ABSTRACT

The study was designed to examine the Effects of innovation on the profitability of Microfinance in Buea. Specifically, to investigate the effect of product innovation on the profitability on UB finance in Buea. Assess the influence of process innovation on the profitability of UB finance in Buea and to examine the effect of institutional innovation on the profitability of UB finance in Buea Literature was reviewed conceptually, theoretically and empirically. Using a case study design, the study sample 50 microfinance workers using a questionnaire. Therefore, the study made use of quantitative data. The quantitative data was analyzed using SPSS version 23 and presented descriptively using tables, scattered, frequency and percentages and the inferential results were presented using the Pearson Product Moment Correlation Coefficient. Findings from the analysis revealed that all the alternative hypothesis were rejected and null hypothesis accepted. It was therefore, concluded Product innovation effectiveness, risk assessment, and institutional innovation are statistically significant and strong positive determinants of profitability in Microfinance Institutions in Buea. In line with this, it is recommended that MFIs should undertake a comprehensive review and overhaul of their product innovation systems. This includes; Prioritizing Accurate Financial Reporting: Invest in training and technology to ensure that internal controls are effective in generating accurate and timely financial reports, enhancing audit frequency and quality, develop and enforce robust regulatory frameworks and also that future research could delve deeper into the impact of specific product innovation mechanisms (e.g., specific types of audits, segregation of duties for particular transactions) on different aspects of profitability .

Keywords:    innovation on the Profitability, Microfinance

CHAPTER ONE

INTRODUCTION

1.1 Introduction

The study on the effect of innovation and the profitability of Microfinances in Cameroon is a crucial area of research that seeks to explore the relationship between innovation and financial outcomes in the banking sector of a developing economy. Innovation in the context of this study encompasses various dimensions, including product innovation, process innovation, and institutional innovation. Microfinances play a vital role in the economy by providing financial intermediation services, facilitating economic growth, and supporting the development of various sectors. In today’s dynamic and competitive business environment, innovation has emerged as a key driver of sustainable competitive advantage and financial success for businesses, including Microfinances.

This work is titled the effect of innovation and the profitability of Microfinances in Cameroon. This research is structured into five (5) chapters. Chapter one gives an introduction to the research explaining the background to the study, the main focus of the study and its significance to the Microfinancing sector.  Chapter two is about the literature review and focuses on conceptual, theoretical as well as empirical literature laying emphasis on the information that was already available before this research with an analysis of key data for better enlightening on the subject matter of innovation in relation to profitability of Microfinances in Cameroon. Chapter three gives the methodology of the research, giving details on the design of the research, the types of sampling used, sources of data collected and the explanation of the vital aspects of the research. Chapter four focuses on data analysis and interpretation of results. This chapter will give importance to the data we collected with a detailed analysis to clearly bring out trends, significant changes and issues that will reveal the impact of innovation on Microfinances profitability more clearly. Lastly, chapter five contains a summary key finding from the research work, recommendations necessary for the banking sector regarding innovation, and a conclusion on the matter.

1.2 Background of the Study    

Profitability of depository financial institutions has experienced a mixed results in the American banking market (Berger & Humphrey, 1997), European banking markets, Asian banking markets and the African banking sector (Altunbas et al., 2001).and according to Weigand (2013), the banks’ revenue growth, profitability and levels of balance sheet capital decline from 2007-2009 in America, while the European microfinance continue lagging in terms of banks’ revenue growth, profitability and levels of balance sheet capital. According to Ayadi et al. (2012) factors contributing to European banks’ decline are more dangerous and include the persistent economic disparity between stronger and weaker Eurozone countries and the European Central Bank’s painfully slow efforts to reduce exposure to systemic risk, compared with countries such as the U.S. and the U.K. similarly in Asia, depository financial institutions touching and interesting profitability over the years.

In Asia and particularly in the Kingdom of Kuwait, depository financial institutions contribute to 16.7% of the Kingdom’s total real GDP in 2013 (Alemadi, 2021). By November 2014, banking sector assets stood at over US$189.1 billion, more than twelve times annual Gross Domestic Product. In the United States of America, Microfinances contrasts sharply with that of their European counterparts in 2012. By the end of 2012, 15 of the 20 largest Microfinances in the U.S. posted record setting revenues, with 12 of these microfinances also earning record profits (Weigand, 2013). The financial profitability of these microfinance may mean that they are ready to compete in a free-market environment and require no further post crisis regulatory support. According to Weigand (2016), financial profitability of 20 largest Microfinances in Japan, U.S. and Europe from 2003-2015 shows that the stocks of U.S. Microfinances continued outperforming Japanese and European microfinance during the 2014-2015 period, but all three sets of microfinances underperformed their regional stock indexes from 2014-2015. Large microfinance in Japan, the U.S. and Europe continue to struggle to grow their total revenue post-crisis

In Africa and Sub-Saharan Africa (SSA) in particular, the global banking or depository financial sector during the last two decades has experienced major transformations in its environment, resulting in a significant impact on its profitability. Poor profitability of microfinance (La Porta et al., 1997), has been largely due to lack of openness to foreign competition. Privatization which took place in 1980s and 90s was expected to improve and boost profitability of the banking sector in Africa.

The Microfinance sector in Cameroon faces several challenges, including regulatory constraints, technological limitations, and intense competition from both traditional and non-traditional financial service providers. In this context, innovation becomes a critical tool for microfinance to differentiate themselves, attract and retain customers, and create sustainable value for stakeholders. Product innovation involves the development of new financial products and services tailored to the specific needs of customers, thereby expanding market reach and generating additional revenue streams. Process innovation focuses on streamlining internal operations, automating tasks, and enhancing operational efficiency to reduce costs and improve overall profitability (Smith, 2018).

