ABSTRACT

This study examines the effect of loan delinquency on the performance of microfinance institutions (MFIs) in Bamenda II, Cameroon, and explores the potential solutions to mitigate the impact of delinquency on the financial stability of MFIs. Specifically, this study examines the effect of collateral, interest rates and monthly budget loan payment on the performance of MFIs in Bamenda II. The study adopted a descriptive survey, making use of a structured questionnaire in total 30 to some selected MFIs in Bamenda II. The study finds that loan delinquency can have a negative impact on the financial performance of MFIs, leading to increased levels of non-performing loans and decreased profitability. To address this issue, the study recommends that credit unions in Bamenda II consider implementing collateral requirements, adjusting interest rates based on the risk profile of borrowers, and encouraging borrowers to create and follow a monthly budget to manage their finances effectively. These measures can help to mitigate the risk of loan delinquency and default while ensuring that loan products remain accessible and affordable for all borrowers. Effective loan management practices, such as regular monitoring of loan repayments and timely communication with borrowers, are also crucial to minimizing the impact of loan delinquency on the performance of MFIs in Bamenda II.

Keywords: Loan delinquency, collateral security, interest rates, availability of monthly budget, MFIs, Bamenda II.

CHAPTER ONE

GENERAL INTRODUCTION

1.1. Background of the study

Microfinance is an old concept which dates back in the 19th century when money lenders were informally performing the role of now formal financial institutions. These informal financial institutions include; cooperative credit unions, village banks, state owned banks and venture capital funds to provide help to the poor. These institutions provide lending services to the government, other financial institutions and private individuals. The roots of lending can be traced back to the roots of civilization itself. Written loan contracts from Mesopotamia that are more than 3,000 years old showed the development of a credit system that included the concept of interest (Carlin, & Mayer. 2003).

Legitimate banks were developed from the indenture servitude that was rampant by individuals known as moneylenders. It is from Italian moneylenders who would set up benches in the local market place (with the word for bench being “banca”) that we coin the word ‘Bank’ (Payner, and Redman 2007).

Banks in Africa started giving loans to white settlers in the 1950’s. Getting to the 1990’s, 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). This brought about crises in the Banking sector. Sustainability and growth of MFIs is undoubtedly relevant for industrial development. This is because the banking sector is among the very few sectors that contribute to economic growth in various dimensions. MFIs contributed to economic growth by paying taxes and also creating employment.

They also serve as an anchor of growth for other sectors of the economy by providing them access to credit facilities in the form of loan (Asante and Tengey, 2014). Availing credit to borrowers is one means by which banks contribute to the growth of economies.

Lending represents the heart of the banking industry. Loans are the dominant asset and represent 50-75 percent of the total amount at most banks, they are the major contributor of operating income and represent the banks greater risk exposure (Mac Donald and Koch, 2006).

Moreover, its contribution to the growth of any country is huge in that they are the main intermediaries between depositors and those in need of funds for their viable projects (creditors) thereby ensure that the money available in economy is always put to good use. The Basel Committee1 (2001) puts non-performing loans as loans left unpaid for a period of 90 days

Lending is very risky in that repayment of the loans is not always guaranteed and most of the times depend on other factors not in the control of the borrower.Therefore, managing loans in a proper way not only has positive effect on the banks performance but also on the borrower and a country’s economy as a whole.

Failure to manage loans, which make up the largest share of banks assets, would likely lead to high levels of non -performing loans. And this in turn effect on the performance of MFIs and the economy at large. As contained in a CEMAC report of 2015, it was reported that the countries in this zone (Cameroon included), faced a high volume of NPLs.

Regular monitoring of loan quality, possibly with an early warning system capable of alerting regulatory authorities of potential bank stress, is thus essential to ensure a sound financial system and prevent systemic crises. In line with Basel II, accord asset quality is regularly monitored by supervisory authorities like central banks to ensure their well-being. MFIs have been facing major problems when it comes to collection of debt from their customers.

This has forced these institutions to seek for expertise in debt collection. Financial institutions with poor loan collection have faced serious liquidity problems. And yet a lot more have been dependent on government subsidy to financially cover the losses they faced through loan delinquency. Michael et al (2006) emphasized that NPLs in loan portfolio affect operational efficiency which in turn affects the profits of the institution, liquidity position and solvency position of banks. Batra, (2003) noted that NPLs also affect the psychology of bankers in respect of their disposition of funds towards credit delivery and credit allocation. This creates a different attitude and perception towards different borrowers in different locations by the Bankers.

