ABSTRACT

The financial health of the commercial banking industry is an important element for economic stability and growth. Microfinance banks are part of the financial sector in an economy performing valuable activities on both sides of the balance sheet and provides financial support to other segments. In the recent past performance among MFIS has continued to attract attention not only globally but regionally, this shift has caused a very big gap in terms of their profit margins. It is evident that their performance has been on a declining trend despite the efforts made to counter their lost profits this is due the fact that they are over indebted. While MFIS in other continents have been reporting positive profits over the years, those operating in Africa continue to post negative profits and thus the study sought to explain this gap by assessing the debtors management practices that have been adopted by the MFIS in Buea with the case of ECOBANK in Buea). This was mainly to reduce the amount of money that is left outstanding which accumulates to form doubtful debts in any financial year. Management should thus be in a position to adopt debtors management techniques and use them appropriately to finds olutions and encourage financial performance. The general objective of the study was to assess the effect of debtors management on financial performance of MFIs in Buea, the case of ECOBANK. Whereas the specific objectives of the study were: To determine the effect of credit extension policy, debt control and monitoring and client appraisal on financial performance of Micro Finance Institutions in Buea. Various theories were incorporated in this study. Loanable funds theory provides knowledge on pricing of loanable funds, while the liquidity preference theory reveals the equilibrium point where demand meets the supply of money. The theory of information asymmetry which tells us that, there exist an imbalance of information between two parties in a transaction that leads to inefficient results in certain markets. The target population was 133respondents which targeted the operations manager, finance manager and the debt collection officers and customers of BPTCCUL. The researcher used purposive sampling to pick respondents and a sample size of 100 respondents was picked. The validity and reliability of the research instrument was tested and a Cronbach alpha coefficient threshold of 0.8was used. The researcher used a semi structured questionnaire to collect data. Data was analyzed using descriptive analysis (mean, standard deviation, ANOVA) and Multiple Regression Analysis. The results showed that the independent variables in consideration had a relatively strong positive correlation where Interest rate had a Beta value of 0.204 and a p-value of 0.005, reserve requirement had a Beta value of 0.271 and a p-value of0.018,  while Financial performance had  a  Beta  value  of 0.231  and  a  p-value  of 0.031. Recommendations of this study were that management of MFIS should be keen while coming up  with credit extension policies since this affects financial performance if not adhered to, MFIS  should  adopt  and implement  stringent debt  collection policies as this  significantly increases financial performance. MFIS should also strictly monitor outstanding debt on a continuous basis as this improves financial performance.

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Credit creation is a fundamental concept in the banking industry that plays a crucial role in the financial performance of commercial banks. It involves the process by which banks create new money through the extension of credit to borrowers. This process is essential for stimulating economic growth and facilitating investment and consumption. One of the key elements of credit creation is the fractional reserve banking system, which allows banks to lend out a portion of the deposits they hold, thus creating new money in the form of loans. This process has a multiplier effect on the money supply, leading to increased economic activity and liquidity in the financial system. Financial concepts such as liquidity, solvency, and profitability are closely linked to credit creation and play a significant role in determining the financial performance of commercial banks.

        Liquidity refers to the ability of a bank to meet its short-term obligations, while solvency indicates the bank’s ability to meet its long-term obligations. Profitability, on the other hand, reflects the bank’s ability to generate profits from its operations. Authors such as Mishkin (2016), Fabozzi et al. (2014), and Saunders and Cornett (2017) have extensively studied the impact of credit creation on the financial performance of commercial banks. Their research has highlighted the importance of credit creation in driving economic growth and stability, as well as the risks and challenges associated with excessive credit expansion.1. Mishkin, F. S. (2016). The Economics of Money, Banking, and Financial Markets: Mishkin’s book provides a comprehensive overview of the economics of money, banking, and financial markets. It covers topics such as the role of money in the economy, the functions of financial institutions, and the operation of financial markets. Mishkin explores how central banks influence monetary policy, the impact of interest rates on economic activity, and the role of banks in creating credit. The book also delves into the relationship between financial markets and the overall economy, highlighting the importance of understanding these connections for policymakers, investors, and financial professionals. Fabozzi, F. J., et al. (2014). The Handbook of Fixed Income Securities: Fabozzi’s handbook is a comprehensive guide to fixed income securities, covering various aspects of bond markets, interest rate risk, credit risk, and valuation techniques. The book explores different types of fixed income securities, such as government bonds, corporate bonds, and mortgage-backed securities, and provides insights into the factors that influence their prices and yields. Fabozzi also discusses strategies for managing fixed income portfolios, assessing credit quality, and understanding the risks associated with investing in fixed income securities. Saunders, A., & Cornett, M. M. (2017). 

    Financial Institutions Management: A Risk Management Approach: Saunders and Cornett’s book focuses on financial institutions management from a risk management perspective. It covers topics such as the role of financial institutions in the economy, the regulatory environment in which they operate, and the various risks they face, including credit risk, market risk, and operational risk. The authors emphasize the importance of effective risk management practices for ensuring the stability and profitability of financial institutions. The concept also discusses key concepts such as liquidity management, capital adequacy, and corporate governance in the context of financial institutions. In this case study, we will examine the effects of credit creation on the financial performance of Ecobank, a leading commercial bank in Africa. By analyzing the bank’s credit creation practices, liquidity management, and profitability metrics, we aim to provide insights into how credit creation influences the overall financial health and stability of commercial banks. The effect of credit creation on the financial performance of commercial banks is a critical aspect of banking operations and profitability. In this case study, we will examine the impact of credit creation on the financial performance of Ecobank, a prominent commercial bank operating in various African countries. Ecobank is known for its extensive presence in the African banking sector, offering a wide range of financial products and services to individual and corporate clients. Like other commercial banks, Ecobank plays a crucial role in the economy by providing credit to businesses and individuals, thereby stimulating economic growth and development. Credit creation is a fundamental function of commercial banks, as they have the ability to create money through the process of lending. When a bank issues loans to borrowers, it effectively creates new money in the form of deposits, which can then be used for further lending or investment. This process of credit creation has a direct impact on the financial performance of banks, as it influences key metrics such as profitability, liquidity, and asset quality.

