ABSTRACT

The purpose of the study was to evaluate the effects of budgetary control on the financial performance of Microfinance institutions in Bamenda. The study was guided by the following research questions: What is the effect of resource allocation and investment decisions on financial performance of Microfinance institutions in Bamenda?, what is the effect of monitoring and variance analysis on financial performance of Microfinance institutions in Bamenda? And what is the effect of financial planning and forecasting on the financial performance of microfinance institutions in Bamenda?, resource allocation and investment decisions, monitoring and variance analysis and financial planning and forecasting. In order to collect the data needed for this study, the source of data was the primary data with the use of questionnaires. The study reveals that resource allocation and investment decisions have a positive and significant effect on financial performance of Microfinance institutions in Bamenda. Monitoring and variance analysis had a positive and significant effect on financial performance of Microfinance institutions in Bamenda while financial planning and forecasting have positive and significant effect on financial performance of Microfinance institutions in Bamenda.

Key words:Bamenda, Budgetory Control, Financial Performance and Microfinance institutions.

CHAPTER ONE: INTRODUCTION

1.1 Background of the Study

Managing the performance of most institutions has been a complex task due to the changing organizational environment. However, most managers realize the importance of addressing the organization’s performance through budgetary controls for short and long-term success. The provision of services is limited by the lack of valuable insights and trends necessary in driving the performance of most institutions. Budgeting makes achieving the project in any institution easier if they are within the set objectives and goals. What is more, budgeting assists in controlling the daily operations of any business in a country. The approach makes specific project goals are achieved within a short period using the available resources. Setting the budgets makes it possible to outline current and future resources to ensure they are synchronized with organizational goals. According to Otieno (2019), budgetary control measures involve continuous planning processes that offer information on the actual expected results compared to the planned budgets in any organization. Budgetary control plays a vital role in institutions through the establishment of effective management control. In addition, budgets are essential in monitoring, planning, and controlling the finances availed for any project (Otieno, 2019). It helps provide an estimation of the expenditures and the income of a company for a specific period. The analyses provided in the budget enable most parastatals to align with the economic environments leading to the overall success of the companies.

Budgetary control plays a vital role in institutions through the establishment of effective management control. In addition, budgets are essential in monitoring, planning, and resource allocation and investment decisions in the finances available for any project (Otieno, 2019). It helps provide an estimation of the expenditures and the income of a company for a specific period. The analyses provided in the budget enable most parastatals to align with the economic environments leading to the overall success of the companies.

Budgetary control is the process of developing a spending plan and periodically comparing actual expenditures against that plan to determine if it or the spending patterns need adjustment to stay on track. This process is necessary to control spending and meet various financial goals. Organizations rely heavily on budgetary control to manage their spending activities, and this technique is also used by the public and private sectors (Dunk, 2009). Budgetary control is system which uses budgets as a means of planning and controlling all aspects of producing and selling commodities or services. This is true as we tend to prepare revenue and expenditure variance analysis to be able to deduce area of divergences for which management needs to watch to avoid embarrassment as any adverse variance will translate in to inability to meet the corporate objective which will eventually lead to disagreement with stakeholders (Batty, 1982).  Budgetary control is important because it allows organizations to operate within their means and enables them to plan for the future thus giving them a sense of direction and consequently increases firm performance (Nafisatu, 2018). Firms that apply budgetary control strategies often tend to enhance organization decision making, effectiveness as well as productivity. Budgeting is a statement in financial terms of the total revenue to be generated from a time period and the expenses to be incurred for that same period. The budget in terms of revenues gives a bottom line for revenues to be met while on the other hand, it gives a maximum amount of money to be spent. This revenue target and expenses limit gives institutions a forecasted profitability level for that period Internal controls are appropriately managed with a sound budgeting system because they ensure the company does what it is supposed to do (Muhunyo, & Jagongo, 2018). However, the budgeting system is affected by factors such as inflation, policies of taxation, interest rates, and economic situations in a particular country. Such factors have to be considered when budgeting because the currency’s value determines the budgets to set. The value of the money usually controls the financial interactions, and that affects the budgets made by those institutions. The impact of inflation in Kenya will affect the budgets made because the currency is not as stable as other developed countries.

