CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

A great portion of the economy of CEMAC is finance to a great extent by Micro Finance Institutions (MFIs). In sub–Saharan Africa, MFIs helps to develops countries and boosting of entrepreneurship development especially amongst the low-income earners. These institutions according to Eoin (2005a) attempt to improve access to small deposits and small loans for poor households neglected by banks. Thus, Rhyne (2001) argued that the main products and services of these institutions consists of providing microcredit’s, subsidizing collateral through group leading guarantees or compulsory savings, disbursing more larger and repeated loans to customers depending on their repayment capabilities, monitoring loans disbursed to customers and safeguarding customers saving. MFIs often include both financial and social intermediation and execute activities as small loans working capital, informal appraisals of borrowers and investment, collateral substitutes (as compulsory saving, groups guarantees), access to repeat and larger loans based on repayment performance, streamlined loan disbursement, monitoring and secure saving product (Sayed, 2013).

The goal of any organization is not only to survive, but also to sustain its existence by improving performance. In order to meet the needs of the highly competitive markets, organizations must continually increase performance (Arslan & Staub 2013). The observation of leadership behavior, traits and styles has been a topic of concern for many organizations over the years due to the ever-changing nature of technologies as well as the growth of globalization which has transformed the expectations and behaviors of people within an organization. Glantz (2002) states that, successful companies today look for knowledgeable workers who are highly qualified and who can use their capabilities to improve the performance of their organization. However, such workers need leadership that will give the enabling environment in which to excel.

The concept of leadership and leadership style may differ from one person to another and will depend on the situation. The term ‘leadership’ has been widely used in politics, academics, social work and in business management (Messick & Kramer, 2004). Yukl (1994) defines leadership as the process of influencing followers to achieve a set goal. Leadership style can be defined as the manner and approach of providing direction, implementing plans and motivating people (Glantz, 2002). Organizational performance relates to an organization ability to attain its goals by using resources in an efficient and effective manner (Daft, 2000). It is the achievement of organizations goals in pursuit of business strategies that lead to sustainable competitive advantages (Mitonga-Monga, et al., 2011). It is therefore, evidence of the output of members of an organization measured in terms of revenue, profit, growth, development and expansion of the organization.

According to Yukl (1994), leaders affect organisational performance because they influence employees’ attitudes, motivation, and behavior. Stoner and Gilbert (2001) have also noted that leadership is important to an organization because it binds subordinates to work together towards a common goal. This means that effective leadership provides the building block for organizational performance and is absolutely essential for the survival and growth of every organization. Effective leadership is the extent to which a leader constantly and progressively leads and directs his or her followers; towards organizational performance. Therefore, the leadership style of a leader greatly impacts on the organizational performance (Shamir, et al., 2006).

The study of leadership styles has gained significant attention in recent years, reflecting the evolving complexities of the business environment, social changes, and technological advancements. Researchers are increasingly focusing on identifying which leadership styles and approaches are most effective in various contexts, such as diverse workplaces, remote work settings, and rapidly changing industries (Khan et al., 2020; Elkhwesky et al., 2022). Studies have shown that the style of leadership adopted can have profound implications for the success of an organization or team (Fischer & Sitkin, 2023; Mulyana et al., 2022). Knowing when to apply different styles enhances communication, productivity, and employee satisfaction. Thus, understanding leadership styles and approaches is crucial for anyone in a leadership role or aspiring to become a leader (Asbari, Santoso & Prasetya, 2020).

Purwanto et al. (2020) explains that leadership styles and approaches vary widely, and the effectiveness of each depends on the situation and the team being led. The importance of understanding leadership styles cannot be overstated because the effectiveness of a team often hinges on the approach taken by its leader. For instance, autocratic leadership is likely to be effective in crisis situations where quick decisions are needed, but it is also has the potential to stifle creativity and morale in a more stable, collaborative environment (Tedla, 2022). In addition, democratic leadership fosters innovation and employee satisfaction but may be too time-consuming in emergency situations (Goleman, 2020). Leaders often need to adapt their style to the maturity and capabilities of their team members. It is possible that a new team with less experience can benefit from a more directive approach, whereas a highly experienced team might excel with a more delegative or laissez-faire style. Leadership is considered important for the success of an organization, as it helps navigate global business challenges. Hosseini et al. (2020) argue that the presence or absence of effective leadership has the ability to make or break an organization.

According to Mills (2023), without leadership, organizations risk stagnation and internal conflict due to divergent views and solutions among team members. Successful leadership inspires enthusiasm and commitment, enhancing organization performance. The style of leadership affects performance since performance cannot be achieved in the absence of a leadership that can adapt to the changes and challenges of the environment. Therefore, if an organization wants to improve its performance, it is the leadership style that should be analyzed and adapted to new requirements (Popa, 2012).

