CHAPTER ONE

INTRODUCTION                       

1.1 Background to the Study

International organisations are coming to the realisation that Microfinance Institutions (MFIs) are veritable and effective channels to ensure programme implementation effectiveness, particularly in poverty alleviation projects and firsthand knowledge of the needs and interest of the poor. News on financial scandals in developed economies is mainly associated with stock market activities, issues related to mergers/acquisitions and other macroeconomic issues. This is due to the well-established and pivotal role the stock market in this market plays in channeling funds from different areas for investment purposes. Even though microfinance has proved its worth as a weapon against poverty, it is going through a critical phase especially with the governance practices within these organisations (Labie, 2001). Most Microfinance Institutions (MFIs) face the challenge of achieving sustainability, but are also faced with the problem of governance (Mersland and Øystein Strøm, 2009). Mersland and Øystein Strøm (2009) argue that, in order to improve the performance of MFIs and make microfinance a much more effective weapon against poverty and hunger, it is important that we start by understanding the influence of governance on the industry. Good governance of MFIs requires a clear strategic vision of the organisation, transparency and efficient management strategy acceptable by all involved with the organisation (Lapenu and Pierret, 2006). Microfinance has been exploited and will continue to be exploited by major stakeholders in the microfinance value chain who preach the same doctrine; that of poverty alleviation (Fotabong, 2011). These liquidity problems have resulted from the rates of loan default. Efforts are being made by institutions to collect past due accounts (Mwangi., 2016).   This has resulted to a loss on goodwill between a microfinance and the individual borrower (Brighan, 1997) as it includes, attaching the property of the defaulter or group members who are guarantors and as and hounding the property to force repayment including the children of the defaulter (Myers, 1998).

According to Lapenu and Pierret (2006), the governance within MFIs is situated at the crossroads of two approaches: a political/ethical approach and an economic/managerial approach. They argue that the political/ethical approach emphasises the need for MFIs to have in place a strategic vision for the institution, the legitimacy of its decision-makers and the integration of the institution into its environment. On the other hand, the economic/managerial approach emphasises MFIs having in place a system of good governance that can improve the organisation’s efficiency, reduce most of the costs incurred in the running of the organisation and optimise resources. At the same time, Kyereboah-Coleman and Osei (2008) and Bakker et al., (2014) argue that, as MFIs increase in their numbers and outreach, increase their assets and the savings of the poor, not only are they supposed to submit to some form of regulatory regime, but should be forced to assume good governance practices (Labie, 2001). Therefore, in order to differentiate between governance within other industries and MFIs, the Council of Microfinance Equity Funds (CMEF) in 2005 published the governance guidelines for The Practice of Corporate Governance in Shareholder-Owned Microfinance Institutions (CMEF, 2012). In the four years since the publication of these guidelines, there has been a radical transformation of the Microfinance industry and good governance is now highly regarded as essential for any successful MFIs financial sustainability and impact (Bakker et al., 2014).

Corporate governance is significant in improving the efficiency of an organization. Globally, corporate governance is generally regarded as the practice through which a company is managed and directed. According to OECD (2015), transparency and accountability, the board of directors, position of the chairperson and chief executive, and rights of shareholders are the key principles of corporate governance. Corporate governance is described as the structures and processes for the direction and control of companies; corporate governance concerns the relationships among the management, Board of Directors, controlling shareholders, minority shareholders and other stakeholders (Norlia, Mohammad & Ibrahim, 2011). Mayer (1999) describes corporate governance as the sum of the processes, structures and information used for directing and overseeing the administration of a firm. It is a system by which corporations are governed and controlled with a view to increasing shareholder’s value and meeting the expectations of the other stakeholders. In other words, corporate governance is the system by which business corporations are directed and controlled to enhance performance and long-term shareholder value (Angahar & Mejabi, 2014). Igbekoyi and Agbaje (2018) opine that corporate governance structure specifies the distribution of rights and responsibilities among the different participants in the organisation.