According to the local government and accounting manual, Uganda 2007 budget can be defined as an annual plan of a local government income from the revenue collected, Government grants, and all other revenue source and how much local revenue will be spent in accordance with their objectives, needs, and priorities. And this is mainly concerned with both the central government and local governments. The chartered institute of management Accountant (CIMA) of England defines a budget as a plan quantified in monetary items prepared and approved prior to a defined period of time usually showing planned income to be generated and expenditure to be incurred during that period and the capital to be employed to attain a given objective and this definition of (CIMA) covers budgeting activities largely in the private sector enterprises. The major objective of budgeting in financial institutions and micro-financial institutions in Bamenda to be precise is to ensure efficient and effective utilization of funds and for the realization of the objectives of the institution. However, the absence of an appropriate budgeting system in the micro-financial institution will result in poor operations as there may be no goals and objectives to be achieved hence leading to poor performance. The unaccepted consequences of productivity and income levels of most developing countries remain issues of great concern. From 1950 to 1970, a number of developing countries and their donor partners implemented the policy of subsidization of agricultural activities for small and low-income farmers as a means to boost productivity and income levels. Since the mid-1980s, such subsidization polices have been criticized for diverting the center 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 micro-finance institutions (MFIs), began focusing on the activities of low-income farmers. Micro-finance institutions switched focus from agricultural subsidies to target aid to the poor and help establish local institutions which became financially and operationally stable for such objectives. Microfinance institutions essentially operate on a combination of financial products (micro-credit, micro-leasing, micro-insurance, micro-savings, and money transfers) targeting specific groups 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 credits and services provided by classical financial institutions and banks. Microcredit, started in Europe at the end of the nineteenth century with the creation of the Raiffaisen example in Germany or the local case of mutual agricultural credit in France, and in Africa with the protective sackings, took truly its rise in the 1980s. From the evolution, the first experiments were by Mohammed Yunus in Bangladesh and the Grameen Bank in 1983.The Grameen Bank, launched in 1976 by Mohammed Yunus in Bangladesh, remained the first to have shifted focus from individual to group loans.

The concept of microfinance is not new. It is an approach that has been used by governments, regional agencies and other international plays in the development arena to improve on the livelihood of the poor. Even though this approach (lending to the poor) has existed in the world for quite some time, it was formalized by Mohammed Yunus in Bangladesh during the 1970’s, in his efforts to combat poverty and provide resources to the poor via the Grameen Bank and the microfinance model. The commercialization of microfinance is a means to an end, and that end is the reduction and ultimate lamination of extreme poverty from the face of the earth. (Yunus 1999) Microfinance refers to a variety of financial services that target low-income clients, particularly women (Sivachithapp, 2013). Since the clients of microfinance institutions (MFIs) have lower income and often have limited access to other financial services, microfinance products tend to be for smaller monetary amounts than traditional financial services. These services include loans, savings, insurance, training and remittances. Microloans are given for a variety of purposes, frequently for microenterprise development. The diversity of products and services offered by microfinance reflects the fact that the financial needs of individuals, households, and enterprises can change significantly over time, especially for those who live in poverty (Howson, 2013).

Despite all the efforts and strides to create a poverty free ecosystem the world over, the rate of poverty is still relatively very high in the developing world (Chenaa and Kimengsi, 2017). Sub-Saharan Africa for instance still records many slumps and high rural poverty. It is reflected in many forms and causes multiple harms. Lack of basic necessities such as food, water, and shelter, high rate of unemployment, prevalence of diseases, homelessness, and marginalisation are some of the common features observed among the poor who also reinforce to each other (Ogwumike and Akinnibosun, 2013).

