CHAPTER ONE

INTRODUCTION

In the competitive environment, more and more lines of business which need a huge investment are being opened. Some of these huge investments are financed through credit union loans. With this respect, credit unions play a major role in the overall economic development of a country. However, in the process of extending credit to customers, a credit union should have a way of scrutinizing its borrowers so that it would minimize the risk of default loans. The effects of default loans are not limited to that of affecting the profit of one particular credit union but it has a ripple effect that extends itself into the economy at large.

Non-Performing Loans (NPLs) is a loan that is in default, or close to being default. Loans become non-performing when they are not being paid, or default for 3 consecutive months, or depends on the contract term. According to IMF (www.imf.org),  “a loan is nonperforming when payments of interest and principal have past due by 90 days or more, or at least 90 days of interest payments have been capitalized, refinanced or delayed by agreement, or payments are less than 90 days overdue, but there are other good reasons to doubt that payments will be made in full”.

This work or research is divided into five chapters. Chapter one is based on the introduction, background of the study, statement of problem, objectives of the study, research questions, hypothesis of the study, significant of the study, scope of the study and definition of terms. Chapter two is based on literature review that is, the conceptual, theoretical and empirical literature. Chapter three is on, the area of study, research design, population of study, research instrument(s), sources of data collection and data limitations, techniques of estimation and validation techniques. Chapter four is talking about data presentation, data analysis and discussion of results. And finally, in chapter five, the study discusses the summary of the major findings, conclusion and recommendation(s).

1.1 Background of the Study

    In Cameroon, Credit unions are believed to have done creditably in their quest to provide services to majority of the population in areas where credit unioning is not part of their culture. Distribution of credit disbursement is one of the main activities of every Credit union as well as Financial Non-Governmental Organization (FNGO), Savings and Loan Companies, Credit Unions and Microfinance Institutions in Cameroon and the globe as a whole, (J.Obuobi and G.Polio, 2010). It is commonly demonstrated through the huge fraction the loans occupy in the total operational assets of the financial companies. Recovered loans are thus essential to financial companies in the sight of their effect on capacity in lending, liquidity, profitability as well as earnings of every credit union.

    It is believed that credit unions presently deliver financial services to an estimated 15% more than the commercial credit unioning sector out of Cameroonian population total as asserted by (J.Obuobi and G.Polio, 2010). Arko (2012) reported that large proportion of the loans disbursed by these institutions unfortunately become non-performing and anally result in bad debts which have negative consequences on their overall financial performance. The non-performing loans can be defined as those monetary assets from which financial institutions no longer receive interest and/or installment payments as initially or previously scheduled. They are referred to as non-performing loans due to the fact that the loans stop creating income for the financial institution.

    The issue of non-performing loan is becoming a serious problem that impends the sustainability of the various credit unions. The main reason of the challenges is diverse which is not constant across diverse literature, this ascertain is supported by Mombo (2013) who also opined that the high increase of non-performing loans has been at the pivotal point of affairs of causing credit union’s distress as well as economic crises in both developing and advance economies. Example can be said of the 2008 global economic crises. In view of this, it is advisable for financial institutions to develop the means of checking the conduct of borrowers. It has been observed that since 1990’s, borrowers and lenders have significantly increased their management in credit risk, primarily in the developing countries (Elsinger et al., 2006). Consequently, the specialists argued that, financial institutions were obliged to review their lending policies. Assessment of potential borrower’s credit risk is the basic efficient responsibility related to lending this include; monitoring borrower’s behavior and compiling management report gathering receivables as they decrease due and dealing with those who default loans, bearing the risk of default loans or bad debts, making the credit granting decision in line with credit terms and limits and financing the investment in receivables.

    The Credit union of Cameroon regulates these credit unions and thereby forms part of the regulated financial sector in Cameroon. The credit unions are believed to be the largest formal financial services providers in the rural areas. They represent about half of the total credit unioning outlets in Cameroon (IFAD 2008). Credit unions are amalgamated and registered under the company’s code 1963 (Act 179) of Cameroon as limited companies and shareholders from tire local community where the credit unions operate is required to own it. In the beginning 43% of the shares in the credit unions were owned by Credit union of Cameroon (BoC) as preference. The shareholding levels for an individual were 10% whereas that of the corporate body was 30% in the early years of credit unions. The credit unions have elected board of directors that forms the governance structure. Board of directors serves as shareholder’s representatives within the credit union. The board supervises the management of the credit union funds. Shareholders of the credit union elect the board of directors from the communities where it is situated. Board members are elected during the credit union’s annual general meeting (AGMs).

    The election of directors is done based on their professional qualifications and status in the community. The Credit union of Cameroon validates the individuals that have been nominated by the shareholders before their responsibilities are given to them. The board of directors in their own jurisdiction elects a chairman and a vice chairman form among them. The chief executive officer of the credit union in most times serves as the secretary of the board. The fixed term in office for a board member is three years but can be re­elected for an unlimited number of terms by the shareholders. One-third of the board members need to go on retirement at every AGM but are qualified for re- election, in agreement with the Cameroonian company code.

1.2 Statement of Problem

    It is asserted that all over the globe, financial institutions face enormous risk of non-performing loans (NPLs). Financial institutions particularly credit unions are very important not only in providing financial assistance to the low-income earners in the society, but also in granting of credit facilities to them. However, just like other financial institutions, credit unions experience numerous cases of non- performing loans. The non-performing loans negate the profitability of the credit unions. Non-performing loans are not only argued to harmfully affect the financial performance of credit unions, but they also have other ear reaching repercussions. This is due to the fact that; other potential borrowers may be denied to access credit facilities since part of the funds that could be extended as loans by the credit unions are still knotted to non-performing loans. The non-performing loans also affect the economy of a country which explains the rationale behind the settings of guidelines by the central credit union for enabling financial institutions to alleviate NPLs. The importance of NPLs to the financial performance has necessitated this study which aims at finding the effects that NPLs have on the financial performance of BAPCCUL in Cameroon.

1.3 Research Questions

1. To what extent does agricultural loan default affect the profitability of

           BAPCCUL?

2. To what extent does school fees loan default the profitability of BAPCCUL?
3. To what extent does business loan default affect the profitability of BAPCCUL ?

1.4 Research Objectives

The prime objective of the study is to assess the effects of non-performing loans on financial performance of BAPCCUL in Cameroon

Specific Objectives

The specific objectives of this study are;

1. To determine the effects of agricultural loan default on the profitability of BAPCCUL
2. To identify the effects of school fees loan on the profitability of BAPCCUL
3. To examine the effects of business loan default on the profitability of BAPCCUL?