CHAPTER ONE

INTRODUCTION

1.1  Background of the Study

Micro financial institutions (MFIs) play a vital role in the economic development of many developing countries. They offer loans and technical assistance in business development to low-income community in developing countries (Hartungi, 2007). They have a variety of products including micro loans, savings and other deposit products, remittances and transfers, payment services, insurance, and any other financial product or service that a commercial bank does not offer to low-income clients in the banking system (Hoque and Chisty, 2011). The contribution that microfinance institutions make towards the economy of any country emphasizes the importance of their existence. Governments around the world have realized just how important this sector of the economy is for the future growth of their respective countries. Entrepreneurship therefore has a critical role to play in the economic development of especially poorer nations of the world.

African MFIs have continuously faced many challenges including lack of proper regulatory environment and lack of funds. Despite the series of financial sector reforms that the African countries have undertaken since the 1980s, financial systems still exhibit substantial degrees of inefficiencies in their savings mobilization and allocation of resources into productive activities (Senbet and Otchere, 2006). Operating and financial costs are high, and on average, revenues remain lower than in other global regions. Efficiency in terms of cost per borrower is lowest for African MFIs. It is therefore important to find cost-effective ways of improving standards while at the same time minimizing restrictions and encouraging innovation. Technological innovations, product refinements, and on-going efforts to strengthen the capacity of African MFIs are needed to reduce costs, increase outreach, and boost overall profitability (Lafourcade et al., 2005). Consequently, the MFIs should develop viable financial products relevant to the target markets.

We are living in times of innovation and development and witnessing constant change marked by the emergence of new business models in various industries. Innovation is changing the face of business and improving its conditions by creating value for the shareholders. There’s no need arguing that innovation is one of the most important variables in economic growth. Solow, (1956) states that economic development in the long run, is impossible without innovation and innovation is the only variable which impacts growth. Even though Solow discusses technological innovation, rather than financial, Blach (2011) argues that without financial innovation technological and economic development would be much slower and as a consequence, wealth of nations would be lower. Thus, financial innovation is critical, both, for the business sector to spur development and growth, which increases shareholder value, and for the public sector to increase the economic growth and thus the standard of living.

According to Aspara, Rajala & Tuunainen (2012), the financial industry has been immensely transformed by changes in regulation, globalization and digitalization. These changes have highly increased the attention to customer experience and moved the financial industry from using technology only as facilitator of internal processes to being a crucial component in value offering. Hence, in today’s world where technological innovation can hardly be separated from other forms of innovation, including financial, it becomes even more important to understand how it impacts the more regulated and thus, less prone to change, traditional industries like banking.

Innovation is described as the process by which, firms master and implement design, and the production of goods and services that are new to them regardless of whether they are new to their competitors, country or the world (Mytelka, 2000). More so, Spielman (2005) defines innovation as the continuous process of upgrading by employing new knowledge or the new combination of existing knowledge that is new to the local area. Innovations generally assume different forms such as product innovations, marketing innovations, location innovation, and research and development innovation.

Many organizations are agreeing that to grow, stay competitive and survive, they have to constantly change their strategies to meet new business demands and this explains the growth of interest in knowledge management (Maingi et al., 2013). Most studies have identified technology, leadership, strategy, and organizational culture as the enablers of performance. Those organizations that work as if their environment is still stable are not only losing competitive advantages, but are also facing huge financial losses (Mosoti & Masheka, 2010). According to Shariq (1997), we are entering into an era where the future will be essentially determined by our ability to wisely use knowledge, a precious global resource that is the embodiment of human intellectual capital and technology.

According to Obay (2013) financial innovation refers to several phenomena. It includes new financial instructions, which are the objects of transactions, new financial markets, which are fields of transactions, and new media to effect transfers (Yumoto et al., 1986). While financial innovation is by no means a recent phenomenon of the most significant economic phenomena of last decades, it has exerted considerable influence on the workings of the financial system, the conduct of monetary policy in a number of countries and management of costs and risks by governments, financial institutions, and corporations.