For many years in Cameroon, the micro-finance sector has evolved and has been transformed into a system of provision of short term loans, savings, credits, money transfers, etc 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 Bamenda and other towns in the process of economic growth. Although finance literature explains the emergence of the micro-finance industry as an answer to an unfulfilled demand (Littlefield & Rosenberg, 2004), MFIs are not evenly spread around the globe and Bamenda in particular. Hardy et al. (2002), by comparing Cameroon and Gabon concludes that even though the countries have similarities (common currency, comparable per capita income, etc.), the microfinance industry is more expanded in Cameroon than in Gabon. The environment in which MFIs operate plays a vital role in the cross-country differences. While a lot has been written on factors influencing the development of the financial sector as a whole, almost nothing has been written on the factors determining microfinance performance and its macro environment. Most works on the microfinance industry focus on the institutional side of the organizations (Hudon, 2006). The impact of MFIs on poverty reduction, economic growth and women empowerment has increasingly received greater attention in many developing countries like Cameroon. Conversely, much has not been done linking the development of the microfinance industry with macro-economic activities.

The purpose of budgetary control is to provide a forecast of the revenues and expenditures, this is achieved through constructing a model on how a business might perform financially speaking, events and plans are carried out, (Churchill, 2010). The Association for Microfinance Institutions (AMFI) was established in 1999 to help in the capacity building of the Kenya Microfinance Industry. Since its inception, it has made the provision of financial services easier and more affordable to the population in rural and marginalized areas. This will result in the improvement of quality and widen the funding base of MFIs. It will also begin integrating micro finance institutions with the formal financial system thus enabling regulators to define standard procedures for the industry (Kathomi, Maina & Kariuki, 2017).

Microfinance can pay for itself, and must do so if it is to reach very large numbers of poor households” (CGAP 2005). Notably unless microfinance providers charge enough to cover their costs, they will always be limited by the scarce and uncertain supply of subsidies from governments and donors. The main underlying assumption in this argument is that microfinance is already good for the clients, and therefore what is really needed is to make the financial service available to as many poor people as possible. (Morduch, 2000) states that this kind of enthusiasm for microfinance rests on an enticing win-win proposition that: Microfinance institutions that follow the principles of good banking will also be the ones that alleviate the most poverty. The assumption that with good banking practices it is possible to cover costs and operate in a sustainable manner to continue serving clients and alleviating poverty (Morduch, 2000)

Although many people complain about budget and its process, budgets are indispensible in a large modern organization as the benefit that occurs from budgets and its control is much greater than the cost involved. In view of this, the fact that resources are scare, coupled with high competition that permeate most business, budgets when rightly applied, would be an effective tool for planning and control, especially large organization as Nepal Oil Corporation (Pandey, 1985).Performance refers to the extent of which an organization’s goals and objectives are achieved effectively and efficiently while financial performance is general measure of a firm’s overall financial health status over a given period of time. Financial performance can be measured by using variable such as firm’s cash flow, working capital, cost base, borrowing as well as firm’s growth (San and Heng, 2011).

Organization’s Performance (OP) is partly dependent on its technology, processes, systems and employees. It is concerned with efficiency and effectiveness of operation. It is an indicator which measures how well an enterprise achieved their objectives (Hamon, 2003). Blair (1995) puts forward major areas in which performance can be examined.

Financial performance explains how an organization uses the assets it has to generate revenues through its primary mode of business. Financial performance is also an indicator of the firm’s general financial health and outlook over a given time frame. It shows how well a firm is utilizing the resources at its disposal to maximize the wealth and profitability of its shareholders (Wang & Sarkis, 2017).  These include: liquidity, profitability, efficiency and debt repayment capability. Empirical studies by Fonjong (2007) show a positive link between budgetary control and financial performance and have a good motivational impact by involving managers in the budgeting process and by providing incentives to managers to help achieve the business’s goals and objectives. It can be said that budgetary control is one of the key tool which leads to the realization of benefits in the financial performance in the organization. Budgetary control involves the preparation of a budget, recording of actual achievements, ascertaining and investigating the differences between actual and budgeted performance and taking suitable remedial action so that the budgeted performance may be achieved effectively (Kinyua, 2015). By implementing proper budgetary control planning, the firm is able to reduce costs and improve on quality of its services based on its budgetary allocations. This helps to reduce on costs and achievement of goals is enhanced thus organizational effectiveness. By budgeting, managers coordinate their efforts so that objectives of the organization harmonize with the objectives of its parts. Control insures that objectives as laid down in the budgets are achieved (Churchill, 2001).

