CHAPTER ONE

INTRODUCTION

1.1  Background to the Study

A productive and healthy loan portfolio is very imperative to the performance of microfinance institutions (MFIs). The MFIs performance is manifested in the financial and social services that they offer to their clients. Loan portfolio management features prominently as a major challenge. The Loan portfolio is regarded as not only the largest asset, but also as the predominant source of revenue. Loan Portfolio management is therefore, influential in enhancing the achievement of financial and social performance of microfinance institutions. Its central role in financial institutions makes it the greatest source of risk to the institution’s performance and sustainability. Effective management of the loan portfolio is fundamental to a microfinance institution safety and soundness (Janson, 2002).

South Asian MFIs’ performance is buoyed by strong productivity and efficiency generated from a proper loan portfolio management. These MFIs earned a 3.5% Return on Asset (ROA) while managing an average portfolio yield of 21.2%. Latin American and Caribbean, the largest region by loan portfolio base, also witnessed the most stable situation performance. Some markets like Mexico experienced a small rise in portfolio risk up to 9.4% due to the fall short of the proper loan portfolio management by end of 2016. In other countries like Bolivia, Colombia, and Peru, the stable environment allowed MFIs to maintain similar portfolio risk, operating efficiency and ROA (Microfinance Barometer, 2018).

In most Developing countries in Africa and in Asia were MFIs are fundamental in growth and economic development, a lot of studies have been carried out on how to improve on the loan portfolio management in order to enhance the performance of MFIs. From the 160 MFIs in some selected countries in Africa such as Uganda, Kenya, Ghana, Cameroon, Nigeria, Benin, Mali, Senegal, Rwanda, Ethiopia, and Gabon where proper loan portfolio management was carried out, earned a positive return on asset of 3.1% with Portfolio at Risk (PAR30) of 14.5% and a loan portfolio earning the highest yield of any region at 26.6% (Microfinance Barometer, 2018).

The performance of many MFIs in Cameroon notably in the North West region of Cameroon has been eminent from the proper loan portfolio management and good governance. Some of these institutions have a stable record and good reputation such as CCA which has performed so well and transformed into a commercial bank in 2018, Ntarinkon Cooperative Credit Union, Azire Cooperative Credit Union, CCC, Advance Cameroon and many others. So many members and customers have been so attached to these MFIs due to their stable nature with many other affordable services (micro insurance and micro transfer).  Despite the growing reputation in the microfinance industry in Cameroon, so many MFIs have open their doors today and close in one, two or three years later. This was the case of FIFFA that shutdown in 2012, CAPCOL closed in 2010, Dominion Finance, Raven Green Finance, and Global Finance, which went operational between 2008 and 2010 and by 2011 went bankrupt (Martin et al. 2016). Business in Cameroon, 2020 reported a huge loss of XAF8.2 billion by Comeci during the fiscal year 2017 which resulted from the poor management of the loans granted and failure of forced debt recovery. Camccul reported some huge losses on the balance sheet of Nsanimunwi Cooperative Credit Union, Mbatu Cooperative Credit Union, Ntambeng Cooperative Credit Union and a host of others recorded as a result of poor performance of the loan portfolio. The deteriorating customer confidence in this sector is cause by only one thing, “frequent news of bankruptcy”. Recovering of deposit in case of bankruptcy is never possible considering limited intervention from authority. 

Microfinance Institutions are organizations such as credit unions, downscaled commercial banks, and financial cooperatives that provide financial services to the poor and allow the disadvantaged households and entrepreneurs gain access to affordable financial services to help them finance income generating activities, accumulate assets through savings, provide for family needs, and protect themselves against the risks of daily life, such as illness, death, theft, and natural disasters (Christen et al., 2003).  In the last 15 years, growth in microfinance worldwide has been unprecedented and the microfinance industry grew from a few million clients in the 1980s to reach more than 190million families in 2013 (The World Bank, 2013). The World Bank (2013) further stated that in the 15 years up to 2013, the microfinance industry grew exponentially in terms of the number of clients and the number and types of microfinance providers. Alongside the growth in the microfinance industry the number of MFIs has also grown dramatically. Next to the growing number of Non-Governmental Organisation (NGOs), commercially oriented MFIs have also recently been entering the market (Assefa et al, 2013). According to the World Bank (2013), funding for microfinance is no longer the purview of donors alone and also regulatory systems has been changing there by transforming MFIs into regulated institutions with return seeking investors.

