CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Microfinance has gain a universal recognition as an important tool for reducing poverty in many developing countries today. According to Njogu ( 2011) ‘ The term microfinance Institution is usually used to refer to those financial institutions that are characterized by their commitment to assisting typically poor households and small enterprises in gaining access to financial service’ such financial service may include; savings by accepting deposits from members, giving out loans, money transfer services and micro insurance. The performance concept relating to MFI is a vital and crucial issue for many reasons such as to ensure donors or investors effective and efficient utilization of billions of donors injected in MFI. Information is a very important element at the heart of many MFI’s. MFI maintains a large amount of critical data which needs to be stored, manipulated, and presented in a coherent way so that the end-users can effectively make sound business decisions. 

In others to manage this vital data, a viable information system is necessary, as it will act as a conduit through which raw data is manipulated into accessible and usable information (Main, 1999).Information system helps microfinance track, analyses, and report on all their operations (Mittchel, 2000). Many small MFI’s can initially manage with manual ledgers of spreadsheets, but in order to grow and become truly sustainable, an information system needs to be introduced to tracks all financial transactions and create report for management and regulatory affairs departments.

MFIs are not only out for poverty alleviation, they are also out to educate the poor, needy and or members of the availability of financial services which commercial Banks could not provide for them such as investment advice, give proper training and impact them with other social and institutional development issues, knowledge that will increase their financial investment know how such as women empowerment. In addition, women are the recipient of Microfinance services though many MFIs now have male members (Islam, 2009). MFIs are broken down into category one (1), category two (2) and category three (3) MFIs.

Muhammad Yunus, the founder of Grameen Bank and the father of Microfinance, found the blind spot of conventional banking system where the poor were deprived from getting access to loans without collateral. He said «poor people are bonsai people. There’s nothing wrong with their seeds. The only thing is that the society never gave them a base to grow on” this was commonly said by Muhammad Yunus (the 2006 Noble Laureate). He is the founder of Grameen Bank. From the empryonic stage until the decade of 1980s, Yunus had given poverty reduction in Bangladesh, one of the poorest countries in the world a new lifeline. Historically, Yunus found the idea of the Grameen Bank in 1976 which is the best known in the world as Microfinance institution, in the form of a closely monitored project in the village of Jobra. Due to its success, the project became an established independent bank regulated by the government in 1983 and named it «Grameen Bank”. The Grameen Bank became the largest microcredit institution in Bangladesh.

Later on, BRAC begot the secondary aim to rehabilitate refugees returning to Bangladesh from India after the 1971 devastating war in sylhet, a district in the northeast of the country which has become the world largest development organization, well known for its multidimensional approaches. As far as BRAC credit extensions are concerned, microcredit is one of the oldest and the largest programs undertaken by BRAC where it started as early as 1974. The present form of program, which was introduced in 1990, is known as the Rural Credit Project (RCP), an important component of BRAC’s larger Rural Development Project (RCP), (Abdullah & Uddin, 2013).

In Cameroon, the concept of Microfinance development can be traced back to the 19th century when money lenders were informally performing the role of new formal institutions. These lenders were mostly “Njangi” groups and cooperative credit Unions .It was on this basis that the idea of credit union came to Cameroon through Rev. Father Antony Jansen, a Roman Catholic Priest from Holland who established the St. Anthony discussion group in 1963. According to Cameroon Co-operative Credit Union League (CAMCCUL) (1993), this group was later registered in 1964 as Njinikom Credit Union Limited. It started with savings of FCFA 2,400.

When Cameroon became independent in January 1960, most Cameroonians suffered from poverty and its concomitants of poor education and health. Ahmadou Ahidjo, the Head of State, was quick to set up an economic programme known as Le Libéralisme Planifié which later became known as L’économie Autocentrée. These programs recognized the value and necessity of stimulating economic development by urging Cameroonians to contribute individually through the mobilizing of local savings which were to be deposited in commercial banks to finance investment in various projects for improved health and education. Surprisingly, these savings were not kept in banks as expected but in the ground, food containers or under mattresses. As a result, currency notes decayed, were eaten by termites, destroyed by fire, lost or stolen. Sixteen people were already members.

