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.

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.

As with any financial institution, the biggest risk in microfinance is lending money and not getting it back.

The study sought to determine the effect of credit management on the financial performance of Microfinance Institutions in Yaoundé. 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 analyze data. Furthermore, descriptions were made based on the results of the tables.

The study found that client appraisal, credit risk control and collection policy had effect on financial performance of MFIs in Yaoundé.

The study established that there was strong relationship between financial performance of MFIs and client appraisal, credit risk control and collection policy.

The study established that client appraisal, credit risk control and collection policy significantly influence financial performance of MFIs in Yaoundé. Collection policy was found to have a higher effect on financial performance and that a stringent policy is more effective in debt recovery than a lenient policy.

The study recommends that MFIs should enhance their collection policy by adapting a more stringent policy to a lenient policy for effective debt recovery.

CHAPTER ONE

INTRODUCTION

1.0. Background of the study

Microfinance is an old concept which dates back in the 19^th century when money lenders were informally performing the role of now formal financial institutions. These informal financial institutions include; cooperative credit unions, village banks, state owned banks and venture capital funds to provide help to the poor.

These institutions provide lending services to the government, other financial institutions and private individuals.

The roots of lending can be traced back to the roots of civilization itself. Written loan contracts from Mesopotamia that are more than 3,000 years old showed the development of a credit system that included the concept of interest (Carlin, & Mayer. 2003).

Legitimate banks were developed from the indenture servitude that was rampant by individuals known as moneylenders. It is from Italian moneylenders who would set up benches in the local market place (with the word for bench being “banca”) that we coin the word ‘Bank’ (Payner, and Redman 2007).

Banks in Africa started giving loans to white settlers in the 1950’s. Getting to the 1990’s, loans given to customers did not perform which called for an intervention. Most suggestions were for the evaluation of customer’s ability to repay the loan, but this didn’t work as loan defaults continued (Modurch, 1999). This brought about crises in the Banking sector.

Sustainability and growth of MFIs is undoubtedly relevant for industrial development. This is because the banking sector is among the very few sectors that contribute to economic growth in various dimensions. MFIs contributed to economic growth by paying taxes and also creating employment.

They also serve as an anchor of growth for other sectors of the economy by providing them access to credit facilities in the form of loan (Asante and Tengey, 2014). Availing credit to borrowers is one means by which banks contribute to the growth of economies.

Lending represents the heart of the banking industry. Loans are the dominant asset and represent 50-75 percent of the total amount at most banks, they are the major contributor of operating income and represent the banks greater risk exposure (Mac Donald and Koch, 2006).

Moreover, its contribution to the growth of any country is huge in that they are the main intermediaries between depositors and those in need of funds for their viable projects (creditors) thereby ensure that the money available in economy is always put to good use. The Basel Committee1 (2001) puts non-performing loans as loans left unpaid for a period of 90 days.

Lending is very risky in that repayment of the loans is not always guaranteed and most of the times depend on other factors not in the control of the borrower.

Therefore, managing loans in a proper way not only has positive effect on the banks performance but also on the borrower and a country’s economy as a whole.

Failure to manage loans, which make up the largest share of banks assets, would likely lead to high levels of non -performing loans. And this in turn effect on the performance of MFIs and the economy at large. As contained in a CEMAC report of 2015, it was reported that the countries in this zone (Cameroon included), faced a high volume of NPLs.

Regular monitoring of loan quality, possibly with an early warning system capable of alerting regulatory authorities of potential bank stress, is thus essential to ensure a sound financial system and prevent systemic crises. In line with Basel II, accord asset quality is regularly monitored by supervisory authorities like central banks to ensure their well-being.

MFIs have been facing major problems when it comes to collection of debt from their customers.

This has forced these institutions to seek for expertise in debt collection. Financial institutions with poor loan collection have faced serious liquidity problems. And yet a lot more have been dependent on government subsidy to financially cover the losses they faced through loan delinquency.

Michael et al (2006) emphasized that NPLs in loan portfolio affect operational efficiency which in turn affects the profits of the institution, liquidity position and solvency position of banks. Batra, (2003) noted that NPLs also affect the psychology of bankers in respect of their disposition of funds towards credit delivery and credit allocation.

This creates a different attitude and perception towards different borrowers in different locations by the Bankers.

The 2015 Banking Survey on  couyntries in the CEMAC zone (Cameroon being among),  indicates that many MFIs in this zone are encountering massive bad loans as the volume of delinquent loans within this period reached 894 billion FCFA, which is 11.8% of gross lending by all banking institutions. T

he situation is considered serious because the country’s major financial institutions are facing the same problem.

The report does not reveal the exact repercussions of the situation; but based on other evidences, it is certain that bad loans appeal the financial condition of banks. Delinquency which can lead to default is probably the largest single down fall of MFIs even in successful financial institutions. It therefore has to be addressed.

This study therefore assesses the determinants of loan delinquency and its effect on financial performance of MFIs in Cameroon.

1.1. Problem Statement

Loan portfolio constitutes the largest operating assess and source of revenue of microfinance institutions. However, some of the loan given out become non performing or end up being delinquent or at default and adversely affecting the financial performance of microfinance institutions.

Research studies have shown that loan delinquency have two main effects on MFIs: these effects are the limitation of financial performance and lending potentials.

In foreign country context, this evidence is acknowledged by Karim et al. (2010), Obamuyi, (2007), Nguta & Huka, (2013), Nawaz et al., (2012), Fidrmuc & Hainz (2009) whereas Appiah (2011), Awunyo also provides this evidence in Ghana.

Though these evidences on the effect on loan delinquency on MFIs prevail, it is realized that the general contribution to academic debate on the subject is weak owing to the fact that studies on the subject are generally few.

This study therefore assesses the effects of loan delinquency on MFIs in Cameroon being the main question guiding the research in this project. Case study UNICS plc Yde-Cameroon.

1.2 Objectives of the study

The objectives of this study are divided into major (main) and minor objectives.

1.3. Main objective

The main objective of this study is to examine the effects of loan delinquency on MFIs in Cameroon with case study UNICS plc.

1.4 Specific Objective

1 Assess the impact of loan delinquency on the profitability of UNICS

 2 Make recommendations based on the findings

1.5 Hypothesis

In order to meet the above objective, the following hypothesis will be tested, they will be in null and alternative form (H₀& H₁).

H₀: loan delinquency does not have any effect on the profitability of UNICS

H₁: loan delinquency has effects on the profitability of UNICS