Over three billion people in developing countries are still without effective access to loan and deposit services. The problem is particularly acute in Sub-Sahara Africa, where only between 5 and 25% of households have a formal relationship with financial institution (IFC, 2021). Improved financial services are needed most in Africa’s poorest economies and countries emerging from conflict. The distinct feature of an MFI lies in its willingness and ability to offer financial services to those poor clients who are generally overlooked or refused by the formal financial institutions. Moreover, it has to do this job in the absence of any collateral and often have no idea about clients’ credit history. Nearly all the MFIs mentioned the above function as one of their main goals. They strive to achieve these objectives by applying innovative techniques such as social collateral, group lending, smaller loan size with regular repayment schedules and progressive loan structures.

Many aspects of modern society trace their roots back through history and microfinance is no exception. Mechanisms for issuing loans to destitute populations have existed in various forms in Asia for thousands of years. In Europe, Franciscan monks formed the Mounts of Piety in the 15th century to reintegrate the poorest populations into community life (BNP Paribas Group, 2017). Nearer to our time, the first savings and loan cooperative opened in 1879 in Germany’s Rhineland. As the first Mutualist Financial Institution, it primarily served working populations by giving them access to credit BNP Paribas Group, (2017). In the early 1900s variations on the savings and credit theme began to appear in rural Latin America and elsewhere (Batra and Sumanjeet, 2012). The 1970s saw the birth of microcredit as programs in Bangladesh, Brazil and a few other countries began lending to poor women entrepreneurs and the early pioneers include Grameen bank in Bangladesh, Americans for Community Cooperation in Other Nations (ACCION) in Latin America and the Self Employed Women’s Association (SEWA) Bank in India. From the 1990s the provision of financial services to the poor began to be termed microfinance instead of microcredit as the range of financial services offered to the poor now included savings, money transfers and insurance.

MFIs in Sub-Sahara Africa (SSA) include a wide array of institutions that provide financial products and services to low income people and these institutions include NGOs, NBFIs, cooperatives, rural banks, savings and postal institutions and an increasing number of commercial banks Microfinance Information Exchange (MIX, 2014). MIX, 2014 indicated that unlike trends in most regions around the world, the vast majority of MFIs in Africa offer savings as a core financial service for their clients and a source of funds for lending. In Nigeria, microfinance banks (MFBs) are private (generally for profit) deposit taking institutions and they fall into three major categories namely Unit MFBs, State MFBs and National MFBs (Ulrich and Hoback, 2014). In some African countries commercial banks have increasingly been entering the microfinance market. In SSA, banks’ participation in microfinance has been on the rise and despite banks accounting for only 8% of SSA financial institutions reporting to MIX in 2009; they served 25% of total borrowers and 40% of total depositors (MIX and CGAP, 2011).

Even though Microfinance and Microfinance Institutions started earlier in other countries around the world, it started in Cameroon in September 1963 with the St. Anthony’s Discussion Group (Long, 2009). This idea was introduced in Njinikom in the North West Province (today known as the North West Region) of Cameroon by a certain Rev. Father Anthony Jansen, a Roman Catholic priest from Holland. Initially, 16 members of this discussion group started with some small contributions that amounted to FCFA2.100 (US $3.5; the exchange rate at time of writing is US$1 = FCFA582) (Long, 2009). However, it was not until the late 1980s, as a result of the commercial banking sector in Cameroon experiencing a serious crisis, with many major banks becoming illiquid and/or insolvent that Microfinance and Microfinance Institutions really gained grounds. At the root of the banking crisis in Cameroon was multifaceted government intervention, inadequate management, and a virtual lack of enforcement of banking regulations (Brownbridge & Kirkpatrick, 1999).

The Microfinance market and services in Cameroon is no longer reserved for the social Non-Governmental Organisations (NGOs) as the boundary between microfinance and commercial banking activities are becoming blurred. Today, there are over 850 registered Microfinance Institutions in Cameroon as estimated by the regulatory authority COBAC. These MFIs are classified under three categories; Category One, Two and Three. Category One or class One Institutions are those that have just members, accept deposit and lend money just from and to members. This category includes associations, cooperatives and credit unions. Category Two are those that accept deposit from members and third parties (customers), this category are groups of limited liability companies that function more like micro banks. Category three MFIs are those that do not collect savings and deposits but engaged just in lending. They include micro credit and project financing institutions. In terms of value and shares, Class one institutions dominated by Cameroon Cooperative Credit Union League (Camccul), Mutuelle Communitaire de Croissance (MC2) and Caisse Villages dominate the microfinance sector of Cameroon, controlling out rightly more than 68% of the total number of customers/members, deposits and outstanding credits.