Business ethics and corporate governance rules and regulations have been at the forefront of investor’s minds due to corporate mismanagement (Lemma & Negash, 2016). Corporate governance is the system of internal controls and procedures that regional banks follow. Corporate governance provides a framework that identifies managers’ roles and responsibilities, the board of directors, and shareholders (Awotundun, Kehinde, & Somoye, 2011). The recent financial scandals have justified the importance of new rules and regulations to regulate corporate governance within organizations (Alotaibi & Hussainey, 2016). Legislators and regulators seek to strengthen and enhance corporate governance rules and regulations, disclosure, and transparency to prevent future financial crises (Al-Maghzom, Hussainey, & Aly, 2016). One example of the rules and regulations put into place to prevent financial crises is the Sarbanes-Oxley Act of 2002 (SOX) enacted by the U.S. Congress to impose corporate governance rules and regulations on publicly listed companies (Sorensen & Miller, 2017). SOX addressed audit independence, board independence, and corporate disclosures (Silkoset, Nygaard, & Kidwell, 2016). The United States passed SOX in 2002, which changed the accounting profession standards (Sorensen & Miller, 2017). SOX had many vital provisions that companies needed to follow. The purpose of the requirements was to improve the independence of the external auditors and strengthen corporate governance and board of directors (Silkoset et al., 2016).

The purpose of corporate governance is to achieve long-term stockholder value; as the banking leaders adopt the best practices in corporate governance, the bank may achieve better financial performance and a better market for the bank (Al-Matari, Al Swidi, & Fadzil, 2014; Ghazali, 2010; Mazzotta & Veltri, 2014). Corporate governance is a valuable tool to mitigate the conflicts of interest between stakeholders and management (Al-Matari & Al-Arussi, 2016; Pandya, 2011). Corporate governance broadly can be defined as the set of processes, policies, laws and institutions affecting the way a company is directed. It also includes relationships among the stakeholders of the company and a definition of the goals for which it is governed (OECD, 2004; Cadbury Committee, 1992; Economiesuisse, 2002). In the early days, most attention focused on rules and policies to share power between principals and agents and govern management activities corporate governance is a crucial piece to market stability and economic development, shown through research (Bonna, 2011; Chahine & Safieddine, 2011). Corporate governance is crucial to protect the interest of all the stakeholders and shareholders. Corporate governance induces confidence not only from the stakeholders and shareholders but also (a) government, (b) employees, (c) suppliers, and (d) customers. Companies with weaker corporate governance have higher input costs, lower labor productivity, lower equity returns, lower value, and lower operating performance than banks with good corporate governance (Zaharia & Zaharia, 2012). Shareholders can see economic growth and an increase in wealth due to good corporate governance (Cretu, 2012). The micro finance sector is a highly regulated industry, and corporate governance is a critical element to maintain transparent financial reporting (Sorensen & Miller, 2017). The regulation behind corporate governance continues to evolve; managers and board of directors can demonstrate the changes to investors by showing them the financial disclosures (Silkoset et al., 2016). The poor implementation of corporate governance practices has resulted to loan delinquency in micro finance institutions.

The issue of loan delinquency/default among banks and microfinance institutions has been discussed in many public lectures and fora as one of the reasons why commercial banks have not shown much interest in financing Micro, Small and Medium Enterprises (MSMEs). According to Balogun and Alimi (1990), loan default can be defined as the inability of a borrower to fulfil his or her loan obligation when due. According to CGAP (2009), the delinquency can be analysed by looking at three broad indicators. These include collection rates which measure the amount of money over schedule for payment by the customers (clients) as against the amount of loan issued out; arrears rates measure overdue amounts against total loan amounts and risk rate of the portfolio measures the unpaid loans balance that were not settled on time by the clients against total loans balances. Delinquency arises when there is an increased loss of credit risk and cautions of operational challenges. The measurement of delinquency helps to project how much of the portfolio will not be retrieved from the clients or otherwise will never be repaid by the customers (CGAP, 2009). Agene (2011) explains credit risk portfolio as the worsening of the quality of loan portfolio leading to losses of loan from clients and rising delinquency cost of management.

For purposes of managing delinquent loans, microfinance institution should categorise loans into five loan portfolios and also make provision for bad debt. These categories include performing, watch unpaid unto 30 days, substandard –unpaid up to 180 days, Doubtful-unpaid up to 360 days and Loss unpaid for over 360 days. These classifications will help delinquency management on loans portfolios’ to be effective (Lillian, 2013). Kohansal and Mansoori (2009) observe that lenders devise various institutional mechanisms aimed at managing loan default. These include pledging of collateral, third party credit guarantee, use of credit rating and collection agencies, etc.