The first loan was granted during 1964 and the first annual general meeting was held in February 1965. In June 1968, 34 credit unions were registered in Cameroon and a joint meeting of all credit unions was held in Kumbo to consider the formation of a co-ordinating committee. This committee led to the creation of the West Cameroon Co-operative Credit Union League (WCCUL). In August 1968, the draft League and credit union bye-laws were approved. The bye-laws were similar to those of Tanganika, Canada and the United States of America. The first general meeting of the WCCUL was held in February 1969. At this meeting it was confirmed that all credit unions would deposit 25 per cent of their total shares/savings with the League as fixed deposits.

Seevanyana (2009), of Uganda, also reported that the use of Information Computer Technology (ICT) has improved efficiency, services and performance of MFIs. Khalil et al (2013), reported that the use of an Accounting Information System (AIS) has saved time and improved the accuracy and security on transactions.

However, not many MFI’s have adopted information technology systems. The problems encountered at the low level of human resources technology adoption. Ulrich (1988), stated that the key to success for change lies in the human resources, none as the initiators and continuous agent of change, the process and culture jointly improving the ability of the organizational change.

Also, companies in Cameroon make use of AIS. Companies like CAMTEL, NESTLE, for example, banks and others use AIS in their different organizations with other microfinance institutions. MFIs are now the primary sources of funds to small and medium size enterprises in Cameroon and other countries in the process of economic growth. The Cameroon microfinance sector has made remarkable progress during the last ten years, due to the dynamism of the main actors who are the State, the MFIs and development partners (Fotabong, 2012). The progress of microfinance in Cameroon has led to the opening of MFIs such as CAMCULL, RECCUCAM, BAMCUL, etc. In this study, financial performance shall be determined solely by Accounting Systems by MFIs in Bafoussam

Accounting is carried out with the use of accounting systems. Accounting systems are therefore systems which process access financial transaction in monetary terms into useful financial information for decision makers. Accounting systems can be seen in the developed and less developed countries as follows,

Considering the developed countries of the world, we can see the case in Bangladesh, Accounting Information Systems (AIS) play a critical role in supporting the financial operations and regulatory compliance of businesses, organizations, and government entities across various industries. We can also see the case of Canada, like many developed nations, utilizes accounting information systems (AIS) extensively throughout its business landscape. AIS plays a crucial role in supporting financial operations, reporting, decision-making, and compliance within Canadian organizations.

Considering the less developed countries of the world, we can see the case of Mozambique, last updated knowledge in September 2021, Mozambique, like many developing countries, is in the process of advancing its accounting information systems (AIS) to support more efficient financial operations, regulatory compliance, and enhanced decision-making. It’s important to note that the specifics of AIS adoption in Mozambique may vary across different industries and organizational sizes. As technology continues to advance, there is potential for further growth and adoption of AIS in Mozambique to drive operational and financial improvements across various sectors.  We can also see the case of Uganda, as of the last updated knowledge, there were no specific widely reported or documented cases or studies about the Accounting Information Systems (AIS) in Uganda. However, it’s important to note that the role of AIS in Uganda is likely to parallel the trends seen in many developing countries, with a growing emphasis on enhancing financial operations, regulatory compliance, and decision-making processes through technology. As the technological landscape continues to evolve in Uganda, the adoption and development of AIS within the country is likely to be an area of growth and further focus. These systems can support improved financial operations, compliance, and strategic decision-making for businesses and institutions across various sectors.

Accounting system exist in two main forms which are the Manual Accounting System and the Computerised Accounting system.

The Manual accounting system is most at times used by small business men such as sole proprietors and shopkeepers. Manual accounting systems are easily accessible and it is also very confidential. Manual accounting is basically done by the hands. Manual accounting system is very time consuming, tedious, less effective and inaccurate in generating financial information for MFIs. As a result, it is no longer necessary for institutions to keep store rooms full of ledgers and records because all of an organizations accounting information can be stored in a computer system giving rise to computerized accounting.

