CHAPTER ONE

    INTRODUCTION

• BACKGROUND OF STUDY

The concept of micro finance can be traced back to the 19^th century, which had many definitions in terms of finance, regulations, product and services, where money lenders were performing the role of informal practices, which has now developed to be called formal financial institutions. These informal financial institutions include; village banks, cooperative credit unions, state owned banks and venture capital funds to innovatively provide, help the unbanked or the poor. These institutions provide lending services, not only to the poor but to the government, private institutions and financial institutions, but as the years went by, micro finance institutions were faced with the concept of loan delinquency that reduces performance, which is the portfolio quality, financial stability efficiency of micro finance institutions in the world.

Loan delinquency, is a concept, which can be traced back in the years of micro finance institutions creation in the world. Loan delinquency can be termed different in its evolution since the 19^th centuries. I recent years, a lot of focus has been directed towards understanding the challenges confronting banking institutions as a whole and one key challenge has been to analyses the factors affecting non-performing loans and doubtful debts bank and most especially micro finance institutions. According to the international monetary fund (IMF, 2015) non-performing loans contribute as a drag to economic activities mostly for countries where micro finance institutions act as the main financial intermediary. Equally, high non-performing loans which is a sub delinquency goes a long way to tie or prevent micro finance institutions in the world to raise funding cost and capital. That is why, policyholders in the world are addressing the case of loan delinquency to better promote the interest and growth of micro finance institutions.

The evolution of loan delinquency, has been spotted and researched on in the middle East and North Africa, where articles iv report of micro finance institutions have said that, high level of loan delinquency in these countries, for instance, during the 2000-2006, Tunisia and Egypt had a total of 20% loan delinquency, equally, loan delinquency was also high in the United Arab Emirates (UAE) not forgetting other reforms in the financial sector. On the other, countries like Kuwait, Saudi, Qatar and Arabia had less challenges, when it came to loan delinquency although bad loans had trended upward since the crises (IMF, 2012) that makes the impact uneven with non-performing loans in the year 2010 being in double digit as Algeria, Egypt and significantly lower in Qatar, Saudi and Arab (IMF,2012).

High loan delinquency, over the recent years, has led to liquidity problem which has gone a long way to jeopardize the performance of micro finance institutions in the world and countries economy as a whole. The principle of good lending states that a loan should not be granted to a borrower until the source of repayment is reasonable and certain, that is why, the occurrence of the financial crises in the United States, that can lead to unprecedented level of debt. During the 2000 financial crises, total debt in the USA and Europe amounted to three times of the counties GDP (DHAMEJA 2010), indeed the high loan default in these countries has caused bankruptcy and closure of banks and financial institutions.

Micro finance institutions in the world should prevent themselves from loan delinquency by properly identifying the characters of their clients. Most cases of loan delinquency in the world are as a result of improper screening of borrowers, to know who is fit or eligible by character to pay back loans on time. When this is omitted, it gradually led to loan Dubai and Greece have further provided that states that, easy availability of credit loan delinquency which leads to excessive leverage by micro finance institutions to fund their activities in the world.

Regarding the collateral features, this is an item of value used to secure a loan. This is where banking sectors are heavily reliant on and where credit loan delinquency has been a major concern, showing that, collateral plays an important role in the control of loan delinquency although (Vietnamese bank) in state of Vietnam insists that lending decisions are based on their assessment of borrower’s payment ability but in practice, collateral is the most important in decision to approve a loan. However, Anecdotal evidence shows, that heavy reliance on collateral may lead to negligence in screening and monitoring processes, leading to increase loan delinquency in the world thereby reducing the performance or efficiency of micro finance institutions.

Bank capital contributes to loan delinquency phenomenon, is also considered the best way to protect banks and micro finance institutions in the world and aggregate their leverage. Bank capital has influenced the impact of monetary changes all over the world in two ways, that is adverse selection, that affects both bank and micro finance institutions in fund raising. The bank lending channel which relies on imperfection in the market for bank debt (Bernanke et al.,1988) states that, bank and micro finance institutions capital matters in the propagation to different types of leading, owing to the existence of regulatory capital constrains and imperfections in the market for bank fund raising. So therefore, adverse selection has posted a problem of bad debt by some clients or customers leading to poor performance of micro finance institutions worldwide.

Research studies have debated on the fact that loan delinquency has two main effects on micro finance institutions, these effects are the limitations of financial performance and lending potentials of micro finance in Africa, which is increasingly limiting the performance of micro finance in Africa as acknowledge by foreign countries such as Obamuyi et al (2007).

Looking at the concept of loan delinquency, as its evolvement has acted as a challenge to micro finance institutions performance, we can realize that many financial institutions in the world had gone bankrupt because of bad debt and non-performing loan, which calls for an alarm for special consideration by all micro finance institutions worldwide.

• Statement of Problem

There is significant disparity in the level of development and performance in micro finance institutions across different countries (mix, 2010) but the main focus here is micro finance institutions in Cameroon mainly in the Buea municipality. The performance of micro finance institution in Cameroon has been strengthened over the years because of some contributed factors. Micro finance institutions in Cameroon, which are over 850 registered (statistics compiled by this researcher from government figure) appeared to have failed to achieve their planned portfolio performance, which has led to bankruptcy in many micro finance institutions in Cameroon, especially those in the Buea municipality such as CCA (Credit Communique D’Afrique) Buea P and T Cooperative Credit Union LTD and many others.

The low performance of micro finance institutions over the years came in as a result of some contributed factors. The regular news about the micro finance institutions in Cameroon is the constant close down of several micro finance establishments which reduces customers confidence level. We still have in mind the confinest and fiffa cases Cameroon as researched (Ndambu et al, 2011).

Many research has been carried out on this same problem; (Baku,1998; Okpugie,2009; Ameyaw 2011; Kwakwa, 2009; Akinwumi, 1990). Even though, this research has been made to minimize loan delinquency, there still exist bad debt and doubtful debt in Cameroon. This creates a research gap, that’s the reason why in my own study, I will be using that research above but with my case study MFIs in the Buea municipality.

Loan delinquency by customers not paying loans tend to affect the performance and operation of the MFIs in the Buea municipality. While repayment of loans by customers lead to sustainability of MFI’s. Therefore, it is important to investigate the effects of loan delinquency of MFI’s which is negative. Loan delinquency, is increasingly eating up the operations of MFI’s, which draws me to a research topic, of what are the effects of loan delinquency on MFIs in the Buea municipality as a case study.

• Objectives of the Study

1.3.1 Main objective

The main objective of the study is “To analyze the effects of loan delinquency on the performance of MFIs in the Buea municipality.

1.3.2 Specific objective

• To evaluate the effect of loan default on the performance of MFI’s
• To assess the effects of Bad debts on the performance of MFI’s
• To examine the impact of loan delinquency on Microfinance institutions
• Research Questions

The main research question for this project is “What are the Effects of Loan Delinquency”. Specific research questions include:

• What are the impacts of loan default?
• How does loan delinquency affect MFI’s?
• what are the effects of microcredit on the improvement of MFIs?
• Research Hypothesis

The hypotheses used in this research are the null hypothesis () and affirmative hypothesis ()

H0: Microfinance activities have no significant impact on the improvement of people in the Buea Municipality.

H1: Microcredits have a bearing on the improvement on the performance of MFIs in the Buea municipality.

H2: There is a significant impact of loan delinquency on the performance of microfinance institutions in the Buea municipality.

H3: Loan lending has been an improvement on the performance of microfinance institutions in the Buea municipality.