The Effect of Loan Repayment Method on Loan Delinquency in Micro finance Institutions in the Buea Municipality.
Department: Banking and Finance
No of Pages: 63
Project Code: BFN2
References: Yes
Cost: 5,000XAF Cameroonian
: $15 for International students
ABSTRACT
Current
business trends have made it imperative for almost all organization to maintain
an internal control system.
This
study focused on examining the effects of loan repayment method on loan
delinquency in Micro Finance Institutions in Buea with case study of 5 micro
finance institutions (mutengene savings and loan, ntarinkon cooperative credit
union, community Credit Company, UNICS Plc. and P& T credit union) all
found in Buea.
The
study employed quantitative and qualitative research technics as the research
design. In achieving the research objective, primary and secondary data was
used. The primary data was collected through a well-structured questionnaire.
Simple
random sampling was used to select the 5 MFIs under study and purposive
sampling was used to select the 20 employees of each micro finance and
investigate from them various loan repayment methods and their experiences on
how these affects loan delinquency.
The
study uncovered impactful effects on how loan repayment method affects loan
delinquency. In light of loan default, pure discounting and loan amortization
revealed a significant effect on loan delinquency as compared to interest only
with no significant effect. The study also evaluated the types of loans given
out by MFIs with a majority being school fee loans and building loans followed
by car loans.
The
study concludes that repayment method can significantly affect the likelihood
of a loan going delinquent as such; the researcher recommends that customer
loan repayment method be adopted for specific customers based on their ability,
reputation and collateral.
Also,
the governmental units involved should establish credit rating agencies that
rates loan buyers to ensure that their credibility can be evaluated.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE
STUDY
The
history of micro finance is closely linked with poverty reduction. Although the
beginning of cooperatives, savings and credit activities can be traced back as
far as in 1849 with the foundation in the Rhineland of the first cooperative
society of saving and credit by Raiffeisen, it is truly with Yunus in 1976 with
the creation of the Gramen Bank that one can situate the birth of “modern microfinance” (Blondeau, 2006).
Before
the emergence of micro financial institutions, most poor people could not
benefit from commercial bank loans as they were not able to fulfill collateral
or security requirements. Sometimes lack of credit history and credit
worthiness was regarded as the main problem for not sanctioning loans to the
poor.
Consequently,
these people who could not obtain loans from commercial banks where being
exploited by money lenders. Exploitation ranged from high interest rates to
complicated conditions of lending.
These
are some of the reasons that led to the creation of micro credit as an
alternative source for people to borrow money on favorable terms (Fotabong and Akanga,
2005; Dieckmann, 2007). Micro finance was originally conceived as an
alternative to banks, which in most developing countries serve only 5 to 20% of
the population (Gallardo et al.,2003), and informal moneylenders. With the
passage of time, the micro finance sector has evolved.
The
evolution of credit unions started in the United States of America even before
the outbreak of WW1 (Brook 2005). The Credit Union Extension Bureau (CUNEB) was created in 1921 to provide
the legislative, organizational and operational services that enabled their
growth. Credit unions have been among one of the fastest growing enterprises in
recent years.
Credit
unions were organized originally to extend short term credits at reasonable
interest rates to their members. They have always been found extending credit
to help business enterprises and individual customers.
The
receiver of the credit is been helped with capital to run his or her own
business (in the case of a business customer) and to improve on his or her
standard of living (in the case of a household). The extents to which these
credits are taken by customers depend on the credit policies which the union
applies (Brook, 2005).
In
the past micro finances were considered as a cluster of people who have little
to offer in terms of development and economic welfare (Ross, Westerfield and
Jordan, 2002 and 2003); but today, credit unions through their participative
management approach and non-profit making motive, have remained distinct from
other financial institutions.
They
have succeeded in breaking socio-cultural, economic and financial barriers and
have instilled the idea of the communion of sharing in showing mutual
assistance to their members (Ross, Westerfield and Jordan, 2002 and 2003).
The continent of Africa has experienced exponential growth in the last few decades, which has attracted attention and investments from several multinational firms and corporations. International corporations such as Facebook and Google have then concentrated on accessing this booming market of newly prosperous consumers.
The World Economic Forum has recorded
the astronomical growth of African markets and outlined a very optimistic and
trajectory for many of its developing nations.
The
Forums findings revealed that the “continent demonstrated an average real
annual GDP growth of 5.4% between 2000 and 2010, adding $78 billion annually to
GDP. Growth continued annually at 3.3% from 2010 to 2015.”