The use of budgetary control in profit planning to improve the financial performance of the organization is tremendous. It can be used in matching expenditure and income in order to make some profits. And to the extent that budgetary control is frequently applied in profit planning, its contribution to the realization of profits and improve financial performance cannot be doubted. In recent years, budgetary control has been frequently examined to find out its relationship with financial performance of the organizations. The existence of many organizations at present can only be justified in terms of their financial performance. Therefore, to such organizations, anything, which improves their financial performance, is worthwhile. The literatures mentioned above clearly depicts that budgeting is a useful tool that guides firms to evaluate whether their goals and objectives are achieved. Many research and studies has been conducted internationally and indicated that a positive significant relationship exists between budgetary control and financial performance of state corporations

The history of microfinance is closely linked with poverty reduction. Although the beginning of cooperative savings and credit activities can be traced back as far as in 1849 with the foundation in Rhineland of the first cooperative society of saving and credit by Raiffeisen, it is truly with Yunus in 1976 with the creation of the Gramen Bank that one can situate the birth of “modern microfinance” (Blondeau, 2006). Microfinance was originally conceived as an alternative to banks, which in most developing countries serve only 5 to 20% of the population (Gallardo et al., 2003), and informal moneylenders. With the passage of time, the microfinance sector has evolved. Microfinance institutions now have more than 100 million clients and achieve remarkable repayment rates on loans (Cull et al, 2009). The rapid growth of microfinance has brought increasing calls for regulation, but complying with prudential regulations and the associated supervision can be especially costly for microfinance institutions (Cull and al., 2009). Since regulation remains a precondition for deposit taking in many countries, more MFIs seek to transform into regulated entities to access cheap and local currency deposits. Regulation also opens the door to a variety of funding opportunities and helps to reduce the overreliance on subsidies. Donors and microfinance practitioners are well aware that micro lenders need to prepare for the day when subsidies disappear (Aghion and Morduch, 2005).

Microfinance has been defined therefore as “a credit methodology that employs effective collateral substitutes to deliver and recover short-term, working capital loans to micro entrepreneurs”(CGAP1 2003). The roots of microfinance lie in a social mission of enhancing outreach to alleviate poverty. More recently there has been a major shift in emphasis from the social objective of poverty alleviation towards the economic objective of sustainable and market based financial services (Rauf and Mahmood, 2009). The difference between microfinance and commercial lending lies within the concepts of joint liability or group lending, dynamic incentives that allow for an increase in size of loans over time, regular repayments schedules and alternative collateral through forced savings (Gine 2003). For example, joint liability helps to overcome adverse selection (borrowers know who in their community is a credit risk) and moral hazard (borrowers can monitor each other), and to enforce auditing (by ensuring borrowers are honest in the case of default) and repayment as borrowers can impose social sanctions on defaulters (Ghatak and Guinnane, 1999). These alternatives to collateral are especially important for borrowers who do not have assets to pledge, and for lenders who operate in countries with weak secured lending laws and enforcement. As the number of MFIs has dramatically increased, their mainsource of funds, nongovernmental organizations (NGOs), hasgained leverage in demanding more transparent accounting, audits, and, in some cases, clear plans to attain financial sustainability. Most of the estimated 7,000 MFIs have fewer than 3,000 clients and less than a 95% repayment record (Garber, 1997). Many of these organizations have been unable to control administrative costs. For some MFIs, high administrative costs are simply a way of doing business that enables staff members to earn a living through the generosity of NGO subsidies. Job creation in the MFI itself was not the original goal, though for some, job sustainability may have become more important than minimizing expenses. This is no longer a viable strategy. Competitiveness in the market for funds is prompting a return to the original MFI mission motivated by a need for continuing access to capital. The possibility of comparing publicly available audited statements of a significant number of MFIs with any MFI seeking funding may inspire some MFIs to alter financial figures to reflect a more robust performance than actual (Woolcock, 1999). Lack of transparency or even outright dishonesty creates difficulties for NGOs seeking to determine which MFIs can best use funding. Increasingly, NGOs require MFIs to adapt standard accounting practices to ease comparisons. Accion Camel has been adopted by a growing number of MFIs to report a variety of financial measures, such as capital adequacy, asset quality, management, earnings, and liquidity management (Saltzman & Salinger, 1998). Budgetary control and financial performance are the most critical aspects of managing microfinance institutions (MFIs). Effective budgetary control enables MFIs to monitor and manage their resources efficiently, while financial performance  reflects their outcomes and archievements of their operations. It sets financial targets, controls with the actual results and helps to archieve the set goals of the organization. This include budget preparation, budget implementation and budget review ( Armendariz et al., 2015) and (Ledgerwood J., 2006).