Despite the widely held perception that innovation and technological change are major drivers of economic growth that provides competitive edge to firms, most literature has focused on innovation in the manufacturing sector. Further, innovation in services remains under-researched by innovation analysts (Henderson & Pearson, 2011). Nonetheless, several studies have focused on the role of services innovation in general and financial services innovation in particular (Makini, 2010). The researches identify significant contribution of innovation in services to modern economies in relation to their employment output and inputs to other sectors of the economy. Compelling evidence is available that financial innovations yield returns to innovators and positively influence the entire economy (Lerner & Tufano, 2011). The benefits, according to the authors, are realised when households are able to have investment and consumption choices on top of lowering the cost incurred in raising and deployment of funds. In agreement with Lerner and Tufano’s (2011) findings, emerging financial innovations, particularly in mobile money have propelled Cameroon to the global limelight and caused intellectual curiosity in the research arena. As a way of appreciating the context of the current study, these developments should be placed into proper perspective.

The application of electronic card payments systems has been adopted in Cameroon, which comprise credit cards, debit cards, charge cards, prepaid cards as well as Automated Teller Machine (ATM) cards. Commercial banks as well as merchants have dominated the electronic payment card market for years.  Safaricom launched the world-acclaimed mobile money transfer service M-Pesa (Kiswahili word meaning mobile money) that has won several awards for its role in improving financial access and financial inclusion in the country. The model has been adopted by the other mobile phone service providers in the country as well as commercial banks, resulting in an unprecedented mobile money transaction growth in the country.

EIU (2012) report credits the mobile money services sector in Kenya as one of the most advanced in the world. Financial innovation has substantially reduced the cost of money transfer in Kenya and increased the rate of financial deepening and financial inclusion. Demirgüç-Kunt and Klapper (2012) opine that Kenya is Sub-Saharan Africa’s regional leader in mobile money. The authors further gave credit that the emergence of mobile phones is key to the development of most electronic payment innovations. Al-Khouri (2014) reports that internet technology advancements and mobile phones subscriptions have led to the growth of electronic payments. These findings are in agreement with Ingenico (2012) on the significant role the mobile phone technology has contributed to the growth of electronic payments.

The World Economic Forum (WEC) brings on board several countries across the world and its headquarters are in Geneva, Switzerland. The WEC Report (2012) indicated that innovation is the critical source of economic growth and plays a crucial role in improving social welfare. It is indicated that the recognition and acknowledgement of the role of innovation in economic growth, many governments around the world encourage investment in research and development. The WEC report puts into perspective the various functions of financial innovation. These include providing ways of clearing and settling payments to facilitate trade as exemplified by credit and debit cards, PayPal, and stock exchange. Another function is providing ways to transfer economic resources through time, across borders and among industries as it is the case with savings accounts and loans.

1.2  Problem of Statement

Over the past decade, African countries have experienced positive economic growth; in fact, The Times UK (2017) reported a 4.7percent per annum growth. There is an increase in financial services including efficient financial transfers and increasing volume of trade (Maimbo et al., 2010). Napier (2010) stated that financial innovations foster growth of the financial sector in Africa. In Cameroon, mobile cellular subscription rate was slightly over 19million in 2018 (World Bank, 2018).This in turn increased mobile financial services, and the Fin Scope Consumer Survey 2018 report indicated that 48% of adults in Cameroon use formal financial services. This increase in financial services is imperative for economic growth in the country. Mwinzi (2014) study demonstrated that mobile transactions have a positive impact on economic growth.

The embrace of technology into banking sector is becoming a strong trend as service providers are currently being urged to empower in financial technology to advance their performance. Innovation creates array of competitive positions and enhances a firm’s potentiality in the market (Cefis & Marsili, 2003). Competition has created a fast-paced industry where firms must transform in order to survive (Nyathira, 2009). Hence, many service sectors, MFIs being part of it, have been left with no preference but to embrace innovation to meet and even to surpass customers’ satisfaction and service expectations to improve their financial performance. Therefore, Maorwe (2011) urges financial institutions to adopt new innovative means and strategies to finance their activities rather than only relying on the members’ deposits.

