Role of Cash Management on the Profitability of Micro Finance Institutions
Department: Banking and Finance
No of Pages: 73
Project Code: BFN4
References: No
Cost: 5,000XAF Cameroonian
: $15 for International students
CHAPTER ONE
INTRODUCTION
This
introductory chapter of the study will be discussing the background of the
study, research problem, research objectives, research hypothesis, significant
of the study, scope and limitation of the research and the organization of the
research.
1.1 Background of the study
The concept of micro finance originated from
the field of informal finance in the years 1970 and 1980.Micro finance involves
the provision of financial services such as savings, loans and insurance to
poor people living in both urban and rural settings who are unable to obtain
such services from banks (Basley 2002).
Micro
finance according to Otero (1999.p.8) is the provision of financial service to
low income poor and very poor finance self-employed people. These financial
services according to Ledger wood (1999) generally include micro savings and
micro credit, but can also provide other services like micro insurance and
money transfer or payment services.
Micro
finance institutions also provide non-financial services like education,
counseling, health, technical assistance training and many others. They are
nine approaches of providing micro credit or finance to customers.
These
ones are; the minimalist approach, the integrated approach, the institutional
approach, welfarist approach, the commercial approach, the individual approach,
the group lending approach, the existing business approach and the creation
business approach(Messomo,2012).
When
micro finance institutions perform services like micro credit, there is high
probability of default. This at times greatly affects the probability of
microfinance institutions.
The
concept of microfinance was pioneered in Bangladash by Muhammed Yunus in the
year 1970s in the village of jobra. He experimented by lending to the poor
women of the village of Jobra. He also found the Grameen bank and won the noble
price in 2006(Helms, 2005).
Since
then, innovation in microfinance services has evolved. This evolution is aimed
at alleviating poverty. Poverty has been the talking point of most political
agendas worldwide especially less developed countries like Cameroon.
According
to International Monetary Fund (IMF)(2003) country report on poverty reduction
strategy papers(PRSPS), poverty rate in Cameroon has about was 40.2% in
2001.According to Ayuk (2012), Cameroon has about 500 microfinance institutions
of all categories actively participating in the alleviation of poverty.
If
alleviation of poverty by MFIs through the granting of micro credit leads to
default at times, there is a need to identify this problem. The evolution of
microfinance has been the turning point in financing of both entrepreneurial
ventures and small businesses.
In a number of European countries micro
finance evolved from informal beginnings during the 18th and 19th centuries as
a type of banking of the poor, juxtapose to the commercial and private banking
sector.
Almost
from the unset microfinance meant financial intermediation between micro
savings and micro credit and was powered by intermediation. In Germany, the
former microfinance institution now accounts for about 50% of banking assets;
the outreach is to about 90% of the population.
Microfinance
in Asia has much longer history, though little seems to known about the early
history of hui in China, Chit funds in India, the arisen in Indonesia or the
paluwagan in the Philippines to name a few. Financial institutions of
indigenous origin, most of them informal are still exceedingly wide spread but
had been largely ignored in financial sector developments.
However, there are exceptions on a limited scale, as in India where chit funds are regulated like in Indonesia with its highly diversified rural microfinance sector where various forms of informal financial institutions have been registered and eventually regulated throughout the 20th century (Hans, 2005).
Over
time, micro credit programs all over the world improved upon the original
methodologies and defiled conventional wisdom about financing the poor.
First,
they showed that poor people, especially women, had excellent repayment rate
among the better programs, rates that were better than the formal financial
sectors of the most developing countries.
Secondly,
the poor were willing and able to pay interest rate that allowed microfinance
institutions to cover their cost. Therefore, financial service providers have
had better understanding of the need of microfinance institutions and of the
wide range of financial rate of low income people in both urban and rural areas
(Gateway).
These
needs might be managing irregular income flows and coping with crisis such as
unexpected sickness, natural disasters and death, many financial service
providers have broaden their scheme of operations beyond their product of
providing only credit services but also offer other services like; savings,
insurance and money transfers, to help poor people manage their financial lives
(Robert et al, 2004).
