The impacts of credit control management on Micro-Finance Institutions(MFIs)

Other Banking and Finance project topics with Materials

CHAPTER ONE

General introduction

1.1 Background to the study

The history of microfinance is closely linked with poverty reduction. Although the beginning of cooperative savings and credit activities can be traced back as far as in 1849 with the foundation in Rhineland of the first cooperative society of saving and credit by Raiffeisen,

it is truly with Yunus in 1976 with the creation of the Gramen Bank that one can situate the birth of “modern microfinance” (Blondeau, 2006). Microfinance was originally conceived as an alternative to banks, which in most developing countries serve only 5 to 20% of the population (Gallardo et al., 2003), and informal moneylenders.

With the passage of time, the microfinance sector has evolved. Microfinance institutions now have more than 100 million clients and achieve remarkable repayment rates on loans (Cull et al, 2009).

The unaccepted consequences of productivity and income levels of most developing countries remain issues of great concern. From 1950 to 1970, a number of developing countries and their donor partners implemented the policy of subsidization of agricultural activities for small and low-income farmers as a means to boost productivity and income levels.

Since the mid-1980s, such subsidization policies have been criticized for diverting the centre of attention to focus exclusively on social needs, thus, proving financially unviable and unsustainable.

As the need for an approach that would take both the market and the social contexts into consideration became fashionable and rewarding, new organizations, known as micro-finance institutions (MFIs), began focusing on the activities of low-income farmers.

Micro-finance institutions switched focus from agricultural subsidies to target aid to the poor and help establish local institutions which became financially and operationally stable for such objectives.

Microfinance institutions essentially operate on a combination of financial products (micro-credit, micro-leasing, micro-insurance, micro-savings, and money transfers) targeting specific groups of customers.

Recipients of the services generally are micro-businesses and economically active citizens who at the same time are poor, with incomes below the poverty line of $1.25 per day. Such poor persons normally have limited access to standard financial credits and services provided by classical financial institutions and banks.

 Microcredit started in Europe at the end of the nineteenth century with the creation of the Raiffaisen example in Germany or the local case of mutual agricultural credit in France, and in Africa with the protective sackings, took truly its rise in the 1980s.

From the evolution, the first experiments were by Mohammed Yunus in Bangladesh and the Grameen Bank in 1983. The Grameen Bank, launched in 1976 by Mohammed Yunus in Bangladesh, remained the first to have shifted focus from individual to group loans.

Today, the Grameen Bank consists of more than 2.4 million clients. The scheme has contributed significantly to the Bangladesh economy as 48% of poor farmers have benefited from such agricultural credits.

The concept of microfinance development in Cameroon can be traced back to the 19th Century when moneylenders were informally performing the role of new formal institutions. These informal leaders were mostly ‘‘Njangi’’ groups and Cooperative Credit Unions.

The first micro-finance institution in Cameroon was created in 1963 by Janson, a Dutch Catholic Father in Njinikom, Bamenda of the North West Region of Cameroon.

The law of 1990 which allowed for freedom of association and creation of Common Initiative Groups (CIG) came to foster the powerful existence and manifestation of micro-finance institutions in Cameroon. For many years in Cameroon, the micro-finance sector has evolved and has been transformed into a system of provision of short term loans, savings, credits, money transfers, etc thanks to various financial sector policies and programs undertaken by the government since independence.

 MFIs now are the primary sources of funds to small and medium-sized enterprises in Cameroon and other countries in the process of economic growth. Although finance literature explains the emergence of the micro-finance industry as an answer to an unfulfilled demand (Littlefield & Rosenberg, 2004), MFIs are not evenly spread around the globe and Cameroon in particular.

Hardy et al. (2002), by comparing Cameroon and Gabon concludes that even though the countries have similarities (common currency, comparable per capita income, etc.), the microfinance industry is more expanded in Cameroon than in Gabon.

The environment in which MFIs operate plays a vital role in the cross-country differences. While a lot has been written on factors influencing the development of the financial sector as a whole, almost nothing has been written on the factors determining microfinance performance and its macro environment.

Most works on the microfinance industry focus on the institutional side of the organizations (Hudon, 2006). The impact of MFIs on poverty reduction, economic growth and women empowerment has increasingly received greater attention in many developing countries like Cameroon. Conversely, much has not been done linking the development of the microfinance industry with macro-economic activities.

Performance in micro-financial orientation is a subjective measure of how well an MFI can use assets to attain its objective. It is a multidimensional concept without an acceptable and uniform definition. Performance can be broken down into two sub-concepts: effectiveness and efficiency.

While the former measures the ability to attain the organizational goals, the later measures the ability to attain the organizational goals at the minimum costs. The microfinance sector faces a dual objective usually referred to as the microfinance schism, that is, how to reach the maximum number of poor (social performance) while remaining financially sustainable (financial performance). As microfinance is viewed predominantly as instruments of social change, their performance is often measured by non-financial parameters.

The concept of social performance has seemed to overshadow the state of the financial health of these enterprises. However, a tradition in microfinance analysis studies has been the combination of Financial Performance and Outreach (Chaves and Gonzales-Vega 1996, Ledgerwood 1999, Yaron, 1992, Yaron 1994, Yaron et al., 1998).

Traditionally, some financial ratios like return on asset (ROA) and return on equity (ROE) are used to measure financial performance. However, with the evolution of quantitative techniques, more sophisticated and inclusive measures have been developed.