The notion of financial innovation and its effect on financial performance has received significant concentration and has been acknowledged as an input matter in the organization’s survival probability. Different scholars have conceptualized and assessed financial performance (profitability) in different sectors by gauging different variables like size, investment, liquidity and age of the firm resulting to unlike dimensions and financial performance implications making research conclusions ambiguous and varied. Cefis and Marsili (2003), they observed that the principal technological characteristics in a sector are the dynamic forces for the survival of a firm than the firm’s specific characteristics as age and size. While Mehjardi (2012), Chen & Wong (2004) found that size, age, investment and liquidity are the major determinants of profitability.

The importance of financial innovations cannot be underrated. These innovations have eased the way of doing business for financial institutions including microfinance institutions (Ongwen, 2015). As a result of innovations, there can be greater outreach, for instance when technology is adopted in transacting business. Leading financial institutions such as commercial banks are very innovative in their institutionalization, products and processes which have resulted in improved performance. However, this has not been the case with MFIs in Cameroon. It remains largely unclear whether MFIs are adequately innovative in running their businesses given that they are faced by the challenge of limited growth and expansion.

Performance and growth are related in that a firm cannot grow if it fails to post sound performance. MFIs have been around for decades and have primarily been serving the low cadre members of the society (EUI 2010). Against the backdrop of dynamics in the world today and advancement of technology in the financial sector, in addition to commercial banks providing microfinance services, MFIs have found themselves in an awkward position in terms of competition. This has threatened their very existence. The financial challenges facing MFIs have far reaching impact. These institutions employ thousands of Cameroonians who are breadwinners in thousands of households across the country. As such, in the event that MFIs post poor performance and downsize their staff or close shop altogether, there are many Cameroonians who would directly and indirectly be affected. More so, these MFIs pay taxes to the government and poor performance would translate to reduced tax remittances. The foregoing would definitely affect the revenue collection by the government.

The concept of financial innovation is critical as it spurs the growth of MFIs in Cameroon. Innovation is the arrival of a new or better product and/or a process that lowers the cost of producing existing financial services. Innovation embraces the firm that is the first to introduce it and the subsequent spread to others (Heffernan & Fu 2008). Micro financial institutions have in a large extent helped the development of the Bamenda (Cameroon) rural community and continue serving the rural people by transforming them into community based micro-credit units. On the other hand development practitioners and policy makers have as well identified efficient microfinance services as important for a variety of reasons; helping the poor manage their risks, build their assets, enhance their income earning capacity, be able to develops small enterprises to generate income, this has a direct positive impact on poverty alleviation and specific economic indicators such as nutrition status, women empowerment and children schooling. The purpose of this study therefore is to determine the influence of financial innovation on the performance of micro financial institutions.

1.3  Research Questions

In carrying out this research, the following research questions will be asked in an attempt to provide answers to the problem highlighted above:

1.3.1        Main Research Question

What is the influence of innovation on the financial performance of micro financial institutions in Bamenda? 

1.3.2        Specific Research Questions

• How institutional innovation does influences the financial performance of micro financial institutions in Bamenda?
• To what extent does product innovation influences the financial performance of micro financial institutions in Bamenda?
• What is the influence of process innovation on the financial performance of micro financial institutions in Bamenda?

1.4 Objectives of the Study

1.4.1 Main Objective

To examine the influence of innovation on the financial performance of micro financial institutions in Bamenda

1.4.2 Specific Objectives

• To assess how institutional innovation will influences the financial performance of micro financial institutions in Bamenda.
• To evaluate the extent to which product innovation influences the financial performance of micro financial institutions in Bamenda.
• To examine the influence of process innovation on the financial performance of micro financial institutions in Bamenda.