There has been a substantial change in, micro finance institution over the past years. These changes have been mostly evidenced on the way customers are served in the microfinances (Idowu, Ngumi, &Muturi 2016). micro finance institution changed dramatically although the traditional functions as performed by the microfinance remains unchanged where there is significant increase in the alternative channels owned by the bank for delivery of financial services (Wachira, 2013). One of the best ways to new technologies has been traditional delivery methods (Domeher, Frimpong, & Appiah, 2015). According to Sweeny and Morrison (2004), delivery of services and retail banking has been greatly changed by the innovations in the banking industry. New ways of accessing balances, transfer of funds, paying of bills are some of activities which are being supported by the Collaboration of hardware, software and telecommunication companies with the banking sector.

Emergence of the standardized teller machine (ATM), agency banking and mobile banking are some of innovations in ICT which have major impact in micro finance institution and results to novel delivery of daily services (Ahmad, 2006). The ATMs for instance, has been conducting much of duties than personnel in the counter and has been one of the major improvement and success of innovation in banking sector with a high benefit.

The internet has revolutionized the business strategies of many services firms. In the banking sector, a few pioneering microfinances started to offer products via the internet in the mid-nineties. These new entrants bypassed traditional microfinance through electronic channels, offering banking services without the support of a network of physical branches. The investment in ‘clicks’ instead of ‘bricks’ was seen as a means to reduce costs of the retail network, and offer lower fees and higher rates while improving customer convenience.

Empirical study of previous studies’ outcome of innovation and profitability has had mixed results. According to Ozili (2017), digital finance had a positive effect on financial profitability in emerging and advanced economies. Franscesa and Claeys (2010), concluded that innovations had insignificant impact on financial profitability while Adhiambo (2014), ended that financial innovation had significant effect on financial profitability. Fentaw and Thakkar (2022,) revealed that financial innovation has positive and significant effect on financial profitability of private Microfinances in Ethiopia. Okoth and Muia (2020), studies revealed that financial innovativeness of Microfinances had a positive and significant effect on financial profitability of banks. The study further revealed that financial innovation constructs positively and significantly correlated with financial profitability. From these results, it is clear that innovativeness dimension of Microfinances significantly affects financial profitability of the banking sector in Cameroon.

1.3 Statement of the Problem

There has been a rapid growth in the customer base of the Microfinances in Cameroon over the years given by (Tameta, 2024). This simply implies massive growth in deposits, loans, withdrawals and other transactions. Microfinance under the prudential regulations must keep proper records of all their transactions for tax and regulatory purposes. Due to this rapid growth in the scale of the microfinance transactions, it became difficult for the manual systems to handle these large transaction volumes. This called therefore given rise to innovation.

Being innovative can potentially establish a competitive edge for financial institutions such as Microfinances. This is because, innovative microfinance can expand their market through establishment of new channels of product distribution, new products and new markets. Due to stiff competition in the financial sector, microfinance need to be innovative in order to remain profitable (Mabrouk & Mamoghli 2010). In this respect, microfinance engage in financial innovations to improve service delivery which is believed to foster the chances of making profits by the firms. Malhotra and Singh (2009), views that financial innovations aid in cost management but when empirically tested in India, financial innovations did not offer much financial benefits. Therefore, microfinance adopt financial innovations to improve organizational profitability and remain competitive. However, innovations tend to differ with respect to the timings of adoption (Learner & Tufano 2011).

Despite great outlook of the Kenyan banks, there has been slow growth in the profitability of Microfinances as a result of increased operating expenses as these microfinance transition to more innovative products. Local microfinance has been experiencing great losses and have not been able to realize more earnings despite increased financial innovations as a result of competition from local mobile service transfer services like Mpesa and Airtel Money hence lowering their profitability through low returns to investments (Ngalyuka, 2013; Mimano, 2014). In addition, other most frequent problems in using banking services such as transaction errors have reduced banks’ credibility hence profitability (Muiruri & Ngari, 2014). This study therefore seeks to assess the role of financial innovations in influencing profitability of Microfinances in Kenya

The research questions guiding this study revolve around understanding the extent to which different dimensions of innovation contribute to the financial profitability of Microfinances in Cameroon. This study aims to generate actionable insights that can inform the development of effective innovation strategies tailored to the specific needs and objectives of microfinance operating in Cameroon. Ultimately, the findings of this study have the potential to enhance the competitiveness, sustainability, and growth of Microfinances in Cameroon by leveraging innovation as a strategic driver of financial success.

None of the studies has been put forward to look at the effect of innovation on profitability of microfinance in Cameroon. This creates an academic gap that this study seeks to fill

1.4 Research Questions

1.4.1 Main Research Question

What is the effect of innovation on the profitability of Microfinances in Cameroon?

1.4.2 Specific Research Questions

1. To what extent does product innovation affect the profitability of Microfinances in Cameroon?
2. What is the effect of process innovation on the profitability of Microfinances in Cameroon?
3. To what extent does institutional innovation affect the profitability of Microfinances in Cameroon?

1.5 Research Objectives

1.5.1Main Research Objective

To investigate the effect of innovation on the profitability of Microfinances in Cameroon.

1.5.2 Specific Research Questions

1. To analyze to what extent does product innovation affect the profitability of Microfinances in Cameroon
2. To assess the effect of process innovation on the profitability of Microfinances in Cameroon
3. To examine to what extent does institutional innovation affect the profitability of Microfinances in Cameroon

1.6 Research Hypothesis

HO₁; Product Innovation does not significantly affect the profitability of Microfinances in Cameroon

HO₂: Process innovation does not significantly affect the profitability of Microfinances in Cameroon

HO₃: Institutional innovation does not significantly affect the profitability of Microfinances in Cameroon