ABSTRACT

Microfinance Institutions (MFIs) play important roles in socio-economic development and poverty alleviation particularly in developing countries. This study investigated and sought to establish the relationship between accounting procedures and loan management of Microfinance institutions in Douala II Subdivision. Accounting procedures was looked at from the perspective of Credit Risk Identification, credit history, Collateral and Condition analyses, capacity and capital analysis. However, there are limited empirical research findings regarding the relationship between accounting procedures and loan management. The main objective of the study was to establish the effect of accounting procedures for loan management in Microfinance institutions in Douala II Subdivision. The study specific objectives were; to investigate the influence of loan management procedure on the growth, growth is due to the mastery of the loan management procedures, and to examine if the loan management procedures are efficient in safeguarding against recalcitrant customers in micro finance institutions in Douala II Subdivision. The study was anchored on Option Pricing Theory, Modern Portfolio Theory, and Arbitrage Pricing Theory (APT). The study used a descriptive research design. This study took a sample study approach with its target population being the different categories of staff in different departments of Microfinance institutions in Douala II Subdivision. It took on a sample of 50 employees. Primary data was collected from sample population using open and closed ended questionnaires. Descriptive statistics was used in the data analysis and information presented in statistical forms. A multiple linear regression was also used to analyze the relationship between the dependent and independent variable. The study realized that the influence of loan management procedure on the growth, growth is due to the mastery of the loan management accounting procedures, and examining if the loan management procedures are efficient in safeguarding against recalcitrant customers have a significant influence on the loan management of Microfinance institutions in Douala II Subdivision. The study recommends that Microfinance institutions should consider the interest rates they charge on loans; this is because interest rates have a negative effect loan performance to a great extent.

    Key word: Accounting Procedures, Loan management and loan granting, growth, efficiency.

CHAPTER ONE:

INTRODUCTION

1.1 INTRODUCTION

    The concept of loan can be traced back in history and it was not appreciated until and after the Second World War when it was largely appreciated in Europe and later to Africa (Kiiru, 2004). Banks in USA gave credit to customers with high interest rates which sometimes discouraged borrowers hence the concept of credit didn’t become popular until the economic boom in USA in 1885 when the banks had excess liquidity and wanted to lend the excess cash (Ditcher, 2003). 

1.2 BACKGROUND OF THE STUDY

    In Africa the concept of loan was largely appreciated in the 50’s when most banks started opening the credit sections and departments to give loans to white settlers. In 1990s 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). The concept of credit management became widely appreciated by Microfinance Institutions (MFI’s) in the late 90s, but again this did not stop loan defaults to this date (Modurch, 1999).

      Microfinance institutions belong to a wider group of financial institutions regarded as semi-formal financial institutions. These are institutions which are registered as nongovernment organizations performing financial functions of lending and taking deposits(Microfinance Act 2003). According to Kakuru (2000) credit policy is a set of policy actions designed to minimize costs associated with credit while maximizing the benefit from it. Edminster (1990) defined credit policy as an institution’s ‘method of analyzing credit request and its decision criteria for accepting or rejecting applications. The objective of this policy is to have optimal recovery from debtors as a firm may follow a lenient or stringent credit policy. Micro finance institutions employ a combination of three decision variable measures as were also defined by Pandey(1995) credit standards, credit terms and collection efforts. Credit standards (accessibility measures) are criteria to decide the types of customers for purpose of extending credit such as capital adequacy and asset quality.Credit terms are stipulations under which credit is granted, they specify the duration of credit and terms of payments by customers such as loan period and loan size. Collection efforts determine the actual collection period that is procedures that the institution follows to recover payments of past dues. Like phone calls and individual visits.
 Loan management analysis is an evaluation method that determines if loans are made on feasible terms and if potential borrowers can and are willing to pay back the loan. Loan management analysis gives the creditor a measure of safety on the loan by determining the probability that the borrower will pay back the loan. Follow-up visits to the potential borrower, especially for individual loans, help the lending institution

gauge the performance of the investments or assets that are intended to generate revenues to help settle the loans.It checks the eligibility of the potential borrower against the criteria set forth for lending. According to Ssewagudde (2000) credit policy provides parameters, defines procedures and directives that have been carefully formulated, administered from top and well understood at all institution’s levels. Microfinance institutions have a set of three procedures of evaluating credit applicants to establish whether or not loans should be granted, these are credit information, credit investigation and analysis in a bid to maintain proper credit standards, avoid excess risk and evaluate business opportunities. 

1.3 Statement of the problem

According to CFI Education (2022), Loan management analysis is an evaluation method that determines if loans are made on feasible terms and if potential borrowers can and are willing to pay back the loan. It checks the eligibility of the potential borrower against the criteria set forth for lending. Usually, consumers are subject to checks when applying for a loan or to pay for purchases in installments (Soldado, 2020). It ensures that credit providers evaluate the client’s ability to afford a new loan, eliminate unnecessary risks, increases profitability of credit portfolio, reduces operational costs and finally leads to efficient customer prospecting (Ssewangude, 2000; Mbanga, 2008).Although Microfinance institutions carry out loan analysis of their clients, there has been continued failure to recover the loans advanced to clients on schedule. If this situation is not given attention, most Microfinance institutions may run bankrupt, loose clients and automatically lead to closure.

Nevertheless, common measures or strategies have been put in place to facilitate the management as well as the recovery of loans from customers which can be by using automated reminder systems to both the clients and institution, by offering multiple payment options, being clear and strict about the rights and obligations of debtors from the beginning.

1.4 Research question

1.4.1 Main Research Question

What is the Accounting procedures of loan management in Microfinance institutions in Douala II Subdivision?

1.4.2 Specific Research Questions

1. What is the influence of loan management procedures on the growth of micro finance institutions in Douala II Subdivision?
2. Does the growth of micro finance institution in Douala II Subdivision due to the mastery of the loan management procedures by the loan department?

iii. Are the procedures in granting and management of the loans efficient to safeguard against recalcitrant customers?

1.5 Research Objectives

1.5.1 Main Objective

Accounting procedures of loan granting and management in Microfinance institutions in Douala II Subdivision (Case study of Azire cooperative credit union “AziCCUL”  and Global vision cooperative credit union “GloViCC”).

1.5.2 Specific Objective

1. To examine the influence of loan management procedure on the growth of micro finance institutions in Douala II Subdivision.
2. To examine whether the growth of micro finance institution in Douala II Subdivision is due to the mastery of the procedures of loan management by the loan department.

iii. To examine if the loan granting and management procedures in micro finance institutions in Douala II Subdivision is efficient to safeguard against recalcitrant customers.