CHAPTER ONE

INTRODUCTION

1.1 Introduction

The study is organized into five chapters as follows; Chapter one begins with introduction which encapsulated the background of the study, statement of the problem, objective of the study, significance of the study, scope of the study and the structure of the work. Chapter two reviews all the available literature, definition and empirical evidence on the study and captures relevant theories related to credit policy and Customer retention. The purpose is to further elaborate the relevance of the research issue, offer basis for defining relevant research questions and to summarize the existing theories for research issues for later revaluation of research outcome and for designing the content and the structure of the study; an overall view on strategy perception and customer buyer behavior is presented here. Chapter three focuses on the methodology of the study. Here the target population, sample size and sampling technique, research instrument and data collection procedure were outline with other research technique necessary for the study. Chapter four deals with data presentation which include (biological information of respondents, rank of respondents, academic qualification and length of service), analyzing the data, interpretation and discussion. Chapter five outlines the summary of findings; conclusion and appropriate recommendations on the basis research findings, limitations and suggestion for further studies and it will be followed closely with references and appendix.

1.2 Background to the Study

Customer retention refers to the ability of a company or product to retain its customers over some specified period. High customer retention means customers of the product or business tend to return to, continue to buy or in some other way not defect to another product or business, or to non-use entirely. Selling organizations generally attempt to reduce customer defections. Customer retention starts with the first contact an organization has with a customer and continues throughout the entire lifetime of a relationship and successful retention efforts take this entire lifecycle into account. A company’s ability to attract and retain new customers is related not only to its product or services, but also to the way it services its existing customers, the value the customers actually perceive as a result of utilizing the solutions, and the reputation it creates within and across the marketplace. Successful customer retention involves more than giving the customer what they expect. Generating loyal advocates of the brand might mean exceeding customer expectations. Creating customer loyalty puts ‘customer value rather than maximizing profits and shareholder value at the center of business strategy’. (Asplund, 2007)

Prior to the 2008–2009 global financial crises, mainstream macroeconomists seemed to have reached an international consensus regarding the central bank’s mandates and monetary policy. The two main features of the consensus were the necessities of central bank independence and flexible inflation targeting. Under this paradigm, a central bank’s job description was straightforward to minimize volatility in inflation and output. For example, according to the popular Taylor (1993) rule, a central bank should set short-term interest rates in response to the deviation of inflation from its desired or target level (inflation gap) and the deviation of output from its potential output level (output gap). Flexible inflation targeting, together with central bank independence, had appeared to achieve price stability and deliver macroeconomic stability in advanced economies and many emerging market economies, at least until the global financial crisis (Eichengreen, 2011).

Goodfriend, (2011) has proposed a good starting point in credit policy. He divides central bank operations into monetary policy and credit policy. In his categorization, monetary policy refers to open market operations that expand or contract bank reserves and currency by buying or selling Treasury securities. On the other hand, credit policy shifts the composition of central bank assets, holding their total amount fixed. In other words, credit policy involves lending to particular borrowers or acquiring non-Treasury securities with the proceeds from the sale of Treasuries. Surely, in principle, any monetary policy is a credit policy as credit is the main transmission channel of monetary policy.  But there is still a key distinction between the two policies. That is, monetary policy contributes to a broad easing in financial market conditions, but credit policy facilitates funding conditions of specific sectors that have difficulty in accessing credit. In this context, credit policy could be viewed as a debt-financed fiscal policy.

Armed with this overview, this study proposes to categorize the current policies of central banks into monetary policy, credit policy, and macroprudential policy. In this classification, monetary policy can be further divided into conventional and unconventional monetary policies. While conventional monetary policy can be summarized as adjusting central banks’ policy rate at the very short end of the yield curve, unconventional monetary policy can take many different forms, such as large purchases of government bonds and forward guidance.

On the other hand, credit policy intends to ease credit conditions in the economy and affect capital flows or credit allocation in the private sector by making changes to the composition of a central bank’s assets. Therefore, the following actions can be classified as credit policy as they were intended to encourage sector-specific credit allocation: (i) the Federal Reserve’s funding support for nonbank financial institutions (e.g., American International Group) and direct purchase of MBS; (ii) FLS and purchases of corporate bonds and commercial bills by the BOE; and (iii) funding support for stronger growth by the Bank of Japan. In the same vein, the Bank of Korea has recently revamped its Bank Intermediated Lending Support Facility in an effort to incentivize commercial banks to lend more funds to highly promising SMEs that have little collateral.

Finally, macroprudential policy aims to moderate the procyclicality of the financial system. Thus, credit policy and macroprudential policies could overlap because both policies often involve some form of credit control or credit allocation aimed at specific sectors (Shin., 2015)In spite of these similarities; the two policies apparently differ in their priorities. Macroprudential policy mainly aims to restrict the growth of credit from the perspective of systemic risk management, whereas credit policy pays close attention to credit availability, in either the overall economy or particular sectors, and aims to rectify failures in financial intermediation.

A credit policy contains guidelines that structure the amount of credit granted to customers, as well as how collections are to be conducted for delinquent accounts. The policy is an essential element of the finances of a business, since it impacts the amount of working capital required to support accounts receivable, and also influences the amount of bad debt losses. A credit policy typically addresses the topics noted below.

Another parameter to look at credit policy is introducing the parameters of credit policy in this section its important to presents Collateral requirement, payment protocol, and recovery method. 

