CHAPTER ONE:

 GENERAL INTRODUCTION

1.1 INTRODUCTION

The main objectives of banks and other financial institutions is liquidity, profitability and security. But we are going to be talking only about one of these objectives which is Liquidity. It should be noted that these objectives are somehow conflicting in a way that one can be achieved at the expense of another. Because of this conflict liquidity management becomes a focal point of every financial institution. When a financial institution is said to be liquid, it simply means it is able to meet the demands of its customers on time, and pay their debts when it is due.

Therefore, Liquidity can be defined as the ease with which an asset or an item can be converted into cash without a significant cost or loss in value. Or the ability of an organization to have assets in cash or liquid form which will enable them to carry out their day to day operations. The fact that a microfinance is profitable does not mean that it is liquid. This is because accountants can manipulate accounting information to show that the bank is profitable whereas in actual sense, this is not the case. This practice is called Creative Accounting.

Hence liquidity is one of the most important factors in every financial institution. This is because it helps in the day to day functioning of the microfinance. A lack of it can be very dangerous for the microfinance.  without Liquidity, activities won’t go on smoothly hence leading to customers being unsatisfied and unhappy eventually resulting to a loss. So it can be said that liquidity plays a big role and has a sizable influence on the Financial performance of MFI(s).

This piece of work is divided into Five (5) chapters. Chapter one which comprises of the Background to the study, chapter two the literature review and presentation of internship activities. While chapter three comprises of the mythology, Chapter four the presentation, analysis and interpretation of data and finally, chapter five which comprises of discussions, conclusions, and recommendations

1.2 BACKGROUND TO THE STUDY

Here we are going to look at the historical background, theoretical background, conceptual background and contextual background.

1.2.1 Historical Background

1.2.1.1 Background of Liquidity

The history of Liquidity can be traced from the starting of financial institutions. Although the modern theory of financial intermediation portrays liquidity creation as an essential role of banks, comprehensive measures of bank liquidity creation do not exist. We Construct four measures and apply them to data on U.S banks from 1993-2003. Large banks, multibank holding company members, retail bank and recently merged banks create the most Liquidity. Bank Liquidity creation is also positively correlated with bank value. Testing recent Theories, we find that bank capital has a positive(negative) effect on liquidity creation for large(small) banks. In response to the global financial crisis of 2007-2009, the Basel Committee has proposed a new global set of Liquidity requirement, the liquidity coverage Rate(LCR) and the Set Stable Funding Ratio(NFSR), to complement its revised framework of international capital requirements. The primary and obvious motivation for the new interest in Managing banks’ liquidity is concerned about liquidity risk: “The objective of the LCR is to Promote the shorter resilience of the liquidity risk profile of banks. It does this by ensuring that banks have an adequate stock of unencumbered high quality liquid assets that can be Converted easily and immediately in private market in to cash to meet their liquidity need for 30-day calendar liquidity stress scenario”(Basel Committee on banking supervision, 2013) After the malfunctioning of inter-bank market and the heavy reliance of banks on central bank Lending during the crisis, policy makers understandably would like to reduce the like hood of systematic crisis, fire sales, and the dependence of banks on the lenders of last resort.

 In this study, we develop a model of Liquidity requirements in which the proper focus of regulation is on the asset side of the banks’ balance sheet and in which the liquidity requirements trace the form of a narrow cash reserve requirement. Rather than the Basel III Approach which seeks to limit rollover risk, we show that role of Liquidity Requirements Should be conceived in a more nuanced way, not just as an insurance policy to deal with Liquidity risk that can arise in a financial crisis, but also as a prudential regulatory tool to Make crisis less likely. in our framework, cash requirements limit default risk and encourage good risk management. We show that the primary benefit derived from cash requirements (like capital requirements) related to the special role of cash in incentivizing improvements in bank risk profile by encouraging proper risk management. Cash holdings reduce the probability of a liquidity crisis by making banking systems more resilient from a default risk perspective.

