CHAPTER ONE

INTRODUCTION

• Background of the study.

Microfinance is a financial service such as savings, credit, insurance, leasing and money transfer and equity transaction provided by financial institutions to the poor to meet their normal financial needs like life cycle, economic opportunity and crisis (Schrawat, 2011).

Microfinance has been regarded as one of the most promising means to alleviate poverty around the world. The major objectives of microfinance institution(MFIs)  is to provide the low-income earners  in the society, with access to finance services as well as opportunity for them to build their financial capacity and skills to rise to financial self-reliance(Kasangki, 2018).

Accessibility and affordability of Microfinance institutions by the poor and the under privilege in the society, can only be obtained through its distinct characteristics such as granting collateral-free loans with short repayment periods, providing low cost of membership, short-term loan  processing, targeting the poor rural and urban households, easy loan procedures, easy source of awareness to its clients, good employees attitude/behaviors, providing a variety of financial and non-financial services such as cash transfers, insurance, workshops, seminars, ATM and SMS to the poor and grouping members in groups of the same interests.

The chance that microfinance may not receive its money back from borrowers (plus interest) is the most common and often the most serious problem faced by microfinance institutions. Since most microloans are unsecured, delinquency is very common in most microfinance institutions.

 Loan delinquency in microfinance refers to occurrence in loan portfolio where payments are in arrears (late payments). This loan delinquency in microfinance institutions has causes ranging from institution-related causes through client-related causes (jointly regarded as internal causes) as well as external causes. Examples of interior causes are; Noncompliance with established lending policies, poor understanding of client’s needs, inadequate training of staff, lack of accounting and documentation system to track records. External factors which may cause loan delinquency are; natural disasters (like flood, earthquakes), weather conditions, illness, diseases and political instability.

Loan interest rates, age of client, sex of client, lack of follow up measures, unwillingness by borrowers are other factors that contribute to loan delinquency in microfinance institutions. Sometimes, undue government intervention with the operation of government sponsored programs make the  borrowers to feel that it is political money and see no reasons to repay loans.

 The effects of loan delinquency on microfinance institutions are enormous e.g. delinquency reduces profitability in a microfinance institution, it makes the microfinance institution less credible to investors/donors, it shortens the life of a microfinance institution, it paints a bad image about the institution in the community thereby discouraging new members from joining the institution and old members from savings/deposits. In some cases, the microfinance institution may go bankrupt. Also, clients have negative effects.

For example: A client whose loan goes delinquent losses trust from the microfinance institution, he/she cannot take another loan, he/she could be detained or subjected to other judicial measures, not financially discipline etc. all these negative effects on the both the lender and the borrower lead to one end ; that is failure.

In the case of North West region (NWR) of Cameroon, the issue of loan delinquency has been on the marked increased in the past few years. It is based on this that this study seeks to finding out the effects of loan delinquency on the performance of microfinance institutions (MFIs) in NWR of Cameroon.

• Statement of the problem

For microfinance to attain their main objectives, accessibility and affordability to low-income earners, farmers, small business operators and the poor in the society should be their watchword.

Lending is very risky in that the repayment of loans is not always guaranteed and most of the time depends on other factors not under the control of the borrower. Therefore, managing loans properly does not only have positive effects on the microfinance institution’s performance but also on the borrower and a country economy as a whole.

 Failure to manage loans properly which make up the largest share of the MFIs’ assets will likely lead to high levels of delinquent loans or non-performing loans (NPLs). This high loan delinquency levels in turn affects the performance of the microfinance institution and the country’s economy as a whole. The sudden rise of delinquency rates in microfinance institutions in North West Region (NWR) of Cameroon has forced these institutions to seek for expertise in debt collections. Government subsidies to MFIs to cover up the losses incurred through delinquency has not succeeded to solve the problem.

This study is therefore focused on knowing the effects of loan delinquency on the performance of MFIs in the NWR of Cameroon, case study: Manchok-Oku corporative credit union limited (MACCUL) Bamenda branch.

• Research Question

1.3.1 Main Research Question

What are the effects of loan delinquency on the performance of microfinance institutions (MFIs) in NWR of Cameroon?

1.3.2 Specific Research Questions

1. i) What are the short term effects of loan delinquency on the performance of MFIs?
2. ii) What are the long term effects of the loan delinquency on the performance of MFIs?

1.4Objectives of the study

1.4.1The main objective

 The main objective of this study is to examine the effects of loan delinquency on the performance of microfinance institutions in North West Region of Cameroon with case study: Manchok-Oku corporative credit union limited (MACCUL) Bamenda branch

1.4.2 The specific objectives

1. i) To assess the short term effects of loan delinquency on the performance of MFIs.
2. ii) To assess the long term effects of loan delinquency on the performance of MFIs.