New technologies continue to create opportunities to broaden microfinance institutions financial services and to also provide those services at a lower cost to the poor.
In Cameroon the idea
of credit union were introduced in1963 by a Roman Catholic priest Rev father
Anthony Jansen from Holland who was then residing in a village residing in the
northwest region called Njinikom. It is in this light that the first credit
union started in Njinikom.
Before
embarking on the information of credit union, Rev Father had noticed and
witnessed a problem amongst the villagers. Most villagers held that act of
hoarding to a high esteem as a means of securing their liquidity to no avail,
insect usually ate them.
It
is in vain that they saw the need for villages to regroup themselves as well as
their resources to meet their productive need. This idea extended to Bamenda
town as well as other parts of the country.
In
1969 there were already 34 credit union in existence organized jointly by the
mission and the government department in charge of cooperatives. 34 credit
union the joint to form the league known today as CAMCULL acting as a
regulating organ to its affiliate’s credit union. It operates in all the region
of Cameroon with it’s headquarter in Bamenda.
Today,
it’s an umbrella organization for over 200 credit union with a total of
196922(urban and rural) members. Its provides a wide range of services to its
members, it also manages savings that is an amount of over 41000million FCFA
its network consolidated balance is over 49840589FCFA.
It
is worth mentioning that credit unions are also subjected to law number 921006
of 14180106 and decree number 21455pm of 23/11/92 relating to rules and
regulations governing cooperative societies as well as initiative groups.
Another
credit union network named Renaissance cooperative credit unions RECCU-CAM ltd
now exits in Bamenda, north west regional chief town, according to the local
English language newspaper, the SUN.
It
was officially registered on May 30, 2013 but its constituent assembly held
earlier in Bamenda on Saturday May 11.
Mohammed Yunus founded the Garment bank whose research pioneered the
concept of providing micro banking services and non-collateralized loans or the
poor in order to alleviate poverty.
A
credit union is a financial cooperative created for and by its members who are
its depositors, borrowers and shareholders. Credit unions offers many banking
services such as consumer and commercial loans (usually at lower than market
interest rate), time deposit (usually at higher than market interest rate).
Their
financial services are low income earners and for small business owners. It
offers different type of services in practice; the terms are often used more
narrowly to refer to loans and other services from providers that identify
themselves as microfinance institutions. The turn to use new members to deliver
very small loans to unpaid borrowers taking little or no collaterals. There are
3 types of microfinance which include;
Category
one microfinance institution are financial institutions that collect savings
and deposits and lends them out to their members this category includes;
association, cooperatives and credit union.
There
is no stipulated capital for category 1 institution instead COBAC(BANKING
COMMITION OF CENTRAL AFRICAN STATE) text required the capital to be sufficient
to cover and meet up with stipulated prudential norm. An example of category 1
institution is TIKO BANANA PROJECT COOPERATIVE CREDIT UNION LIMITED (TBPCCUL)
Category
two microfinance institutions are financial institution that collect saving and
deposit and later on lend them out to their third parties. These category
groups are limited liability companies that function more like a micro bank.
The
minimum capital for such category 2 institutions are stipulated by the text is
50millionFCFA prove of such must be shown by the use of a bank statement from a
commercial bank
Category
three microfinance institution are other microfinance institutions that give
out loans to everyone who ones it (the are no affiliated to CAMCUULL).
This
is made up of lending institutions that do not collect savings and deposits
they include the microcredit and project financial institutions. The minimum
capital required for such is over 25millionFCFA for category 3.
The
amount must be fully paid and evident to show in the form of a bank statement
from only commercial banks as at the time of application for accreditation.
This microfinance institution has an objective which is divided under article 5
of the uniform act include the following;
Firstly,
to finance small and medium size enterprises in order to boost the economic
growth of the nation. Secondly, to reduce poverty by granting loans to
households, this will go a long way to improve in the living standards of the
citizens.
Tiko
banana project cooperative credit union limited (TBPCCUL) falls under category
1 microfinance institutions. This is because it is own and controlled by its
members. Every financial institution is required to meet up with their desire
of cash by keeping enough cash whenever there is any possible operation by the
institution.