Aballey (2009) states that bad loans delinquent can be managed by ensuring that loans are made to only borrowers who are likely to be able to repay, and who are unlikely to become insolvent. Credit analysis of potential borrowers should be carried out in order to judge the credit risk with the borrower and to reach a lending decision. Loan repayments should be monitored and whenever a customer defaults, actions should be taken. Thus, banks should avoid loans to risky customers, monitor loan repayments and renegotiate loans when customers get into difficulties (Ameyaw Amankwah, 2011).

MFIs need a monitoring system that highlights repayment problems clearly and quickly, so that loan officers and their supervisors can focus on delinquency before it gets out of hand (Warue, 2012). Sheila (2011) is of the view that proper and adequate appraisal is key to controlling or minimising default. This is the basic stage in the lending process. According to Anjichi (1994), the appraisal stage is the heart of a high quality portfolio. This includes diagnosing of the business as well as the borrower. Before beginning the process of collecting information on the client for the purpose of determining credit limits, the loan officer should have specific information available which will guarantee that the data and figures provided by the client will have a pro-margin error (Sheila, 2011).

Microfinance institutions and other finance institutions must develop a credit policy to govern their credit management operations (Pandey, 2020) and since microfinance institutions generate their revenue from credit extended to low-income individuals in the form of interest charged on the funds granted (Central bank (BEAC) Annual Report, 2022) the loan repayments may be uncertain. The success of lending out credit depends on the methodology applied to evaluate and to award the credit (Ditcher, 2022) and therefore the credit decision should be based on a thorough evaluation of the risk conditions of the lending and the characteristics of the borrower.

In most of the world’s economies, micro finance institutions are regarded as vectors for job and wealth creation (World Bank, 2014). Through their investments and consumption, they create value and produce a plethora of goods and services, thereby playing a significant role in funding public services and creating a dynamic local economy (Goudreault and Hébert, 2013). In short, they are a unique asset for development, serving as both a motor for growth and a tool for redistribution of wealth (ESF, 2009, p. 1). Microfinance has been termed as the banks of the poor. When looking at the global development of this financial systems, because for 10 years, the world’s largest aid agencies have worked together under the banner of the Consultative Group to Assist the Poor (CGAP), committing people, money, and countless hours to building more inclusive financial systems that work for the poor. Financial inclusion has recently been a significant concern for the international community. According to the World Bank, the contribution of the microfinance sector to the GDP of developed economies is typically less than 0.5%. For example, in the United States, the microfinance sector contributed only 0.1% to the country’s GDP in 2016 (World Bank, 2018). In the United States, the microfinance sector is relatively small compared to the overall financial sector. According to a report by the Microfinance Information Exchange (MIX), the total assets of US-based microfinance institutions reached $8.4 billion in 2018, representing less than 0.01% of the country’s GDP. Similarly, in 2021, the total assets of US-based MFIs reached $8.6 billion, representing less than 0.01% of the country’s GDP. (MIX, 2019; MIX, 2021). In 2021, according to the latest Global Findex survey of The World Bank (Demirgüç-Kunt et al. 2022), a proportion of 76% of adults at the global level possessed an account at a bank or a regulated institution such as a credit union, a microfinance institution, or a mobile money service provider. At the global level, this rate has improved by 50% since the first such survey in 2011 (Demirgüç-Kunt and Klapper 2012). According to a report by the European Microfinance Network on the performance of microfinance institutions in Europe, the average portfolio-at-risk (PAR) rate for MFIs in Europe was 2.4% in 2015, and this rate remained stable at 2.3% in 2018. (European Microfinance Network, 2019). In the United States, the Microfinance Information Exchange (MIX) reports that the average delinquency rate for US-based MFIs was 3.3% in 2015, and this rate decreased to 2.9% in 2018. (MIX, 2019). It is worth noting that the COVID-19 pandemic has had significant impacts on the microfinance sector, and many MFIs have reported higher rates of loan delinquency due to the economic disruptions caused by the pandemic.