In lending agreements of Afriland First Bank, collateral is a borrower’s pledge of specific property to a lender, to secure repayment of a loan. The collateral serves as a lender’s protection against a borrower’s default and so can be used to offset the loan if the borrower fails to pay the principal and interest satisfactorily under the terms of the lending agreement.

Payment Protocol (Credit Terms) can be looked at as Bank-issued credit makes up the largest proportion of credit in existence. The traditional view of banks as intermediaries between savers and borrowers is incorrect. Modern banking is about credit creation. Credit is made up of two parts, the credit (money) and its corresponding debt, which requires repayment with interest. The majority (97% as of December 2013. of the money in the UK economy is created as credit. When a bank issues credit (i.e. makes a loan), it writes a negative entry in to the liabilities column of its balance sheet, and an equivalent positive figure on the assets column; the asset being the loan repayment income stream (plus interest) from a credit-worthy individual. When the debt is fully repaid, the credit and debt are cancelled, and the money disappears from the economy. Meanwhile, the debtor receives a positive cash balance (which is used to purchase something like a house), but also an equivalent negative liability to be repaid to the bank over the duration. Most of the credit created goes into the purchase of land and property, creating inflation in those markets, which is a major driver of the economic cycle.

If a bank issues too much bad credit (those debtors who are unable to pay it back), the bank will become insolvent; having more liabilities than assets. That the bank never had the money to lend in the first place is immaterial – the banking license affords banks to create credit – what matters is that a bank’s total assets are greater than its total liabilities and that it is holding sufficient liquid assets – such as cash – to meet its obligations to its debtors. If it fails to do this it risks bankruptcy or banking license withdrawal.

There are two main forms of private credit created by banks; unsecured (non-collateralized) credit such as consumer credit cards and small unsecured loans, and secured (collateralized) credit, typically secured against the item being purchased with the money (house, boat, car). To reduce their exposure to the risk of not getting their money back (credit default), banks will tend to issue large credit sums to those deemed credit-worthy, and also to require collateral; something of equivalent value to the loan, which will be passed to the bank if the debtor fails to meet the repayment terms of the loan. In this instance, the bank uses the sale of the collateral to reduce its liabilities. Examples of secured credit include consumer mortgages used to buy houses, boats, etc., and PCP (personal contract plan) credit agreements for automobile purchases.

Recovery methods are the process of pursuing payments of money or other agreed-upon value owed to a creditor. The debtors may be by individuals or businesses. An organization that specializes in debt collection is known as a collection agency or debt collector.  Most collection agencies operate as agents of creditors and collect debts for a fee or percentage of the total amount owed

Thus study seeks to study the effect of credit policy on Customer retention in Afriland First Bank Cameroon.

1.3 Problem Statement 

In the competitive banking sector, customer retention is a crucial determinant of long-term success and profitability. Credit policies, including collateral requirements, payment protocols, and recovery methods, significantly influence customer satisfaction and loyalty. While well-structured credit policies can enhance financial security and minimize risk for banks, overly stringent requirements may discourage customers from maintaining long-term relationships with financial institutions (Kumar et al., 2017).

Collateral requirements serve as a risk mitigation strategy, ensuring that banks have security in case of loan defaults. However, excessive collateral demands may create barriers for customers, particularly small business owners and individuals with limited assets, leading to dissatisfaction and potential attrition (Degbey, 2015). Payment protocols, including repayment schedules and interest rate structures, also play a vital role in customer retention. Flexible payment options and transparent communication regarding repayment terms can foster trust and encourage continued engagement with the bank (Becker & Jaakkola, 2020). Conversely, rigid payment structures and high interest rates may push customers toward alternative financial institutions with more accommodating policies (Ascarza, 2018).

Recovery methods, including debt collection strategies and customer engagement during financial distress, further impact customer retention. Ethical and customer-centric recovery approaches, such as restructuring payment plans and offering financial counseling, can strengthen customer relationships and improve retention rates (De Keyser et al., 2020). On the other hand, aggressive recovery tactics, such as legal actions and asset seizures, may damage customer trust and lead to negative perceptions of the bank (Andreini et al., 2018).

1.4 Research Question

1.4.1 Main Research Question

The main research question to this study is what is the effect of Credit Policy on customer retention in Afriland First Bank S.A?

1.4.2 Specific Research Questions 

In line with the specific research questions to this study they include:

1. What is the effect of collateral requirement on customer retention in Afriland First Bank S.A?
2. Does payment protocol affect customer retention in Afriland First Bank S.A?
3. To what extent does recovery method affects customer retention in Afriland First bank S.A?

1.5 Research Objectives

1.5.1Main Research Objectives

The main research objectives to this study are to analyse the effect of credit policy on customer retention in Afriland First Bank S.A.

1.5.2 Specific Research Objectives

1. To examine the effect of collateral requirement on customer retention in Afriland First Banks S.A
2. To analyse the effect of payment protocol on customer retention in Afriland First Bank S.A.
3. To determine the effect of recovery method on customer retention in Afriland First Bank S.A

1.6 Research Hypothesis

Ho₁: Collateral requirement does not significantly affect customer retention in Afriland First Bank S.A.

Ho₂: Payment protocol does not significantly influence customer retention in Afriland First Bank S.A.

Ho₃: Recovery Methods Does not significantly relates to Customer Retention in Afriland First Bank S.A.