Since after the classification, commercial banks involvement in microfinance in Cameroon has increasingly become visible. Starting with, Afriland First Bank- created MC2, the microfinance brand in 1992, BICEC another giant in the banking sector created ACEP and CVECA, while from the opposite direction CAMCCUL network created UBC a commercial bank that out rightly failed to take advantage of the pool of competitive advantage offered by CAMCCUL. New players in the sector include SGBC that introduced the Advans microcredit brand and Ecobank that brought in EB-ACCION the latest player in the market in 2009.Cameroon is a member of CEMAC (Communaute Economique et Monetaire des Etats de L’Afrique Centrale or Monetary Authority of Central African States). Other member countries are Gabon, Chad, Central African Republic, the Republic of Congo, and Equatorial Guinea. Within the CEMAC sub region, Cameroon’s Microfinance Institutions constitute the largest in the area with deposits of more than 68% of the area total and loan portfolio of more than 78% of the area gross total (Coulter & Abena, 2010).

Unfortunately, the late 1990s witnessed some of the biggest losses incurred by the MFIs in Cameroon. These losses were the result of a range of errors by the MFIs underpricing the risk of the unsecured loans they give to the poor and directly competing for customers by opening offices around the country. The MFIs experienced high arrears in loan repayment and bad debts which amounted to around a quarter of the overall total loan portfolio and losses registered in the sector (Elle, 2012). This situation posts a serious threat on the performance of MFIs thus prompted changes in the management of loan portfolio of MFIs in Cameroon. The main aim of every financial institution is to operate profitably in order to maintain its stability and improve in growth and expansion. In the last twenty years, the banking sector has faced various challenges that include non-performing loans, political interference and fluctuations of interest rate among others, which have threatened the banks stability (Elle, 2012).

Loan portfolio management involves loan portfolio planning, client screening and loan portfolio control (Karekaho, 2009).  In the Micro Finance sector, loan portfolio planning deals with coming up with policies by which loans are segmented, priced, and their sizes and associated risks determined. Client screening focuses on analyzing and appraising the creditworthiness of applicants for loans in terms of their ability to service and repay the loans applied for. Loan portfolio control deals with loan disbursement, enforcing loan servicing, monitoring, repayment, and follow up actions (Aleema & Kasekende, 2001).  Loan portfolio planning, client screening and portfolio control are all conducted with the sole objective of achieving desired loan portfolio profitability, which, itself is reflected in loan interest payment and loan repayment. Thus, when MFIs’ performance is not realized, questioning loan portfolio management becomes inevitable (Martin, 1996). Subsequently, when MFIs target on better performance is not attained, addressing loan portfolio management ends up noticeable inescapable.

The fundamental objective of every organization is to improve its performance. The concept of social performance seemed to have overshadowed the state of financial health of these enterprises (Pankaj & Sinha, 2010). Some MFIs have experienced bankruptcy or failed to achieve financial sustainability, surviving thanks to the subsidies from various national and international donors. Other MFIs have favoured financial performance to the detriment of their social mission. MFIs targeting poor clients located in rural areas face significant transaction costs, a lack of collateral and possibly a substantial default risk, which drive them to charge high interest rates upon borrowers to achieve financial self-sufficiency. MFIs are facing a double challenge; they must ensure the inclusion of poor people, while being financially sustainable without depending on subsidies. The complementarity between social and financial performance is far from satisfied and achieving this complementarity is a major issue for the microfinance industry.

1.2 Statement of the Problem

In Cameroon and the North West Region in particular, MFIs have played an important role in poverty alleviation, realizing gender equality and development. The major goal of these MFIs is the provision of loans to low-income and the poor households and taking savings from them in order to alleviate poverty. The chance that the money (principal and interest) will be recovered from the borrowers is the most common and the most serious problem faced by these MFIs. Failure to respect and properly implement the laid down loan policies are some of the major problems identified which affects the performance of the loan portfolio of most MFIs. Sound loan portfolio management is the prerequisite for a financial institution’s stability and continuing profitability, while deteriorating loan portfolio quality is the most frequent cause of poor performance.

