CHAPTER ONE

INTRODUCTION

This introductory chapter of the study will comprise the background of the study, research problem, research objectives, research hypotenuses, significant of study, scope and limitation of the research and the organization of the research.

1.1 Background Information

Microfinance as pioneered in Bangladesh by Mohanmmed Yunus was to assist low income earners and the poorest of the poor through the micro-enterprises for their economic development thus, microfinance is the provision of financial and non-financial services to the poor (Mohanmmed Yunus2003). Growing concern about poverty stands out in political agendas all over the world, as stubbornness of poverty even in the richest nation is being met increasing impatience (Mwangi et al,1998). Government and some international donors have been subsidizing credit to small poor farmers in Cameroon and some developing countries in the world. These subsidized credit from Non-Governmental organizations (NGO) made it possible for some low income earner to have access to financial services such as loans.

According to consultative group to assist the poor (CGAP, 2001) report, nearly three billion (3billion) poor people lack access to basic financial services essential for them to manage their businesses and it is estimated that about 50% of people in developing countries lives below the poverty line (World Bank, 2009). In Cameroon, it has been estimated that the poverty level for women across all the regions of Cameroon is about 60% and that of men is about 50%. These people cannot grow their businesses owing to lack of access to credit.

Microfinance therefore comes in to bridge the gap by evolving in an economic development approach intended to assist economically active poor people through the provision of micro financial services.

Extension of credit in Cameroon is one of the major activities of microfinance institutions including savings and loans companies, financial and non-financial institution such as non-Governmental organizations (NGOs), banks and credit unions. This is usually evidenced by the large proportion that loans constitute in the overall operating assets of microfinance institution (MFIs) in Cameroon. Some of the loans given out by (MFIs) in Cameroon unfortunately become nonperforming and eventually results in bad debts with adverse consequences for the overall financial performance of the institutions. The issue of nonperforming loans (NPLs) is becoming an increasing problem that threatens the sustainability of MFIs in Cameroon today these are caused by multi-dimensional and non-uniform among different literatures.

Nonperforming loans are usually a source of misery for lenders because if an institution have too much of it on its balance sheet, it can adversely affect its operations in terms of liquidity, profitability debt-servicing capacity, lending capacity and ability to raise more capital. The incidence of nonperforming loans in the Cameroonian MFIs has been on the rise in recent years as their loan portfolio increases despite the efforts by these financial institutions to deal with it. AWICCUL is one of the MFIs in Cameroon which is faced with these challenges of growing nonperforming loan portfolio with its attendant harmful effect on the operations of the institution and situation calls for remedial measures to curb it this study therefore focuses on identifying the effects of nonperforming loans on the performance of MFIs in Cameroon. However, nonperforming loans reduces the profitability of MFIs through disposal cost such as provisions for credit losses and direct write-offs for bad debts and shrinking of loadable funds. Large amount of nonperforming loans in microfinance institutions in Cameroon have at many times threatened the failure and actually collapsed many microfinance institutions in Cameroon.

1.2 Statement of Problem

Loan portfolio constitutes the largest operating assets and source of income to micro financial institutions in the world (capario and klingebiel, 1996). However, some of the loans given out become nonperforming and adversely affect the operations of MFIs in Cameroon and overall financial performance of any lending institution. Most MFIs in Cameroon are confronted with the challenges of rising nonperforming loan portfolios despite efforts put by COBAC to regulate the loaning activities of microfinance in Cameroon.

Awing central cooperative credit union (AWICCUL) is one of the pioneering microfinance institutions in Cameroon with a deteriorating trend in the health of its loan portfolio in recent years with a portfolio of nonperforming loans of about 30% AWICCUL (Annual report, 2015). This have however induces the board of directors (BOD) of this institution to reinforced strategies for recovery loans by putting in place a loan recovery task force(LRTF), with these and other objectives to come up with recommendations that will help arrest this deteriorating and trend or at least help to reduce the rate of nonperforming loans in MFIs.

Looking at the above, we can see that MFIs lending services play an important role in the areas such agriculture, mining, contract financing among others in different countries. These interventions have been made in Cameroon, Ghana and Nigeria. All of these interventions make us to ask the questions such as why nonperforming loans, loan default and loan delinquency in Cameroon. As far as Cameroon is concern, what are the causes and effects of nonperforming loans on the performance of microfinance institutions in Cameroon?

Generally, AWICCUL provides different varieties of loans such as agricultural loans, consumption loans, educational loans, contract loans, real estate among others.

   Base on the above, the research will seek to generate the following questions;

1.3 Research questions

      Main Research Question

• What are the effects of non-performing loans on the performance of MFI’s in Cameroon?

       Specific Research Questions

• What are the effects of non-performing loans on the financial performance of MFI’s in Cameroon?
• What are the effects of non-performing loans on the non-financial performance of MFI’s in Cameroon?

From these set of research questions, the following objectives can be generated in order to provide answers to the above questions;

1.4   Objectives of Study       

        Main Objective

• To Examine the effects of non-performing loans on the performance of MFI’s in Cameroon.

         Specific Objectives

• To determine the effects of non-performing loans on the financial performance of MFI’s in Cameroon.
• To determine the effects of non-performing loans on the non-financial performance of MFI’s in Cameroon