CHAPTER ONE

INTRODUCTION

1.1. Background to the Study

Microfinance institutions (MFIs) play an important role in the financial system in most developing countries. They have a double bottom-line objective: a poverty-reduction mission and a sustainability goal. The Microcredit Summit Report 2011 (Reed, 2011) reveals that MFIs have enabled about 175 million people access to financial services (savings and credit). These organizations have thus undoubtedly facilitated the financial inclusion of people typically excluded from the banking sector. These institutions have also become more sustainable. The implementation of best-governance practices, increasingly required by the ratings agencies and donors, partly explains social and financial performance of MFIs (Armendáriz and Morduch, 2010).

Financial management of microfinance  remains one of the critical issues in the sector, and as such, financial management practices are essential in determining the financial performance of Mfi (Mabonga, Kimani & Maina, 2017). Sound financial management practices have economic benefits and provide long-term direction and stability to microfinance  operations (Eugene & Joel, 2009). On the other hand, Rahaman (2010) postulates that the management of MFis must be vigilant in adopting financial management practices to be at a competitive edge with their rivals. Board characteristics are one of the corporate governance aspects that determines the performance of an organization. Ees, Postma & Sterken (2003) postulate that the corporate board has three key roles: strategic decision making, the link between the organization and its shareholders, and internal governance and monitoring roles. The board of directors’ capacity to achieve these roles largely depends on its characteristics (Gouiaa & Zeghal, 2014)

Turyahebwa et al. (2013) describe financial management practices as a set of constructs or methods developed to carry out accounting, reporting, budgeting, and other business finance activities and are used as trajectories for understanding the financial performance of any institution. Kamande (2015) contends that various practices on financial management are crucial in the control of institutions. Therefore, this research aims to establish the effect of board features, financing mix, credit default risk management, and the management practices of liability and assets on microfinance banks’ financial performance. Board characteristics are one of the corporate governance aspects that determines an organization’s performance. According to Ees, Postma, and Sterken (2003), corporate boards have three critical roles of strategic decisionmaking: a link between the organization and shareholders and the role of internal governance, and one-to-one observation surveillance. The capacity of the board of directors in achieving these roles largely depends on its characteristics. The board composition is one of the board’s characteristics that elaborate non-executive directors’ part to executive directors (Sandada, Manzanga & Shamhuyenhanzwa, 2015). This proportion is vital so that none of the individuals’ categories can dominate the board’s policymaking (Borlea, Achim & Mare, 2017). Non-executive directors can be defined as independent directors from outside and look into and safeguard the bondholders’ comforts (Lawal, 2012). Their presence in a more significant proportion compared

According to Hawo (2015) on the Financial Management of the Public sector of Nairobi (Kenya), said that implementing Integrated Financial Management Information System (IFMIS) is to increase the effectiveness and efficiency of state financial management and facilitate the adoption of modern public expenditures practices in keeping with International Standards and benchmark. Much of the work in automating IFMIS has focused on financial management information system including general ledger accounts payables, accounts receivables, procurement and payroll, asset management, debt management and budget. As IFMIS systems evolved the needs changed so the scope of the automation can be expanded, given the rapid change of technology it may not be feasible to plan all of these potential needs or IT options in advance (Bartel 2009). Husman & Pudjiastuti (2006), said governments in developing countries are increasingly exploring methods and systems to modernize and improve public financial management. Over the years there has been an introduction of the IFMIS as one of the most common financial management reform practice aimed at the promotion of efficiency, effectiveness, accountability, transparency security of data management and comprehensive financial reporting. The scope and functionality of IFMIS varies across countries but normally it represents an enormous complex strategic reform process. According to Carlos & Klaus (2006), cooperative, financial institutions have problems in financial management, governance, and supervision. This is due to the political instability in most developing countries, insufficient technical know-how, and fluctuation of prices and interest rates in the developing countries.

1.2. Statement of the Problem

Management of finance is a crucial function of any business institution since it determines its success (Lakew & Rao, 2014). Kwame (2010) suggests that unpleasant financial management practices will negatively impact business profit and organizations’ financial results. A major challenge faced by financial managers in micro finance institutions in Cameroon is the issue of inadequate investment validation. Investment validation is a critical capability for a microfinance institution’s smooth operation. This is because the market in which micro finance institutions operate are still developing which might limit market activities. As results, microfinance institutions find it difficult to obtain market data for valuation purposes. Microfinance institution management teams are unable to obtain the level of quality information required to make investment decisions due to lack of consistent and reliable valuation procedures. There have been reports that have continuously indicated that the microfinance institutes, financial outcome has not been stable due to various factors. CBK (2019) notes that although microfinance started on a high notch, recent reports indicate that the MFBs have been slogged into a loss-making streak. Pre-tax losses increased from 171 million in June 2017 to 935 million by the end of June 2018, thus a decline of 450%. Evidence also shows that about 70% of microfinance banks had registered losses by the end of 2016/2017. For instance, Daraja, Choice, Maisha, and Century Microfinance Banks had breached their minimum requirement for core capital, thus signaling financial instability. Only Microfinance institution did not fall into the loss-making spree, but its profits declined by 92%, from 224 million shillings to 18.7 million shillings in December 2016 (CBK, 2019). Performance. Kirika (2018) deliberated on the factors that mostly affect microfinance institutions’ performance: A case study of Meru County and found out that credit management, competition, and investment decisions have a significant relationship with the performance of microfinance institutions. This study sought to determine what effect the board characteristics, financing mix, credit default management, and assets and liabilities management practices have on the financial performance of microfinance institution. Thus, this study seeks research on these particular variables.

1.3. Research Questions

1.3.1.  Main Research Question

• What is the role of financial management practices on the financial performance of NtaCCUL.

1.3.2. Specific Research Questions

1. What is the role of Capital budgeting on the financial performance of NtaCCUL.

2. What is the role of Capital structure on the financial performance of NtaCCUL.
3. What is the role of Working capital management on the financial performance of

1.4 Objectives of the Study

1.4.1. Main Objectives

The main objective of the study is to assess the role of financial management practices on the financial  performance of NtaCCUL.

1.4.2. Specific Objectives

1. To evaluate the role of capital budgeting on the financial performance of NtaCCUL.
2. To analyse the Role of capital structure on the financial performance of NtaCCUL
3. To examine the role of working capital management on the financial performance of NtaCCUL.

1.5. Research Hypothesis

H0₁: Capital budgeting has no significant effect on the performance of microfinance institution in Cameroon.

H0₂:  Capital structure has no significant effect on the performance of microfinance institution in Cameroon.

H0₃:  Working capital management has no significant effect on the performance of microfinance institution in Cameroon.