The emergence of computers into the consumer market in the early 1990s made way for the development of Computer software which is used for Computerised accounting. This software changed the face of business and social life forever (Hunton, 2002). Fortunately, Accounting was not left out. Soon computer programs capable of handling accounting transactions where developed. Amongst them was Lotus 1-2-3 which was developed by Lotus Corp which is now part of IBM (Ury, 2011)

Today, there is Microsoft Excel, Tally, Sage, QuickBooks, and other accounting software which together had transformed accounting and brought about which is known as Computerised Accounting. The various programs which make up this type of systems have been termed Computerised Accounting Systems (Frimpong, 2018)

Most businesses except for very small businesses now use Computerised Accounting systems. Computerised Accounting is done with the use of computers. Computerised Accounting is based on a system which was developed 5000 years ago by an Italian monk FraLuca Pacioli. This system was so well known such that even modern accounting principles are based on it, which gives way to the purpose of this research.

1.2. Statement of the Problem

MFIs continuously carryout accounting of financial transactions to make management decisions and in other to keep on with their mission. Such financial information is the basis to evaluate MFIs performance. Accounting end user information is being determined by the type of accounting systems used to process this information. Therefore, accounting systems affect financial information produced by management which is used to evaluate performance. The use of accounting by MFIs in processing financial reports and statements has raised questions on its outcomes. Accounting systems do not only involve the accounting software used but also includes the persons imputing the data. As years past, MFIs continuously carryout accounting of financial transactions to make management decisions and in other to keep on with their mission. Such financial information is the basis to evaluate MFIs performance.

The use of accounting systems by MFIs in processing financial reports and statements has raised questions on its outcomes. Accounting systems do not only involve the accounting software used but also includes the persons imputing the data.

Recently Manual Accounting Systems  (MAS) has been replaced by Computerised Accounting due to its difficulty to manage its accounts as it takes a lot of time to do a single transaction in all the accounts that it affects, it’s also time consuming, inaccurate and ineffective in managing financial input into outputs for decision Computerised Accounting Systems (CAS) which is well known for its high speed, accuracy and effectiveness in producing financial output for suitable decisions taken by the management of MFIs.

The use of Accounting Systems (Both Computerised and Manual Systems) has proven to be very unreliable in processing financial information. Also, Computerised Accounting can only be carefully built to minimize the potential of double entry errors.'(Waterfield & Ramsing, 1998). This implies that Computerised Accounting Systems are also vulnerable to errors and such errors have great impact on financial statements which are used to evaluate performance.

The Accounting Information Systems emerged as a solution to the weaknesses in the traditional performance measurement systems that relied on financial indicators and reports such as the profit and loss statement and balance sheet. Those latter financial reports indicate the financial performance or the outcomes at the end of the reporting period.

Also, another problem is that of inadequate accounting system software to suit the needs of MFIs in producing quality financial output, thus awaken wrong decisions which causes MFIs to dwell in poor performance. As experts says ‘no single accounting software or package is suitable for any entities needs'(Waterfield & Ramsing, 1998)’. And such software are usually made to suit the needs of most banks than MFIs thus it is a problem

Also as more and more Microfinance Institutions want to increase their activities, managers become increasingly aware of the need to improve their information. For many institutions, methodological issues, staff development, and even financing are no longer the critical component of growth. Instead, the most vital need is often a system to track their efficiency in a timely and accurate manner. Thus, the placement of such systems can make the difference between the success and failure of various operations within the institutions, which gives way to the purpose of this research.

1.3. Research Questions

1.3.1. The Main Research Question;

The Main Research Questions is;

What are the effects of using Accounting Information Systems on the Financial Performance of Microfinance Institutions (MFI’s) in Bafoussam?

1.3.2. The Specific Research Question;

The Specific Reasearch Questions are as follows;

What are the effects of Accounting Information Systems on the Financial Performance of MFIs in Bafoussam?

What are the effects of using Computerized Accounting Systems on the financial performance of MFIs in Bafoussam?

What are the effects of using Manual Accounting Systems on the financial performance of MFIs in Bafoussam?

1.4. Research Objectives

1.4.1. The Main Objective of the Study

The Main Objective here is ;

To examine the effects of accounting systems on the financial performance of MFIs in Bafoussam.

1.4.2. The Specific Research Objectives

The Specific Research Objectives is ;

To examine the effects of Accounting Information Systems on the Financial Performance of MFIs in Bafoussam

To examine the effects of Computerised Accounting Systems on the Financial performance of MFIs in Bafoussam.

To analyze the effects of Manual Accounting Systems on the financial performance of MFIs in Bafoussam.