Commercial Bank Industry In Cameroon

The commercial banking industry in Cameroon plays a crucial role in the country’s financial system, providing various financial services to individuals, businesses, and the government. One of the key functions of commercial banks is credit creation, which involves lending money to borrowers to support economic activities and drive growth. The effect of credit creation on the financial performance of commercial banks in Cameroon is significant and can impact their profitability, risk management, and overall stability. A study conducted by the World Bank in 2019 highlighted the importance of credit creation in driving economic growth in Cameroon. The study found that access to credit from commercial banks can stimulate investment, job creation, and entrepreneurship, leading to increased economic activity and improved living standards for the population. However, the quality of the loan portfolio is a critical factor that can influence the financial performance of commercial banks in Cameroon. High levels of non-performing loans can erode profitability, strain capital reserves, and increase credit risk. According to data from the Bank of Central African States (BEAC) as of December 2020, the non-performing loan ratio in Cameroon stood at 12.5%, highlighting the need for banks to enhance their credit risk management practices. Interest income generated from loans is another key driver of financial performance for commercial banks in Cameroon. Fluctuations in interest rates, competition in the lending market, and changes in borrower behavior can impact a bank’s net interest margin and overall profitability.

   The Central Bank of Central African States (BEAC) regularly publishes data on interest rates and monetary policy decisions that can affect commercial banks’ lending activities and interest income. Regulatory compliance is a fundamental aspect of credit creation for commercial banks in Cameroon. The Banking Commission of Central Africa (COBAC) sets prudential regulations and supervisory guidelines to ensure the stability and soundness of the banking sector. Compliance with these regulations is essential for banks to maintain their license to operate and avoid sanctions that could harm their financial performance. Effective risk management practices are crucial for commercial banks in Cameroon to mitigate the risks associated with credit creation.

The BEAC provides guidelines on risk management, capital adequacy, and liquidity requirements to help banks identify, assess, and manage risks effectively. By implementing robust risk management frameworks, banks can safeguard their financial performance and maintain the trust of depositors and investors. Credit creation plays a vital role in shaping the financial performance of commercial banks in Cameroon. By addressing key issues such as loan portfolio quality, interest income generation, regulatory compliance, and risk management, banks can enhance their financial performance and contribute to sustainable economic growth in the country. World Bank (2019). “Cameroon Economic Update: Financing for Development. Bank of Central African States (BEAC) (2020).Central Bank of Central African States (BEAC). “Monetary Policy Decisions. Banking Commission of Central Africa (COBAC). “Regulatory Framework.

1.2 STATEMENT OF PROBLEM

Credit creation is a fundamental function of commercial banks, as they play a crucial role in allocating capital to borrowers and supporting economic activities. This paper examines the effect of credit creation on the financial performance of commercial banks, with a focus on Ecobank Cameroon as a case study. The study aims to identify the key challenges and opportunities associated with credit creation and its impact on the financial performance of commercial .One of the primary challenges faced by commercial banks in relation to credit creation is the risk of non-performing loans. When borrowers fail to repay their loans, it can lead to increased NPLs, negatively impacting the bank’s profitability .Effective credit risk management is essential for commercial banks to mitigate the risks associated with credit creation. Inadequate risk assessment and monitoring processes can expose banks to potential losses and impair their financial performance. The extent of credit creation by Ecobank Cameroon directly impacts its profitability, as interest income from loans constitutes a significant portion of the bank’s revenue.

Effective credit risk management practices are essential to maintain a healthy loan portfolio and sustain profitability levels. The quality of assets, particularly the loan portfolio, is a critical indicator of Ecobank Cameroon’s financial performance. Monitoring NPLs, provisioning for potential losses, and implementing credit risk mitigation strategies are essential to preserve asset quality and ensure long-term financial stability. Credit creation affects Ecobank Cameroon’s capital adequacy position, as loans represent assets on the bank’s balance sheet that require sufficient capital reserve.

1.3 Research Question

1.3.1 Main Research Questions

What is the effect of credit creation on the financial performance of commercial banks in Cameroon case study ECO bank ?

1.3.2 Specific Research Questions

In line with this, the following research questions will contribute in getting an answer to the main research question.

 1  what are the effects of interest rate that will affect the financial performance of ECO bank? 2 To what extent reserves requirements affect the financial performance of ECO bank?

 1.4 Research Objective

The research study was guided by the following objectives

1.4.1 Main Research Objective

To access the effect of credit creation on the financial performance of commercial banks in Cameroon case study ECO bank

1.4.2 Specific Research Objectives

1  To determine the effect of interest rate on the financial performance of ECO Bank

2 To assess the extent to which reserves requirement can affect the financial performance of ECO Bank

1.5 RESEARCH HYPOTHESES

The study sought to test the following null hypotheses:

HO1: interest rates does not affect the financial performance of ECO Banks

HO2: Reserve requirements doesn’t have a significant effect on the financial performance of ECO BANK