In the United Kingdom, the impact of leadership styles on the performance of commercial banks has been a topic of interest, especially in the wake of financial regulations and uncertainties like Brexit (Jallow, Masazing & Basit, 2017). UK banks such as Barclays and HSBC have been increasingly focusing on transformational and adaptive leadership styles to navigate through complex regulatory landscapes and market volatility. The emphasis is often on long-term vision, ethical banking practices, and innovation to stay competitive, reflecting an integrated approach to leadership that aligns with the complexities of modern banking in the UK (Jallow, Masazing & Basit, 2017). Malaysia, banks such as Maybank and CIMB Group have been adopting a more participative and transformational leadership approach, by engaging employees in decision making processes and fostering a culture of continuous learning and improvement (Saleh et al., 2022). This style is particularly effective in nurturing innovation, which is crucial for banks in emerging markets like Malaysia where competition is fierce, and there is a constant need to differentiate services.

In South Africa, a study by Smit et al. (2021) found that transformational leadership styles, when combined with effective talent management practices, had a positive influence on talent engagement and organizational performance. The study indicated that a transformational leadership style had varying impacts depending on other influencing factors like organizational practices. Interestingly, the study also revealed that transformational leadership by itself did not significantly impact work engagement. A few more studies in Tanzania affirm the position that leadership style affects organizational performance. For instance, Mgeni and Nayak (2016) found a major and moderate positive correlation between transactional leadership style and small business enterprises’ performance. On the other hand, Machumu and Kaitila (2014) found that leadership style is an important variable in motivating teachers in Tanzania in their careers. The authors noted that democratic leadership style enhances great satisfaction of teachers in primary schools, while laissez-faire and autocratic leadership styles were undesirable.

1.2 Statement of the Problem

Effective leadership style has the potential of boosting employee morals and drive performance. Strength of the influence that motivates each team member to voluntary co-operate with each other to achieve the objectives set by the leader. Successful organizations are the result of effective leadership but also of organizational culture. The relationship between the employee and the leader as well as the quality of the employees’ performance will be influenced by the leadership style adopted by the leader (Aditya, 2007). Leadership is therefore a crucial management skill; meaning that an effective leader should be able to encourage a group of people towards a common goal. Thus, Glantz (2002) emphasizes the need for a manager to find his leadership style.

Several studies have shown that organizations performance is a function of the organization’s leadership style and behavior (Chen & Barnes, 2006). This is because leadership styles affect administrative and managerial roles which includes the extent to which strategic goals are communicated and shared by each employee. Previous studies have also shown that leadership style will have a direct effect on customer satisfaction, staff satisfaction and financial performance. However, the effects of leadership style on an organizations performance in general has not yet been well studied. House and Aditya (1997) have criticized leadership studies for focusing excessively on superior to subordinate relationships while excluding organizational and environmental variables as well as all the other functions that leaders perform. Fenwick and Gayle (2008) have indicates that most findings are inconclusive and difficult to interpret.

There is also evidence suggesting that leadership style can have a negative impact on financial performance in both banking and other sectors (Bătae, Dragomir & Feleagă, 2021; Cindiyasari, Junarsin, Nani & Septiani, 2022; Tian, 2017). However, these studies were not conducted in a cameroon context much less in the context of MFIs, leaving questions about their applicability to application in micro finance institutions. These inconsistencies in the findings, along with the conceptual, methodological and contextual gaps in the existing research, highlight the need for further research into the relationship between leadership style and financial performance of micro finance institutions in Bamenda. This study therefore seeks to address the identified gaps by analyzing the impact of leadership styles on the financial performance of micro finance institutions in Bamenda

1.3 Research Questions

1.3.1 Main Question

What is the effect of leadership style on the performance of micro finance institutions in Bamenda?

1.3.2 Specific Questions

1. What is the effect of democratic leadership style on the performance of micro finance institutions in Bamenda?
2. How does autocratic leadership style affect the performance of micro finance institutions in Bamenda?

• To what extent does laissez-faire leadership style affect the performance of micro finance institutions in Bamenda?

1.4 Research Objectives

1.4.1 Main Objective

To assess the effect of leadership style on the performance of micro finance institutions in Bamenda

1.4.2 Specific Objectives

1. To investigate the effect of democratic leadership style on the performance of micro finance institutions in Bamenda
2. To examine the effect of autocratic leadership style on the performance of micro finance institutions in Bamenda

• To assess the effect of laissez-faire leadership style on the performance of micro finance institutions in Bamenda