CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

The history of microfinance in Cameroon 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).

According to Kassim (2009), some major reasons or causes of bad loans are poor management skills and experience, non-existence of an efficient and effective loan policy, insufficient loan analysis, documentation errors, much emphasis on profit as against the quality of the loan to be granted, dishonest practices and attitudes, political and economic challenges in terms of depression and instability, unhealthy competition, inconsistent policy and regulation and political and social influences on the management of the banks.

Moreover, other adverse economic and market factors ranging various recessionary circumstances, regulatory variations and others such as resource shortages of effectual management and unsettled labour relations have obstructed on the health of businesses and mostly leads to the none payments of such loan facilities because of their default risks. Bad loans are credit risk to rural banks and it is the risk of loss arising as a result of inability of debtors in honouring their payments obligation. These loans have tended to affect financial instability in the larger economy and have at times resulted in the outright failure of government projects.

Again, whenever public sector workers who mostly take credit from banks experience irregularities in their salaries payment, they are unable to honour their obligation for some tome resulting in growing NPLs. Most of the pensioners have borrowed from our banks when they were in active service and hoping to complete the payment of the loan from their privileges or monthly pensions. The non-payment of such privilege and due pensions (lump sum) has recurrently resulted in bad debts and bad loans.

In the UK credit, dealings were a personal affair, as people tended to borrow from businesses in their community. Whether borrowers were purchasing goods on credit from local merchants or borrowing money from their local bank, lenders typically knew their borrowers well – either personally or through their standing in the community. However, in larger communities this was more difficult (Gallinger & Poe, 2008). So tradesmen would share information on customers who failed to repay their debt. One such group were London tradesmen who, in 1803, pooled their knowledge of customers to avoid. As tradesmen saw the benefit of working together to protect their businesses, other units also formed across the country.

In Africa, credit management is not a new concept, spanning back during the early colonial days. During the 1950s, at the peak of colonial rule, indigenous credit institutions developed alongside colonial ones (Seidman, 1986). However, while colonial credit institutions benefitted from centuries of experience in credit management, African institutions could not build on the same traditions and the lax regulatory regime was not enough to prevent the challenges associated with fraud, embezzlement and high default.

In Ghana Banks should also receive their portion of the blame because banks in Ghana charge very high interest rates on loans mostly between thirty (30) to Forty-five (45) percent. When loan facilities are disburse or approved to customers, financial institutions including banks charge several interests on it as determined by these banks. The total of these interest rates and other interests charges by these banks are usually on a high than the actual amount sanctioned to them. This frequently escalates the loan portfolio collection as well as the quantity of bad loans (Ghana Banking Survey, 2011).

Also, most officers in the credit department and other officers especially branch managers, operations managers after granting or disbursing loan facilities to customers take certain percentage from the loan granted as gratification which is usually referred to as “sule”, which may significance in inadequate funds to implement the intended business and at the end of the day, management may not have moral standing to request for the full repayment of the money borrowed. Again, sometimes some banks‟ Executives and Credit officers take “ghost loans” from these banks to develop their own personal businesses without any plan of resettling the loan taken (Nguta & Huka, 2013).

Most board of directors and other top management members as noted by Okpara (2009), often their highly placed positions to obtain other form of loose loans which, in some cases goes contrary to the banks‟ statutory lending limits a strong violation of the regulation stipulated in the lending policy of the banking system. Again, loans are approved to acquaintances and relatives with no better documentation covering such loans which in the process grow the potential of bad loans

In Cameroon, most financial institutions act as intermediaries to many enterprises both private and public sector especially in the payment of salaries and wages, in this case many state and private contractors acquired loan facilities from the banks to finish their projects, and due to none or poor mobilisations from the government or private companies to finish up the projects, the loans borrowed becomes bad and therefore problematic to the banks. The state who also borrowed from banks for some projects but due to the poor priority of projects, most of these projects are often abandoned and repayments of such borrowed amount often become difficult and Many Rural banks in Cameroon have not survived in the banking industry due to nonpayment of loans creeping most of their activities. These huge overdue balances (loans defaults) in their books with its resulting consequences have resulted in the collapse of rural banks such as COFFINESS Bank (Nawai & Shariff , 2017).