1.2 Statement of the Problem

In many profitable companies, budget is actually a key to their success (Horngren, Datar and Forster, 2012). Budgeting is critical to financial success. Studies of differences between the process of compiling budgets and subsequently adhering to them as closely as possible (Batty, 1970). The terminology used to describe budgets varies among companies. Some companies refer to budgeting as targeting and many companies refer to the budget as a profit plan (Horngren, Datar and Forster, 2012). Effective budgeting depends on a sound organizational structure. In such a structure, authority and responsibility for all phases of operations are clearly defined. Budgets based on research and analysis should result in realistic goals that will contribute to the growth and profitability of a company. In addition, the effectiveness of a budget program is directly related to its acceptance by all levels of management (Pretabh, 2010) successful and unsuccessful new businesses consistently find that businesses that carefully develop and follow budgets increase their chances of survival and success. Budgeting is most useful when it is integrated with a company’s strategy. After organizational goals, strategies and longrange plans have been developed, companies prepare budgets. In developing the budget, each level of management should be invited to participate. Budgets are probably the most widely used control devices. The benefit of budgetary control as profit maximization; a budgetary control aims at profit maximization of an organization through proper planning and coordination of different functions, proper control over various capital and revenue expenditures and putting resources in to best use. Coordination; achieved through working of different department and sectors (Preetabh, 2010).

Many micro-financial institutions in Cameroon and particularly in Bamenda such as Bamccul, CCC Plc etc,  have shown poor performance which can be attributed to poor or inefficient budgeting practices though not leaving out other factors like internal control on resources. This as a factor has kept a lot of shareholders and other investors wondering if there exists any relationship between budgeting and the performance of the institution. It has often been considered as wastage of resources for financial resources to be diverted for the use of such control. As some major micro-financial institutions closed down, others continue to battle in the competitive market with commercial banks since they have no clear cut distinction in the market in addition to the ongoing crisis in the area causing many shareholders to doubt an investment in this sector. Hence triggering the argument that there is a need for effective budgeting practices in micro-financial institutions to impact their performance In clearing this doubt of the shareholders, the need to prove the correlation between budgeting and its effects on these micro-financial institutions. The research on this is important so as to know if resources can be employed in the budgeting process to improve performance since the micro-financial institutions serve as the number one means of funds to most SMEs in Bamenda. Thus the study which seeks to investigate the effects of budgetary control on the financial performance of Microfinance institutions in Bamenda.

1.3 Research Questions

The research questions of this study shall be divided into two sections, amongst which are the main research questions and the specific research questions

1.3.1- Main Research Question

– What is the effect of budgetary control on the financial performance of Microfinance institutions in Bamenda?

1.3.2- Specific Research Questions

– What is the effect of resource allocation and investment decisions on financial performance of Microfinance institutions in Bamenda?

– What is the effect of monitoring and variance analysis on financial performance of Microfinance institutions in Bamenda?

– What is the effect of financial planning and forecasting on the financial performance of microfinance institutions in Bamenda?

1.4- Research Objectives

The research objectives of this study shall be divided into two sections, amongst which are the main research objectives and the specific research objectives. They are stated as follows

1.4.1- Main Research Objective

– To investigate the effects of budgetary control on the financial performance of Microfinance institutionsin Bamenda

1.4.2- Specific Research Objectives

– To investigate the effects of resource allocation and investment decisions on financial performance of Microfinance institutions in Bamenda

– To investigate the effects of monitoring and variance analysis on the financial performance of Microfinance institutions in Bamenda.

–  To investigate the effects of  financial planning and forecasting on the financial performance of microfinance institutions in budgeting in Bamenda.