CHAPTER ONE

INTRODUCTION

1.1 Background of Study

Microfinance institutions (MFIs) have evolved significantly since their inception, focusing on providing financial services to low-income individuals and small businesses worldwide. Central to their operations are lending and recovery strategies, which have direct implications for their performance. In terms of outreach, the global microfinance sector has made considerable progress in expanding financial services to underserved populations. According to the World Bank’s Global Financial Inclusion Database, the number of microfinance borrowers increased from 92 million in 2004 to 138 million in 2018. This growth in outreach has contributed to improved access to credit, savings, and other financial services for the unbanked population (World Bank, 2020). The origins of microfinance can be traced back to the 1970s when organizations like Grameen Bank in Bangladesh and Accion International in Latin America began offering small loans to the poor (Mersland & Strøm, 2015). Over time, MFIs have grown and diversified, expanding their services beyond credit provision to include savings, insurance, and remittances (Hoff & Stiglitz, 2016). This expansion has necessitated the development of effective lending and recovery strategies to ensure the sustainability and success of these institutions.

Lending strategies employed by MFIs are critical to their financial performance, as they determine the types of clients served, loan amounts, and repayment terms. According to Karim et al. (2018), factors such as creditworthiness assessment, interest rates, and loan diversification can significantly influence an MFI’s financial sustainability. Additionally, innovative lending approaches like group lending, individual lending, and village banking have been developed to cater to diverse client needs and improve portfolio quality (Hoff & Stiglitz, 2016). Recovery strategies are equally essential for MFIs, as they ensure timely loan repayments and minimize credit risk. Common recovery strategies include regular follow-ups, client training, and incentive-based schemes (Mersland & Strøm, 2015). Recent technological advancements have also led to the adoption of digital platforms for loan disbursement and repayment, improving the efficiency and effectiveness of recovery efforts (Karim et al., 2018).

Microfinance institutions (MFIs) have witnessed significant growth in Africa over the past few decades, providing essential financial services to the underserved population. African MFIs have adopted various lending strategies to cater to the diverse financial needs of their clients. These strategies include group-based lending, individual lending, and village banking (Bogan, 2012). In the case of Cameroon, a study by Fonkwo et al. (2019) revealed that lending strategies employed by MFIs significantly impact their financial sustainability. Effective recovery strategies are crucial for ensuring the sustainability of MFIs. In the African context, the application of client relationship management, the use of guarantors, and the adoption of digital technologies have been successful in improving loan recovery rates (Bogan, 2012). In Cameroon, the implementation of stringent credit assessment processes, regular client monitoring, and incentives for timely loan repayments have contributed to better loan recovery (Fonkwo et al., 2019). However, MFIs in Africa and Cameroon continue to face challenges such as limited access to credit, high operating costs, and regulatory constraints, which can hinder their ability to implement effective lending and recovery strategies (Abedinoushahroudi & Omidi, 2018). Addressing these challenges is critical for the growth and success of MFIs in the region.

Assessing the financial performance of MFIs is equally important for understanding their sustainability. Key indicators such as return on assets (ROA), return on equity (ROE), and operational self-sufficiency (OSS) help measure an MFI’s financial health. A study by Cull et al. (2018) revealed that MFIs’ financial performance varies widely across regions and countries, with institutions in Asia and Latin America generally outperforming those in Africa and Eastern Europe. In addition to financial performance, MFIs’ social performance is crucial for evaluating their impact on clients’ lives. The Social Performance Task Force has developed a set of indicators to measure dimensions like poverty outreach, client protection, and social responsibility. However, a comprehensive and standardized framework for assessing social performance is still evolving, making it challenging to compare MFIs globally (SPTF, 2014).

1.2 Statement of the Problem

Microfinance institutions play a vital role in promoting financial inclusion and alleviating poverty in developing countries (Mersland & Strøm, 2020). A better understanding of the relationship between lending and recovery strategies and MFI financial performance is crucial for the sector’s growth and sustainability. Karim et al. (2018) emphasized the importance of lending strategies in determining MFIs’ financial sustainability. Moreover, Mersland and Strøm (2020) highlighted the significance of recovery strategies in managing credit risk and improving loan recovery rates.

Despite the acknowledged importance of effective lending and recovery strategies, microfinance institutions still face numerous challenges. Loan defaults, liquidity management issues, and collateral disputes continue to impact their performance. Additionally, intermediation weaknesses and unreliable sureties exacerbate the situation. Given these challenges, there is a need for further investigation into the lending and recovery strategies employed by MFIs and their effects on financial performance. This study aims to investigate the effects of lending and recovery strategies on the performance of microfinance institutions in Bamenda, the Northwest Region of Cameroon.

1.3 Research Questions

1.3.1. Main Research Question

What is the effects of lending and recovery strategies on the financial performance of microfinance institutions in Bamenda Municipality?

1.3.2. Specific Research Questions

• What is the effect of lending strategies on the financial performance of microfinance institutions in Bamenda Municipality?
• What is the effect of recovery strategies on the financial performance of microfinance institutions in Bamenda Municipality?

1.4 Research Objectives

1.4.1. Main Research Objective

To investigate the effect of lending and recovery strategies on the financial performance of microfinance institutions in Bamenda Municipality.

1.4.2. Specific Research Objectives

• To determine the effect of lending strategies on the financial performance of microfinance institutions in Bamenda Municipality.
• To assess the effect of recovery strategies on the financial performance of microfinance institutions in Bamenda Municipality.