In Sub-Saharan Africa (SSA), the SME sector accounts for more than 90% of all firms. Between 70% and 80% of SMEs are micro-finance institutions. They are the main source of jobs, financing and income for Africans, after subsistence farming (Josee et al., 2016). In 2018, the African Development Bank (AfDB) estimated that the microfinance sector contributed 2.3% to the GDP of Africa. (AfDB, 2016). In 2019, a report by the Microinsurance Network estimated that the microfinance sector contributed 2.4% to the GDP of sub-Saharan Africa. (Microinsurance Network, 2019). Similarly, in 2020, a report by the International Finance Corporation (IFC) estimated that the microfinance sector contributed about 2.5% to the GDP of sub-Saharan Africa. (IFC, 2020). It is worth noting that the contribution of the microfinance sector to the GDP of individual African countries can vary widely, depending on factors such as the size of the sector, the level of financial inclusion, and the local economic and political context. For example, in Kenya, the microfinance sector contributed 5.7% to the country’s GDP in 2020, while in Nigeria, the sector contributed only 0.12% to the country’s GDP in 2019. (MicroSave, 2021; Nairametrics, 2020). Overall, while the microfinance sector has the potential to contribute to economic growth and job creation in African economies, the magnitude of its contribution to the GDP varies widely across countries and regions. However, according to the African Microfinance Pricing Report 2019, the median portfolio-at-risk (PAR) rate for MFIs in Africa was 4.5% in 2018, meaning that 4.5% of outstanding loans were at least 30 days past due. The report also notes that the PAR rate varies widely across countries, with rates ranging from 0.4% in Ghana to 11.9% in Zimbabwe. (MIX, 2019). Additionally, a survey of microfinance institutions conducted by the Consultative Group to Assist the Poor (CGAP) in 2019 found that the average PAR rate for MFIs in sub-Saharan Africa was 7.3%, up from 5.9% in 2016. The survey also found that the delinquency rate varied widely across institutions, with some reporting rates as high as 20%. (CGAP, 2019). It is worth noting that the COVID-19 pandemic has had significant impacts on the microfinance sector in Africa, and many MFIs have reported higher rates of loan delinquency due to the economic disruptions caused by the pandemic. According to a survey conducted by CGAP in 2020, 44% of MFIs in sub-Saharan Africa reported that their PAR rates had increased since the start of the pandemic. (CGAP, 2020) Overall, loan delinquency rates in the microfinance sector in Africa can be influenced by a range of factors, and can vary widely by region and institution. MFIs typically employ a range of risk management strategies to mitigate delinquency and other risks, including credit screening, collateral requirements, and borrower education and support.

For many years in Cameroon, the microfinance sector has evolved and has been transformed into a system of provision of short-term loans, savings, credits, money transfers, etc thanks to various financial sector policies and programs undertaken by the government since independence. MFIs now are the primary sources of funds to small and medium size enterprises in Cameroon and other countries in the process of economic growth (GICAM, 2020). According to a report by Cameroon tribune (2020), the performance of microfinance institutions has been decreasing since the 2017 fiscal year but, in 2019, the trend changed slightly. This is revealed in the background note published, on April 1, by the Ministry of Finance in the framework of its coming three bond issuances. At the end of December 2019, the note informs, the total equity of the microfinance sector was XAF2,122.9 billion (representing 32.8% of commercial banks’ equity). Deposits stood at XAF90.09 billion (18.5% of deposits recorded by banks) and credits reached XAF839.14 billion (22.90% of the credits granted by banks by that period). On December 31, 2019, 418 accredited microfinance institutions were operating in Cameroon. Of those institutions, 88.04 % were first-class (123 private and 245 organized as cooperative), 11.24 % were second-class (47 institutions) and 0.72 % third class. MFIs in Cameroon 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 the members, this category includes associations, cooperatives and credit unions (GICAM, 2019).

Despite the immense contribution of micro finance institutions to the economy of Cameroon, they sometimes face challenges due to poor implementation of corporate governance practices. The crucial problem faced by financial institutions including those in Cameroon is credit risk because of defaulters not repaying credits. The failure to manage bad debts leads to insolvency and losses among financial institutions (Abiola & Olausi, 2014). The growing trend of loan defaults is becoming a concerning issue not only for the banking sector but also for the national economy of Cameroon; It hinders the financing capacity of the banks and, therefore, harms the overall socio-economic development of the country. Among the various services provided by the MFIs, lending has been the primary activity for a decade and the credit provided by MFIs needs to be recovered within predetermined period. The loan may not be received on predetermined time. The present study therefore focuses on the on the role of corporate governance practices on delinquency management in micro finance institutions.