This study focuses on the efficiency of microfinance institutions and to be more precise, on the financial and outreach technical efficiency of MFIs in Cameroon. Unlike the traditional measure of performance, the financial outreach approach provides a performance measure that accounts for both the financial and social role of MFIs.

As such it is a more comprehensive measurement approach. Efficiency means allocating scarce resources to generate the maximum potential benefit. Getting better results with the same inputs as well as using the smaller amount of inputs to achieve the same results is still a sign of efficiency.

There are basically two types of efficiency: technical efficiency and functional efficiency or allocative efficiency. The first, also called productive efficiency refers to the ability of a program, or an institution to produce the maximum amount of production using available inputs (that is, to produce at the production possibility frontier).

Put differently, technical efficiency implies the maximum possible output from a given set of inputs.

Within the context of microfinance, technical efficiency then refers to the physical relationship between the resources used (capital, labour and equipment) and, financial and social outcomes(loans, number of borrowers, average loan per borrower, percentage of women borrowers etc).

Secondly, allocative efficiency reflects the ability of an organization to use these inputs in optimal proportions, given their respective prices and the production technology. Productive efficiency is concerned with choosing between the different technically efficient combinations of inputs used to produce the maximum possible outputs.

Thus, the overall economic efficiency means the ability of a production unit (MFI in our case) to achieve both technical and allocative efficiency. Credit control 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.

It is an aspect of financial management involving credit analysis, credit rating, credit classification and credit reporting. Nelson (2002) views credit management as simply the means by which an entity manages its credit sales.

It is a prerequisite for any entity dealing with credit transactions since it is impossible to have a zero credit or default risk.

The higher the amount of accounts receivables and their age, the higher the finance costs incurred to maintain them. If these receivables are not collectable on time and urgent cash needs arise, a firm may result in borrowing and the opportunity cost is the interest expense paid.

1.2 Problem statement

MFIs rely on loans, advances and overdrafts to increase income and profit. These are their main source of income. The MFIs are been face with huge loan defaults that have called management competence into question.

The greatest risk of MFIs is the credit risk, the risk of borrowing money and not getting it back either in full or haft.

Therefore the became a need for assessing credit control management and its effect on MFIs growth. Messi’s encounter a lot of loans recovery predicaments. Thus, the major problem is that of devising appropriate lending principle, set effective standards for evaluating the creditworthiness of customers, employ efficient procedures for processing loans and advances to customers, and to impalement monetary control and recovery of loans and advances in order to reduce the problem of bad and doubtful loans and increase profitability

As with any financial institution, the biggest risk in microfinance is lending money and not getting it back. Credit risk is a particular concern for MFIs because most microlending is unsecured (i.e., traditional collateral is not often used to secure microloans Craig Churchill and Dan Coster (2001).

The people covered are those who cannot avail credit from banks and such other financial institutions due to the lack of the ability to provide guarantee or security against the money borrowed. Many banks do not extend credit to these kinds of people due to the high default risk for repayment of interest and in some cases the principal amount itself.

Therefore these institutions required to design sound credit management that entails the identification of existing and potential risks inherent in lending activities.

Due to the crises face in north and south-west regions of Cameroon leads to bad debts, bankruptcy loan deliquesces which has to be addressed with a strong credit control management in order to avoid or reduces the bad debts and loan deliquesces Considering Cameroon, it is not very clear as to which macro-environments are more conducive for developing successful MFIs. In the current stage of development, where expanding access to financial services in rural areas is becoming increasingly important, the question is how are these institutions performing financially?

Vanroose (2007) has identified possible factors that play a role in the uneven development of MFIs in Latin America. What similarly are the factors influencing micro-finance performance in Cameroon.

The Cameroon microfinance sector has made remarkable progress during the last ten years, due to the dynamism of the main actors who are the State, the MFI and development partners (Fotabong, 2008).

The above progress is evident by the volume of microfinance activities, the proximity of the targeted vulnerable customers and the flexibility of the access conditions to the services which help to fight against poverty. But currently, the sector faces serious problems since 1990 because of the economic crisis that made Cameroon devaluate its currency in 1994.

Also regarding specific prudential standards, many microfinance establishments failed to comply with the required standard for the solidarity fund.

The difficulties can be outlined as problems involved in the control and supervision of the sector, in the regulatory framework, and in the establishment of microfinance enterprises. The micro-finance sector in Cameroun remains exposed to illegal practices.

All the establishments approved for the first category equally carry out unapproved operations patterning to the second category. The insufficiency in the control of the microfinance sector due primarily to the insufficiency of financial, human and material means at the disposal of the regulatory and control agencies remain a big problem.

1.3Research questions

1.3.1 General questions

What is the influence of credit control management on the performance of MFIs in Cameroon?

1.3.2 Specific questions

 Is there an effective credit control management in MFIs Cameroon?

 Are there effective standards for evaluating the creditworthiness of customers in MFIs

Does an efficient procedure exist for processing loans and advances to customers of MFIs?

1.4 Research objectives

 The main objective of this study is to analyze the impact of credit control management on MFIs

Other specific objectives are:

1. To examine the credit control management in MFIs Cameroon

2. To determine the level of credit control management on the performance of MFLs Cameroon

• To analysis, if the is a significant relationship between credit control management on the performance of MFIs in Cameroon

1. To make a recommendation on the effectiveness of credit control management on the performance of MFIs in Cameroon

1.5 Research hypotheses

H₀ credit control management does not affect the performance of MFIs     

H₁ Credit control management affect the performance of MFIs

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