothesis will be tested in the null form:

  • NPL has no impact on the performance of MFIs
  • Capital adequacy has no impact on MFIs
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