CHAPTER ONE:

INTRUDOCTION

1.1 Background to the study

Liquidity management is an important objective of Micro Finance Institutions, not only because it prevents institutions from running into liquidity shortages but also because it determines their profits. Munyambonera (2010), Olweny and Ongore, and Kusa (2013), as cited in Lukorito et al (2014) have not only identified profitability as the secondary objective pursued by MFI’s, but have also recognized it in this era of stiff competition in financial markets, and financial managers have committed to meeting that objective.

Microfinance institutions (MFIs) have been accepted globally as a tool for poverty alleviation and financial inclusion of low-income earners. The microfinance sector has reached more than one hundred and thirty-three million poor peple from three thousand three hundred and sisxteen MFIs worldwide by the end of the year two thousand and six, out of which 69.85% were among the poorest and 85.2 % were women (Harris, 2007). MIX (2009) indicated that between the year two thousand and five to two thousand and seven, borrowers outreach grew at a persistent rate of 26% across all regions, along with the loan portfolio which grew faster at a rate of 47%. At a regional level, the MFIs in Eastern Europe and Central Asia grew by 38% while the Middle East and North Africa credit outreach was the quickest as it grew by 41%.

Asia had the greatest numbers which amounted to 12 million borrowers.The Micro-finance theory has been in existence for centuries in various regions of the globe finstance, “susus” in Ghana, “tandas” in Mexico, “tontines” in West Africa and “pasanaku” in Bolivia. One of the earliest and longest-serving micro-credit organization providing small loans to rural poor dwellers with no collateral was the Irish loan fund system started in the early 1700s by Jonathan swift. His concept began slowly in the 1840s and became a widespread institution of about 300 branches all over Ireland in less than ten years. The main aim of his idea was to advance small loans at interest for short periods. However, the pioneering of modern microfinance is often credited to Dr. Mohammad Yunus, who began experimenting with lending to poor women in the village of Jobra, Bangladesh during his tenure as a professor of economics at Chittagong University in the 1970s. Microfinance sectors in the Middle East, North Africa, Eastern Europe and Central Asia, are reasonably small since the microfinance idea started much later in these regions (Gonzalez & Rosenberg, 2006). At a regional level, the MFIs in Eastern Europe and Central Asia grew by 38% while the Middle East and North Africa expanded credit outreach was the quickest by 41%. Asia had the greatest numbers which amounted to 12 million borrowers.

According to Choudhry (2011), liquidity management is the funding of deficits and investment of surpluses, managing and growing the balance sheet, as well as ensuring that the micro finance operates within regulatory and stipulated limits. Ideal bank management is an uninterrupted endeavor of assuring that a balance exists between liquidity, profitability, and proportion risk (Banks, 2014). MFI’s indeed require liquidity since such a large  of their liabilities are payable on demand (deposits) but typically the more liquid an asset is, the less it yields.

In Africa, the components of the microfinance sector are widespread and examples include Ghana which has the ‘Susu’ scheme which is one of Africa’s most ancient traditional banking systems which have over the years been the mode of fund mobilization for initiation, sustenance and in some cases development of micro and small businesses, particularly micro-enterprises (Basoah, 2010). “Susu” as one of the microfinance schemes in Ghana is thought to have originated from Nigeria and spread to Ghana in the early twentieth century (Basoah, 2010). It is an informal financial identification for daily or weekly collection of deposits which is most rampant on the West African markets (Basoah, 2010). “Susu” is an informal financial identification for daily or weekly deposit collection which can be illustrated as a form of banking because it is a system of trading in money. It involves daily, a weekly and monthly collection of a fixed amount of funds that are made available to the owners after a specified period or when required or to members of the scheme within the scheme at a fee (Basoah, 2010).

In Kenya, the microfinance sector is one of the most dynamic in Sub-Saharan Africa. It includes a variety of financial institutions forms and a fairly large branch network to serve the poor. However, the regulation of microfinance activities in Kenya started in the year two thousand and six. The absence of regulation allowed innovations to take place and MFIs were set up easily without any restrictions, such as minimum capital requirements therefore the microfinance industry thrived in that environment (Nyaga, 2008). Following the enactment of the microfinance act on 2nd May two thousand and eight, several existing MFIs applied for licenses to let them take deposits from members and the general public. The major purpose of the microfinance act was to regulate the establishment, business and operations of MFIs in Kenya through licensing and supervision. Most of the MFIs in Kenya are self-regulated and rely heavily on international donor support which poses a legal challenge (CBK 2011).