Regular news about the microfinance sector in Cameroon is the constant close down of several microfinance establishments or the sudden and spectacular bankruptcy of some MFIs which reduce customers’ confidence. We still have in mind the COFINEST and FIFFA cases with the recent COMECI as reported by Business in Cameroon to have incurred a huge loss of XAF8.2 billion during the fiscal year 2017 which resulted from the poor management of the loans granted and failure of forced debt recovery (Business in Cameroon, 2020). In April 2021, COMECI was declared insolvent and bankrupt. The sector is also criticized for providing services only to bankable customers and on almost same conditions as banks forgetting their social responsibility of providing financial services to those who are excluded from the traditional banking system. This can be explained by the fact that these MFIs are mostly emanations of banks and therefore operate with their mother bank conditions.

The volume of loans and savings mobilized by the micro finance sector is still very low as compared to that of the banking sector (about 5.5% of the banks’ deposits and 4.8% of the banks’ loans in 2008 against 7% and 6% respectively in September 2007). More so, there is uneven geographical distribution of MFIs across the national territory (Fotabong, 2012; Kobou et al., 2009), with less than 48% of these MFIs located in rural areas meanwhile close to 60% of the population of Cameroon leaves in rural areas. Whether due to lax credit standards, poor portfolio risk management, bad faith, willful negligence and improper appraisal by the lending officer, natural disaster, diversion of loan funds by borrowers or poor macroeconomic conditions, loan portfolio problems have historically been the major cause of MFI losses and failures (Janson, 2002).

Many research studies have been carried out on the effect of loan portfolio management on micro financial institutions performance among which are those of Hubka and Zaidi, 2005; Cull and al., 2009; Ndambu, 2011 and broadly on the determinants of MFIs performance (Kobou et al., 2009; Kablan, 2010). However, empirical studies yield divergent results. While some studies revealed a positive relationship between loan portfolio management and MFI performance other showed a negative effect. Also, a third group of studies showed no significant effect of loan portfolio management on MFI performance.

With the outbreak of the Anglophone crises in 2016 and the current COVID-19 pandemic, most MFIs in the North West Region of Cameroon have been experiencing an increase in the volume of their non-performing loans as businesses are going bankrupt, farmers are unable to cultivate effectively due to difficulties to access the farms and the increasing high insecurities that have also displaced thousands within the region while some branches of MFIs have even shutdown their operations in many areas. In the mist of these challenges, most MFIs performance is limping as they have been unable to meet up with their financial and social objectives. This have all contributed to the timely intervention of this study in other to analyze the concept of loan portfolio management and provide insight on how Cameroonian MFIs can best manage their loan portfolios so as to be able to measure the influence it has on its performance in other to address these pertinent issues to avoid worse case scenarios.

Though increasing loan portfolio management has become an issue in the microfinance sector; studies analyzing its effect on performance remain limited in number in Cameroon (Fouda Owoundi, 2010). Even when these studies exist, they failed to account for the dual mission of MFIs which is providing banking services to the poor while remaining financially sustainable. Most importantly, there is no definite answer as to whether increasing loan portfolio management affects MFIs financial performance positively or negatively. Based on the above, the present study seeks principally to assess the influence of loan portfolio management on the performance of Category One MFIs in Bamenda, Northwest Region of Cameroon. In other words, does loan portfolio management really matter for the performance of Category One MFIs in Cameroon?

1.2.1 Research Questions

1.2.2 Main Research Question

What is the influence of loan portfolio management on the performance of Category One MFIs in Bamenda Northwest Region of Cameroon?

1.2.3 Specific Research Questions

1. To what extent does loan portfolio planning influence the performance of Category One MFIs in Bamenda Northwest Region of Cameroon?
2. How does client screening influence the performance of Category One MFIs in Bamenda Northwest Region of Cameroon?

• How does loan portfolio control influence the performance of Category One MFIs in Bamenda Northwest Region of Cameroon?

1. To what extent does loan policies influence the performance of Category One MFIs in Bamenda Northwest Region of Cameroon.

1.3 Objectives

1.3.1 Main Objective

The main objective of this study is to analyse the influence of loan portfolio management on the performance of Category One MFIs in Bamenda Northwest Region of Cameroon.

1.3.2 Specific Objectives

They are to;

1. Investigate the influence of loan portfolio planning on the performance of Category One MFIs in Bamenda Northwest Region of Cameroon.
2. Assess the influence of client screening on the performance of Category One MFIs in Bamenda Northwest Region of Cameroon.

• Measure the influence of loan portfolio control on the performance of Category One MFIs in Bamenda Northwest Region of Cameroon.

1. Investigate the influence of loan policies on the performance of Category One MFIs in Bamenda Northwest Region of Cameroon.