1.2. Statement of the Problem

The microfinance sector in Bamenda, Cameroon, serves as a vital source of financial inclusion for marginalized communities. However, it is increasingly plagued by high levels of loan delinquency, which threaten the sustainability of these institutions and their ability to achieve their social missions. News of the creation of new MFI and closure of existing MFIs are very common. As a result, most citizens view MFIs as “chameleon” institutions while others have been fast to classify MFIs as “sunrise and sunset” institutions which means, they go operational at sunrise and at sunset they do not exist.  Previous studies indicate that effective corporate governance can enhance accountability and operational efficiency, potentially leading to improved delinquency management (Mbah & Okafor, 2020; Nji & Tchouawou, 2021). Board oversight is crucial for ensuring that management adheres to best practices, while robust risk management frameworks can proactively identify and mitigate potential defaults (Ngwa & Ngwa, 2019). Additionally, well-structured staff training programs can improve employees’ skills in client management and risk assessment, further reducing delinquency rates (Kouadio & Nguema, 2019). Monitoring practices are essential for tracking performance and ensuring compliance with established policies, thus fostering a culture of accountability (Mbong & Nnang, 2020).

However, in some cases, board members have personal or financial ties to management, which can compromise their objectivity and lead to inadequate oversight (Kouadio & Nguema, 2019). Equally, many microfinance institutions, particularly smaller ones, lack the resources needed to implement comprehensive risk management systems. This results in ineffective practices that do not adequately address the risks of delinquency (Mbong & Nnang, 2020).  Also, Microfinance institutions, especially smaller ones, face financial constraints that limit their ability to invest in comprehensive training programs. This results to inadequate staff preparation and increased risk of delinquency (Kouadio & Nguema, 2019). Lastly, implementing effective monitoring systems can be resource-intensive, requiring significant financial and human capital. Smaller microfinance institutions struggle to allocate the necessary resources without compromising service delivery (Mbong & Nnang, 2020).

In general, capitalizing the micro finance sector through the corporate governance practices and reduction of loan default rates to drive development is both critically important and urgent for enhancing aggregate economic growth and improving the welfare of millions of extremely poor people as well as enhancing financial inclusion. However, studies that focus on cataloguing and understanding the role of corporate governance practices in MFIs in Cameroon and the North west region in particular, are limited. Incognizant of this, the study is targeted towards assessing the effects of corporate governance practices on delinquency management in micro finance institutions. 

Despite the recognized importance of corporate governance practices such as board oversight, risk management, staff training, and monitoring there is a paucity of empirical research exploring their specific effects on delinquency management within this context. However, the effectiveness of these governance practices in the unique socio-economic landscape of Bamenda remains under-researched. The lack of localized studies creates a gap in understanding how these corporate governance practices interact to influence delinquency management in microfinance institutions in the region. Incognizant of this, the study is targeted towards assessing the effects of corporate governance practices on delinquency management in micro finance institutions. 

1.3. Research Questions

The study will have a main and four specific research questions. The specific research questions will permit to decompose the different variables.

1.3.1. Main Research Question

The main research question of this study is:  what is the relationship between corporate governance practices and delinquency management in micro finance institutions in the city of Bamenda?

1.3.1. Specific Research Questions

The specific research questions are decomposed into four in line with the vectors of corporate governance practices as seen below.

1. What is the relationship between board oversight and delinquency management in micro finance institutions in the city of Bamenda?
2. What is the relationship between risk management and delinquency management in micro finance institutions in the city of Bamenda?

• What is the relationship between staff training and delinquency management in micro finance institutions in the city of Bamenda?

1. What is the relationship between monitoring and delinquency management in micro finance institutions in the city of Bamenda?

1.4. The Research Objectives

The objectives of the study are also decomposed into main and specific objectives in line with the research questions.

1.4.1. Main Research Objective

The main objective of the study is to assess the relationship between corporate governance practices and delinquency management in micro finance institutions in the city of Bamenda.

1.4.2. Specific Research Objectives

1. To examine the relationship between board oversight and delinquency management in micro finance institutions in the city of Bamenda.
2. To analyse the relationship between risk management and delinquency management in micro finance institutions in the city of Bamenda.

• To determine the relationship between staff training and delinquency management in micro finance institutions in the city of Bamenda.

1. To investigate the relationship between monitoring and delinquency management in micro finance institutions in the city of Bamenda.