The 2015 Banking Survey on  countries in the CEMAC zone (Cameroon being among),  indicates that many MFIs in this zone are encountering massive bad loans as the volume of delinquent loans within this period reached 894 billion FCFA, which is 11.8% of gross lending by all banking institutions. The he situation is considered serious because the country’s major financial institutions are facing the same problem. The report does not reveal the exact repercussions of the situation; but based on other evidences, it is certain that bad loans appeal the financial condition of banks. Delinquency which can lead to default is probably the largest single down fall of MFIs even in successful financial institutions. It therefore has to be addressed. This study therefore assesses the determinants of loan delinquency and its effect on financial performance of MFIs in Bamenda II.

1.2. Problem Statement

Interest rate are ordinarily the drivers of Microfinance’s performance. They are the ones that determine the size of the profit margin for every transaction between the MFIs and its customers. Yet there are many reported cases of defaults in loan repayment in MFIs. Interest rate regulations partly contribute to non-performing loans. When borrowers default in their loan repayment, the concerned banks are financially affected. There will be limited finances to run its operations and also to loan out to other potential borrowers. In the event that the challenge of nonpayment persists for long, the MFIs will have huge bad debts, the situation will lead to downsizing of its workforce, stall in it market expansion and finally collapse (kariuki, 2013). The sustainability of MFIs in Bamenda 2 depends largely on their ability to collect loans as effectively and efficiently as possible. In order words, to be financially viable or sustainable. MFIs must ensure high portfolio quality based on 100,% repayment, or at worst loan default cost recover and efficient lending.

Loan portfolio constitutes the largest operating assess and source of revenue of microfinance institutions. However, some of the loan given out become none performing or end up being delinquent or at default and adversely affecting the financial performance of microfinance institutions.

Research studies have shown that loan delinquency have two main effects on MFIs: these effects are the limitation of financial performance and lending potentials. In foreign country context, this evidence is acknowledged by Karim et al. (2010), Obamuyi, (2007), Nguta & Huka, (2013), Nawaz et al., (2012), Fidrmuc & Hainz (2009) whereas Appiah (2011), Awunyo also provides this evidence in Ghana.

Though these evidences on the effect on loan delinquency on MFIs prevail, it is realized that the general contribution to academic debate on the subject is weak owing to the fact that studies on the subject are generally few.

The credit provided by MFIs needs to be recovered within predetermined period. The loan may not be received on predetermined time. When a borrower fails to pays his/her loan installment it is called overdue loan. Normally, the overdue loan can be classified in different category as per regulatory as well as risk mitigation requirement that is pass, watch list, sub -standard, doubtful, and loss (Bad). When the period of installment moves than one year it is called bad loan, and is expected at highest level of risk and chances of recovery is low. It is actually overdue amount invested by MFIs to their borrower based on guidelines. Currently, Neplease MFIs are facing loan delinquent problem which needs to manage properly through policy intervention and credit management functions.

According to loan delinquency data published by Nepal’s central bank, the average NPL (nonperforming loan) of Nepalese MFIs was 17.14 percent in midJuly 2020, compared to 8.10 percent in midApril 2021. Generally, industry level overdue rate is below 5%. Here, the data shows the more than 5% which is higher than industry level. Therefore, MFIs need to manage portfolio quality.

If a client unable to repay their loan installment and increase loan overdue of MFIs which increase the costs of MFIs and adversely affects the revenue and profit. So, loan overdue negatively effects on the sustainability of MFIs. In other hand, there is also another dangerous negative learning on regular clients towards not repaying loan installment on time. So, these above situation are the adverse condition for loan portfolio quality

This study therefore assesses the impacts of loan delinquency on MFIs in Bamenda II being the main question guiding the research in this project.

1.3 Research Question

The study is guided by the following research question

1.3.1 Main Research Question

What is the impact of loan delinquency on the financial performance of MFIs in Bamenda II?

1.3.2 Specific Questions

What is the impact of collateral on the financial performance of MFIs in Bamenda II?

What is the impact of interest rate on the financial performance of MFIs?

What is the impact of availability of monthly budget on the financial performance of MFIs?

1.4 Objective of the Study

1.4.1    Main Objective

The main objective of this study is to examine the impact of loan delinquency on MFIs in Bamenda II

 1.4.2 Specific Objectives

To examine the effect of collateral on the financial performance of MFIs

To evaluate the impact of interest rate on the financial performance of MFIs

To investigate the effect of availability of monthly budget on the financial performance of MFIs

1.5 Research Hypothesis

H0: Collateral has no significant positive effect on the financial performance of MFIs in Bamenda II

H1: Interest rate has no significant positive effect on the financial performance of MFIs

H2: Availability of monthly budget has no effect on financial performance of MFIs