Liquidity management is a critical goal for financial institutions, not only because it keeps institutions from running out of cash, but also because it influences their earnings.  In managing its assets and liabilities in the wake of uncertainties in cash flows, cost of funds, and return on investments, an MFI must ascertain its trade-off between risk, return and liquidity (Mashok Placeholder1, 2020). Indeed, studies in other countries across the globe have attributed bank failures to poor liquidity management.

In Cameroon, adequate liquidity enables a bank to meet three risks. First is the funding risk – the ability to replace net outflows either through withdrawals of retail deposits or nonrenewal of wholesale funds. Secondly, adequate liquidity is needed to enable the bank to compensate for the non-receipt of the inflow of funds if the borrower or borrowers fail to meet their commitments.(Nwankwo , 1991) A firm should ensure that it does not suffer from lack-of or excess liquidity to meet its short-term compulsions. A study of liquidity is of major importance to both internal and external analysts because of its close relationship with the day-to-day operations of a business (Musaed, 2020). The dilemma in liquidity management is to achieve the desired tradeoff between liquidity and profitability (Raheman, 2007).

According to Njimanted et al (2017) From 400 to about 652 microfinance establishments in the  at the end of 2008, a progress of 10% compared to 2007Of this number, the Cameroon Cooperative Credit Union League (CamCcountryCUL) occupies a relatively large proportion; 177 credit unions.

However, by 2015, there were 418 accredited microfinance institutions in the country (Ministry of Finance (MINFI), 2015). Financial institution activities have equally increased in coverage and depth with the number of banks increasing from 9 in 1999 to 12 by January 2010 and to 14 in 2016 with branches all over the urban centers in the country.

1.2 Problem Statement

Generally, in Cameroon, Bamenda, there has been an exponential increase in delinquent loans in deposit-taking MFIs over the last few years. This has led to an increase in liquidity problems in MFIs thus negatively impacting the investment decisions of MFIs leading to poor financial performance (RKCS, 2021) since they are not able to meet a majority of their financial obligations. The original cause of liquidity risk is the maturity imbalance between assets and liabilities. The majority of the assets are funded by deposits most of which are short-term in nature with a possibility to be called at any time leading to an imbalance between short-term assets and short-term liabilities. This imbalance can be evaluated with the aid of the maturity gap between assets and liabilities.

In Cameroon, MFI’s are faced with challenges of financial performance. This is seen in the fact that the firms have problems with their financial performance they may defer their payments to creditors which is harmful for companies and can result in several consequences such as worse credit terms in the future.According to Mashoko (2020), the issue of liquidity management and Financial institution performance has been a called for concern in the banking sector, Financial institutions absorbing financial surpluses from their customers (depositors) and put them at the disposal of investors (borrowers) to be directed towards various investment channels.According to Gibson and Nyabwaga et al., (2011), in their study on the effect of working capital management practices on the financial performance they postulate that working capital management routines were low amongst small-scale firms as the bulk of them had not envisaged formal working capital management practices. The findings also postulate that there is a positive relationship between working capital management practices and financial performance. For micro finance institutions to remain competitive emphasis should be made on liquidity management and profitability with regards to how their ability to manage financial performance and should be provided to the organizational achievement. This study will focus on the Effect of Liquidity management on Micro Finance Institution’s Performance in Bamenda.

1.3 Research Questions

1.3.1 Main Research Question

What are the effects of liquidity management on the performance of Micro Finance institutions in Bamenda?

1.3.2 Specific Research Questions

1. What is the effect of cash flow monitoring on the performance of Micro Finance institutions in Bamenda?
2. What is the effect of cash reserve management on the performance of Micro Finance institutions in Bamenda?
3. What is the effect of contingency planning on the performance of Micro Finance institutions in Bamenda?

1.4 Research Objectives

1.4.1 Main Objective

The main objective of this study was to assess the effects of liquidity management on the performance of Micro Finance institutions in Bamenda.

1.4.2 Specific Objectives of the Study

The specific objectives of this study were;

1. To evaluate the effect of cash flow monitoring on the performance of Micro Finance institutions in Bamenda.
2. To investigate the effect of cash reserve management on the performance of Micro Finance institutions in Bamenda.
3. To examine the effect of contingency planning on the performance of Micro Finance institutions in Bamenda.