CHAPTER ONE

GENERAL INTRODUCTION

1.1 Background of the Study

Every good economic system of a country is highly dependent on a sound financial system. No good financial system can do without well-structured and efficient financial institution. Credit is essential in the modern world and creates wealth, provided it is used wisely (Ciby Joseph 2006). Credit creation is the main income generating activity for the banks. But this activity involves huge risks to both the lender and the borrower. The risk of a trading partner not fulfilling his or her obligation as per the contract on due date or anytime thereafter can greatly jeopardize the smooth functioning of the institution. According to Basel (2000), credit risk is the potential that bank borrower or counter party will fail to meet its obligations in accordance with the agreed terms. It is a risk of borrower default, which occurs when counter party defaults on repayment.

Furthermore, in 2008, there was a great recession and the primary cause of the great recession was the credit crunch where the global banking system became short of funds leading to a decline in confidence and decline in bank. Although its effects were definitely global in nature, the great recession was most pronounced in the United States where it originated as a result of the subprime mortgage (home loans granted to borrowers with poor credit histories) crisis and in Western Europe. Because of this recession, a lot of financial institutions were forced to stop lending especially to the poor because; most poor people lack collateral security. It is widely recognized that the exclusion of the poorest lenders, particularly in the rural areas, from the financial institutions is one of the main obstacles for sustainability, development and poverty reduction. Indeed, it is almost impossible for rural poor people who live in riskier environments and who lack asset collateral, formal wage job and limited credit history loans to obtain credit from financial institutions because lending to them became very risky and very costly.

In Africa, credit was largely appreciated in the 1950’s when most banks started opening the credit sections and to give loans to citizens. This was a good idea but then most microfinance institutions had poor management strategies. In the reports of the bank of Ghana, they identified some of the causes of failed financial institutions because of credit risk as management incompetence, non performing credit portfolios, and ineffective board of directors, poor loan recovering and corruption. Cameroon is one of the developing countries in Africa that promotes microfinance institutions. As a result, non-performing loans is on the increase thus lowering the level of performance of microfinance institutions. The heart of every financial system lies in the banking sector. Yet, credit risk continues to be a problem in African banking systems.

To continue, Micro finance is the major financial intermediary in any economy and they are the major providers of credits to the household and corporate sector, and operate the payment mechanism. They deal with both retail and corporate customers, have well diversified deposit and lending book and generally offer a full range of financial services. It has been proven that microfinance programs have a great contribution in reducing poverty. More importantly, it has been proven that microfinance can be viewed as a development strategic tool by enabling poor entrepreneurs to initiate their own business, teaching them how to protect the capital they have, to deal with risk and to expand the circle of their economic activities. According to Julia Kagan, microfinance also called micro credit is a type of banking service provided to unemployed or low income individuals or groups who otherwise would have no other access to financial services.

1.2 Statement of the problem

The sustainability of microfinance institution depends largely on their ability to collect their loans as efficiently and effectively as possible. Microfinance institutions use the deposits to generate credit for their borrowers, which is the main revenue generating activity for most financial institutions.

Despite all efforts put in place by microfinance institutions in Cameroon, their credit risk in the form of non-performing loans still exist on their bank’s portfolio. In addition, the credit experts of these banks sometimes have overlapping functions, which result to them being mixed up with the type of risk to focus on, since other types of risks such as interest rate risk, market risk, liquidity risk, currency risk and operational risk also exist (Fabrice 2018).

The Central Bank Supervision Report (2005) on the Kenyan banking system indicate that most banks that collapsed in the late 1990s were as a result of poor management of credit risk which were portrayed in the high levels of non-performing loans.

Abdallah Omah (2016) carried out a study on management strategies of managing credit risk among other measures such as operational cost efficiency ratio, liquidity ratio and non performing ratio to establish the relationship between credit risk and profitability of commercial banks in kirinyaga Country.

Although many scholars have carried out research on this topic, each of the researchers had their own areas of interest. Some researchers, alongside myself after having carried out research on a few other credit unions and gathering facts on the negativity of credit risk on the functioning of these organizations, and other impacts of credit risk on bank performance, is in this regard that this study was design to determine whether the effects of credit risk management (client appraisal and credit risk control) on the financial performance of Miro-finance institution in Bamenda is positive or negative

1.3 Objective of the Study

1.3.1 The main objective

The main objective is to examine the effect of credit risk management on the financial performance of  Miro-finance institutions in  Mezam

1.3.2 Specific objective

• To determine the effect client appraisal on the financial performance of Miro-finance institutions in Mezam?
• To determine the effect of credit risk control on the financial performance of Miro-finance institutions in Mezam?

1.4 Research questions

The study attempting to address the following questions:

1.4.1 Main research question

• What is the effect of credit risk management on the financial performance of Miro-finance institutions in Mezam?

1.4.2 Specific research questions

• What is the effect of client appraisal on the financial performance of Miro-finance institutions in Mezam?
• What is the effect of credit risk control on the financial performance of Miro-finance institutions in Mezam?

1.5 Hypothesis

H₀₁: Client appraisal does not have a significant effect on the financial performance of Miro-finance institutions in  Mezam

H₀₂ Credit risk control does not have a significant effect on the financial performance of Miro-finance institutions in Mezam.