According
to Macon, Harris and Davidson (2012) cash is any medium of exchange which is
immediately negotiable. It must be free of restrictions of any business
purpose. Cash have to meet prime requirement of acceptability and availability
for instant use in purchasing and payment of debts.
Acceptability
to a bank or any financial institution for deposits is a common applied to cash
items. This is a process of planning, controlling, and accounting for cash
transactions and cash balances.
To
attain a sound management and cautious cash, all financial institutions must
have a certain position of active elements, assets conserve in excellent
quality security which can easily be transformed to cash without great losses.
Cash is essential in all financial institutions to compensate for expected and
unexpected balance sheet fluctuations and to provide funds for growth.
The
recent cash crisis faced in financial institutions which led to the closure of
some microfinance institutions such as First Investment for Financial Assistant
(FIFFA) and Companies Financier de l’Estuaire(COFINEST) had brought to the
forefront the need to review their existing cash management policies, practices
and procedures.
Globalization
today is more perceived through finance which marked the birth of micro finance
institutions that spread experientially in serving the needs of all social
classes, but in the same familiar way sometimes faces bankruptcy.
This
can be justified by mismanagement of cash as cash management is not limited to
receipt and disbursement. If it is easy to receive or to cash it is difficult
to manage cash flow so as to avoid customer dissatisfaction.
Although
it is easy to manipulate employees, customers are strong partners and for this
reason require a lot of attention. This is why good cash management is a
necessary condition for resistance or for business growth.
So
generally cash management is to ensure the company’s liquidity. In tough
economic times where operating funds have become increasingly limited interest
rate, interest rate is subjected to frequent changes cash position causing it
therefore to be mastered properly.
It
is in this perspective that the theme of our work focuses on “the role of cash
management on the profitability of micro finance institutions”.
1.2 Statement of the
Problem
The
key to survival of any micro finance institution is cash flow because, if cash
does not flow in the institution at any adequate rate to maintain a level of
working capital, then the company will struggle to survive as a result; the
company might close down completely. Micro Finance Institutions have been
facing cash management problems.
Many
MFIs do not perform many cash management policies and techniques simply because
they feel the ones they adopt are ok. Cash management is the lifeline of every
business. The lack of cash management knowledge and skills prevent MFIs to
adequately manage their cash flow.
Over
the years, TBPCCUL has been faced with the problem of not managing cash and
cash payment problem to their members.
For
example, TBPCCUL can give out 500,000 FCFA cash to their members as loans and
as a result the customer pays 300,000 FCFA instead of 500,000 FCFA thereby
leading to decrease of cash by 200,000 FCFA thereby leading to delinquency
meaning customer did not repay the entire cash amount.
For
TBPCCUL, to be able to recover all its loan amount TBPCCUL need to put in place
strategies or procedures by both the loan officer and the board of directors to
recover overdue loans amount granted to members.
The
gap identified was that MFIs are not performing the basic cash management practices
to foster their profitability. This practice is omitted in business largely due
to lack of knowledge and skills to perform the task. Therefore, the purpose of
the study is to investigate the relationship between cash management and
profitability in TBPCCUL and if they face challenges in implementing cash
management techniques.
1.3 Research Questions
The study therefore seeks to provide answers
to the following questions;
- What are the effects of Cash management on the profitability of Microfinance in Cameroon?
In
Line with the study of William Baumol (2003), stated that cash should be
managed and reflect the cost of volume relationship as well as the cash flows,
this study specifically answers the following research questions;
- What are the effects of cash management on the financial profitability of MFIs in Cameroon?
- What are the effects of Cash management on the economic profitability of MFIs in Cameroon?
1.4 Objectives of the
Study
Main objective
- The main objective of the study is to determine the effects of Cash Management on the Profitability of Micro Finance Institutions in Cameroon.
Specific objectives
The
study is guided by the following specific objectives:
- To examine the effects of Cash management on the financial profitability of MFIs in Cameroon.
- To determine the effects of Cash management on the economic profitability of MFIs I'm Cameroon.
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