1.2.1.2 Background of Mmockmbie Cooperative Credit Union Yaoundé

MMCU under the MMOCCUL branch Yaoundé is a credit union owned and controlled by its members. It was opened in the year 2015 and with the aim of providing financial services to its members such as micro-saving and micro-lending and also making profits for its owners. Its registration number at COOPGIC REG. is 17/035/CMR/SW/55/290/CCA/360/3601  

1.2.1.3 Background of Micro Finance Institutions

In Cameroon, MFIs can be traced as far back as 1963 when the first credit union was established at Njinikom in the North West Region, and as union members continue to multiply, in 2000, the banking Commission estimated that the number of MFIs operating in Cameroon was 652 and today numbered/estimated at 645 both registered and unregistered MFIs (Leonard, 2012). However, in 1998 the law 98/99 was passed to recognize MFIs as entities within the financial domain and placed under the control of the ministry of finance than Ministry of Agriculture. Following this law, COBAC was officially recognized as an authority to figure out MFIs and capable of dissolving them if they did not adhere to COBAC rules and regulations. Finally, in 2002, regulation number 01/02/CEMAC/UMAC/COBAC clearly defines and controls the activities of MFIs in Central Africa including Cameroon (Ian, 2009). Following the 1980’s crises in Cameroon that resulted to the closure of many branches of commercial and developmental banks in rural areas and some cities, top executives lost their Jobs and later formed cooperative credit unions and functioned as mini banks (Leonard, 2012). Hence with the expansion of MFIs in Cameroon, roles of different stakeholders became visible and resulted to the network of MFIs in Cameroon, made up of institutions developed Endogenously as MC2, CAMCCUL (Cameroon Cooperative Credit Union League), the self-Directed Village Savings and Credit(CVECA) supported through the decentralized rural credit project of the Ministry of Agriculture and Rural Development with the support of BICEC, two other French institutions and two independent MFIs created by individuals located mostly in urban areas from 1950-1970. A number of developing countries and their donor partner implemented the policy of subsidization of agricultural activities for small and low income farmers as a means to boost productivity and income levels. Since mid-1980s, such subsidization policies have been criticized for diverting the centre of attention to focus exclusively on social needs, thus proving financially unviable and unsustainable.

 As the need for an approach that would take both the market and the social contexts into consideration Became fashionable and rewarding, new organizations, known as Microfinance institutions (MFIs) began focusing on the activities of low income farmers. Microfinance Institutions switched focus from agriculture subsidies to target aid to the poor and help establish local Institutions which became financially and operationally stable for such objectives. MFIs essentially operate on a combination of financial products (micro credit, micro lending, Micro insurance, micro savings, and money transfers) targeting specific group of customers. Recipients of the services generally are micro businesses and economically active citizens who at the same time are poor, with incomes below the poverty line of $1.25 per day. Such poor persons normally have limited access to standard financial credit and services provided by classical financial institutions and banks. Micro finance started in Europe at the end of the nineteenth century with the creation of the Raiffeisen Village Bank Movement Germany or the Local case of mutual agricultural credit in France. And Africa, with the protective sackings, truly took its rise in the 1980s. Originally, the first experiment was conducted by Muhammad Yunus in Bangladesh with the Grameen Bank in 1983. The Grameen bank, launched in 1976 by Muhammad Yunus in Bangladesh remained the first to have shifted focus from individual to group loans. Today, the Grameen Consists of more than 2.4 million clients. The scheme has contributed significantly to the Bangladesh economy as 48% of poor farmers have benefited from such agricultural credits. The concept of MFI development in Cameroon can be traced back to the 19th century money Lenders who were informally performing the role of the new formal institutions. These informal Lenders were mostly “Njangi” groups and cooperative credit unions. The first MFI in Cameroon was created in 1963 by Janson, a Dutch catholic priest in Njinikom, Bamenda of the North West Region of Cameroon. Association and creation of Common Initiative Group(CIG) came to foster the power existence and manifestation of MFIs in Cameroon. For many years in Cameroon, The Microfinance sector has evolved and has been transformed into a system of provision of short term loans, savings, credit, money transfer, and many others Functions thanks to various financial sector policies and programs undertaken by the government Since Independence. MFIs now are the primary sources of funds to small and medium size enterprises in Cameroon and other countries in the process of economic growth.