A
major reason for Africa experienced this high level of growth is the recent
influx of micro finance institutions providing affordable loans to farmers
across the continent (Anand Tayal).
The
micro finance industry in Africa currently has a gross loan portfolio of $8.5
billion and attracts a customer base of 8billion people. According to mix
market micro finance institutions data, the African continent has developed one
of the fastest-growing MFI bases (Anand Tayal, The benefits of microfinance
institutions in Africa).
In
Cameroon, the history of micro finance dates back to more than one century in
its traditional form popularly known as “Njangi or Tontine”. The introduction
of “modern” micro finance in Cameroon started in 1963 by a catholic priest
Father Alfred Jansen, in Njinikom in the North West Region of Cameroon
(Creusot, 2006).
This
idea of credit unionism spread all over the North West and South West regions
of Cameroon and by 1968, 34 credit unions that were already in existence joined
together to form the Cameroon Cooperative Credit Union League (CAMCCUL)
Limited.
Camccul
is therefore the umbrella organization of cooperative credit unions and the
largest MFI in Cameroon and the CEMAC sub-region (www.Camcccul.org). As at
December 31, 2017, 700 accredited micro finance institutions were operating
within CEMAC.
According
to their aggregated data, these institution’s assets is CFA 1.158 billion. This
was revealed by COBAC, the banking sectors regulatory agency within CEMAC. The
total deposit in those institutions was CFA 907 billion and the total loan was
CFA582 billion.
The
Cameroon Cooperative Credit Union League (CAMCCUL) Ltd is a network of Credit
Unions in Cameroon. It is like governing organization for about 191credit
unions in Cameroon and has a total of 196992 members both in de urban and rural
areas. It manages savings worth over 41thousand million (41 billion) FCFA (www.CamCCUL.org/services.html).
The
fundamental issue that frequently results to instability and further to the
collapse of MFI, is illiquidity caused mostly by loan delinquency. Loan
delinquency is a canker worm that is and continues to be a nightmare in the
micro finance sector in Cameroon.
Reducing
loan delinquency is crucial for a micro finance institutions survival. In MFIs,
loan delinquency is a continual problem which when left unsolved, delinquency
becomes the institutions nightmare.
A
loan is delinquent if installments are delayed and in default if one or more
installments are never repaid (Fotabong, 2011). A proper analyses and measures
of specific delinquency ratios could serve as an appropriate tool for
institutions to put things under control. In this light setting up a meaningful
delinquency monitoring is an important control tool.
1.2 STATEMENT OF RESEARCH
PROBLEM
In
yesteryear, lenders have faced difficulties with collecting their debts from
borrowers. This became an issue so much that even humans were been used as
instruments to repay loans.
In
the finance world, institutions go through a lot to analyze the credit
worthiness of borrowers. As if this is not enough, to collect or see to it that
borrower pay on time or past time limit is even more strenuous.
This
has been an issue so much that solutions such as discounting, factoring,
refinancing was introduced in a bit to pipe down the rate of delinquency and
default. The question which remains is; do these institutions not take into
consideration collateral security from the borrowers?
As
practical as it is, we know that collateral is the least aspect to consider in analyzing
a borrower’s credit worthiness. It is so difficult to sell a customer’s asset
and use proceeds to repay their loans but if the case maybe then financial
institutions would rather not prefer a default.
In
trying to solve the problem of delinquency and subsequent default, supervisory
bodies of financial institutions as MINFI, COBAC, OHADA have laid down certain
conditions to be regarded by these institutions before carrying out lending.
As
stated, Repayment terms of a loan should be realistic (Tegwi P N), so are those
instituted by the supervisory bodies. The methods of loan repayment that exist
within the finance world today are; lump sum, interest only, amortization and
payment on demand.
The
above explanation brings us to the problem statement
What
effect does loan repayment method have on delinquent MFI LOANS?
From
the above, we can come out with the following research questions.
Research
Questions
- What are the types of loans given at micro finance institutions?
- What are the types of loan repayment methods?
- Aside from method of loan repayment what are other controls put in place to reduce delinquency.
- How do these repayment methods affect delinquency?
- What are the effects of delinquency to MFIs.
1.3 OBJECTIVE OF THE
STUDY
- The main objective of the study is to examine the effects of loan repayment method on loan delinquency in MFI.
The
specific objectives are;
- To investigate the type of loans and loan repayment method available at MFIs.
- To know the other controls put in place to reduce delinquency.
- To evaluate the effects of loan repayment method on loan delinquency.
- To evaluate the effects of delinquency to MFIs.
- To make recommendations based on findings.
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