1.1 Background to Study

Contemporary businesses use loan repayment as a notable strategy in marketing and finance. Thus, trade credit is vital for business growth. When a company delivers goods or services without immediate cash payment, it extends trade credit to customers, resulting in accounts receivables expected to be collected in the future (Kungu, Wanjau, Waititu & Gekara, 2014).

Accounts receivables represent a substantial proportion of a company’s assets, typically constituting 15% to 20% of the total assets of a typical manufacturing firm (Dunn, 2009). Managing these assets is crucial due to their susceptibility to bad debts and losses.

Loan repayment is essential for companies to safeguard sales from competitors and attract potential customers. In competitive industries, offering credit to customers is inevitable to retain them. Consequently, investing in accounts receivables might be imperative for business survival (Kakuru, 2001). Managing these receivables needs to strike a balance between profitability and liquidity.

To maintain profitability, businesses must ensure the proper management of their receivables (Foulks, 2005). High accounts receivables levels not properly regulated can strain a business’s liquidity (Samuels & Walkers, 1993).

1.2 Statement of the Problem

The effective management of loan and credit functions is essential for the safety and soundness of microfinance institutions. Historical issues in loan management, such as lenient credit standards or weak loan repayment management, have been significant causes of microfinance losses and failures.

Globally, over 3 billion people survive on less than $2.50 a day, with 80 percent in Africa, as reported by the Poverty Facts and Statistics from the World Bank Development Indicators. Microfinance institutions have been advocated as a transformative tool for many, although the issue of loan repayment remains a major challenge. Investigating the state of loan repayment in microfinance management is thus necessary.

According to Tesfamariam (2015), a significant challenge for SEQUOIA lies in the lack of financial education. Inadequate financial literacy can hinder savings and lead to debt accumulation. Poor loan repayments negatively impact an institution’s capital, earnings, objectives, and can even lead to institutional collapse (Benson et al., 2016).

Gogo & Oluoch (2017) concluded that SEQUOIA societies should share financial knowledge through advisory services, particularly for members with inadequate financial training. Inadequate financial literacy results in negative returns and an inability to repay loans.

Mohamad Fazli Sabri and Nurul Farhana Zakaria (2015) found significant influences on financial well-being due to moderate levels of financial literacy, capability, and education among young Malaysian individuals.

The study area faces challenges related to financial literacy, impacting loan repayment, including loan default, budgeting, non-repayment, and debt management. Therefore, this study focuses on analyzing the impact of financial literacy on loan repayment performance, which has shown a negative relationship in previous research (Wanjiku & Muturi, 2017).

1.3 Main Objective

The general aim was to evaluate the Procedure of Granting Loans and Loan Repayments in Financial Institutions.

1.4 Specific Objectives

(i) Analyze the loan-granting procedures in financial institutions. (ii) Evaluate the relationship between loan-granting procedures and loan repayment in financial institutions.

1.5 Specific Research Questions

1. What are the procedures for granting loans in financial institutions?
2. How does the loan-granting procedure influence loan repayment in financial institutions?

1.6 Hypothesis

The research aims to statistically test the following: H0: Loan granting procedures do not significantly affect loan repayment in financial institutions. H1: Loan granting procedures significantly affect loan repayment in financial institutions.

1.7 Significance of the Study

The study results will provide a better understanding of loan repayment management and help improve loan recovery in microfinance institutions. This research intends to contribute to existing literature on the state of loan repayment management in microfinance. It aims to establish an effective and efficient loan process, potentially providing a competitive advantage in the financial sector.

The findings can be used for further research and studies on the status of loan recovery in microfinance and other financial institutions. Additionally, this research is a prerequisite for the Accounting bachelor’s degree at the University of Buea.