1.2 Statement of the Problem

It is generally accepted that credit, which is put to productive use, results in good returns. But credit provision is such a risky business that, in addition to other reasons of varied nature, it may involve fraudulent and opportunistic behavior. MFIs should rather depend on loan recovery to have a sustainable financial position in this regard, so that they can meet their objective of alleviating poverty. Whether default is random and influenced by erratic behaviour or whether it is influenced by certain factors in a specific situation, therefore, needs an empirical investigation so that the findings can be used by micro financing institutions to manipulate their credit programs for the better performance of microfinance institutions (Mwangi et al., 2009).

It is generally accepted that credit, which is put to productive use, results in good returns. But credit provision is such a risky business that, in addition to other reasons of varied nature, it may involve fraudulent and opportunistic behavior. MFIs should rather depend on loan recovery to have a sustainable financial position in this regard, so that they can meet their objective of alleviating poverty.

Furthermore, the experiences of many microfinance institutions have exemplified the fact that a strong repayment rate is a major aspect of financial success in the microfinance industry. Strong repayment rate may be difficult to achieve because the target beneficiary clients are poor, have low income, are illiterate, with no infinite credit history and no potential for collateral. Yet, these are simply the challenges that microfinance institutions take on when providing loans to marginalized people in developing countries. Since micro – finance cannot rely on donor funds in the long run; they should be viable and sustainable by maximizing the full loan repayment.

Despite many researches it is quite clear from the foregoing that very little research studies has been done on effect of loan delinquency on the financial performance of banks as many of the researches concentrates largely on credit allocation yet it is through improved credit management that banks’ loan portfolios will enlarge and banks would meet their ultimate goal of stimulating growth and performance in the economy and despite a growth in its loan portfolio, Bank Limited in Cameroon is saddled with an alarmingly high level of Non-Performing Loans which have adversely affected its net asset value and overall banks financial performance and Repayment of loans by clients ensures sustainability of microfinance institutions and therefore default by clients to repay loans (credit) tends to affect the operations of every viable MFI. This loan default had its consequences and implications on the operations of MFIs this fact therefore prompts the researcher to investigate loan repayment default and financial performance of micro-finance institutions in Mezam Division.

1.3 Research Questions

The research problem raises two fundamental questions to be answered: the main research question and the specific research questions.

1.3.1 Main Research Question

What are the effects of loan repayment default on the financial performance of micro-finance institutions in Mezam Division?

1.3.2 Specific Research Questions

The specific research questions are simply stated as;

1. How do ownership characteristics of loan affect financial performance of micro-finance institutions in Mezam Division?
2. Does a borrower characteristic affect financial performance of micro-finance institutions in Mezam Division?
3. Do loan-specific factors affect financial performance of micro-finance institutions in Mezam Division?
4. How do lender characteristics affect financial performance of micro-finance institutions in Mezam Division?

1.4 Objectives of the study

The objectives are segmented into two; the main objectives and the specific objectives of the study.

1.4.1 Main objective

The main objective is to investigate the effects of repayment loan default on financial performance of micro-finance institutions in Mezam Division.

1.4.2 Specific Research Objectives

The specific research objectives are states thus;

1. To assess the effect of ownership characteristics of loan on financial performance of micro-finance institutions in Mezam Division.
2. To evaluate the effect of borrower characteristic of loan on financial performance of micro-finance institutions in Mezam Division
3. To determine the effect of loan-specific factors of loan on financial performance of micro-finance institutions in Mezam Division
4. To determine the effect of lender characteristics of loan on financial performance of micro-finance institutions in Mezam Division.