The Impact of Micro-Finance in providing credit facilities to the poor
Department: Banking and Finance
No of Pages: 47
Project Code: BFN12
References: Yes
Cost: 5,000XAF Cameroonian
: $15 for International students
CHAPTER ONE
INTRODUCTION
1.1 Background
In
the world the history of banking began with the first prototype banks of
merchants of the ancient world, which made grain loans to farmers and traders
who carried goods between cities. This began around 2000 BC in Assyria and
Babylonia.
Later
in ancient Greece and during the Roman Empire, lenders based in temples made
loans and added two important innovations: they accepted deposits and changed
money. It is worth noting that in small society, some sort of banking exists
and it was being carried out in a primitive manner, in thrift and loan society
regulated by customs and the important role of bank and bankers.
The
conduct of business regulations focuses on how companies and other financial
institutions conduct their business. The evolution of today’s business
organization which is effective and efficient management together with good
technological state unfolds the complicated nature of ancient business.
Nevertheless,
most business organizations are still indistinctive of the dilemma of what
procedures to use in effecting the growth of the business activities. The
movement of microfinance institution in Cameroon has its root in the year 60s
through the creation of the first cooperative in 1963 by a Dutch catholic
Father Alfred Jansen in Njinikom; North-west region of Cameroon.
This
cooperative is the founding father of CAMCCUL (Cameroon Cooperative Credit
Union League). CAMCCUL is the biggest Microfinance institution in Cameroon
today (COBAC regulation, 2000- 2006).
Financial and economic crisis of the year 80s and early 90s in Cameroon was the real “spring-board” of the movement of the microfinance institutions in Cameroon. This crisis had social, regulatory, financial, economic and institutional impact on the microfinance environment in Cameroon.
Socially,
the crisis led to the lay-off of many qualified banking employees in Cameroon
banking sector. Being in quest of new jobs, these qualified employees set
Savings and Credit Cooperatives (COOPEC). The COOPECs were dealing with micro
lending and micro savings.
Financially
and economically, the crisis generated a dropping in confidence in traditional
banking institutions by customers in Cameroon. This lack of confidence in
traditional banks made many customers to quit traditional banks for COOPEC.
The
crisis caused also the collapse of many traditional banking institutions.
Legally, before 1998, the regulation of microfinance institutions in Cameroon
was flexible. Before 1998 no distinction between rural cooperatives involved in
poverty alleviation and commercial microfinance institutions involved in
profit- making activities.
The
flexibility in the law generated a free-entry in the micro lending and in the
micro saving activities in Cameroon. Institutionally, the lay-off of qualified
banking employees, the lack of confidence of customers in the traditional
banking institutions and the free-entry of COOPECs in banking activities led to
a great increase and creation of microfinance institutions.
The
laws of 1998 and 2001 in relation to differences between profit-making
microfinance institutions and non-profit making microfinance institutions did
not stop that increase in creation of COOPEC in Cameroon.
But
the CEMAC1/UMAC2/COBAC3 regulation on microfinance institutions set on April
2002 and implemented from 2007 restructured the sector of microfinance
institutions in Cameroon and henceforth faced out illegal, unqualified and
unprofessional microfinance institutions.
Thus,
the number of microfinance institutions in Cameroon sphere started instead
reducing. The microfinance movement began with the work of Dr Muhammad Yunus in
Bangladesh in the late 1970s, spreading rapidly to other developing countries.
Most early microfinance institutions (MFIs), including Yunus’s own iconic
Grameen Bank, relied on funding from government and international donors,
justified by MFI claims that they were reducing poverty, unemployment and
deprivation.
In the 1980s, however, the expanding microfinance
model operated in a transformed political and ideological environment. Market
principles were in the ascendant, with growing emphasis on financial
sustainability and the need to wean microfinance programmes off long-term donor
support.
It
was felt that the poor should pay the full cost of any support received, rather
than impose an additional tax burden on others .Financial services play a vital
role in the economic growth and development of cities and communities, as well
as on a global level. These services provide businesses with access to credit
and a means for saving and investing money.
Microfinance
banks make these services accessible to individuals and businesses within
underdeveloped communities around the world. Market principles were in the
ascendant, with growing emphasis on financial sustainability and the need to
wean microfinance programmes off long-term donor support.
It
was felt that the poor should pay the full cost of any support received, rather
than impose an additional tax burden on others. Microfinance, in simple terms,
can be described as small loans offered to poor households to foster
self-employment and income generations.
The
loans largely go to rural landless, disadvantaged women and marginal farmers
who depend largely on selling their labour. The terminology of Microcredit has
undergone a change in recent time. Practitioners in many countries call it
microfinance for its wider dimension. microfinance generally involves the
following features:
Small
loans, for both working capital and assets, Collateral free, substituted by
group guarantees or compensatory savings, Access to repeat and larger loans,
Intensive supervision and close monitoring, Secure savings products, Loan
period generally for one year, may go up to 3 years.
Options
available for weekly/monthly instalment payment Can combine social development with
financial intermediation. Ultimately, the goal of microfinance is to give low
income people an opportunity to become self sufficient by providing a means of
saving money, borrowing money and insurance.
Micro
financing is not a new concept. Small microcredit operations have existed since
the mid 1700s. Like conventional banking operations, microfinance institutions
must charge their lenders interests on loans. While these interest rates are
generally lower than those offered by normal banks, some opponents of this
concept condemn microfinance operations for making profits off of the poor.
The
World Bank estimates that there are more than 500 million people who have
directly or indirectly benefited from micro finance operations. Dichter T.
(2006) finds that microfinance has often been used to cover basic consumption
needs rather than fuel enterprise.
In
the face of such evidence, the microfinance sector now portrays consumption
‘smoothing’ as a new argument for microfinance (Collins et al., 2009). Consumption
smoothing can certainly reduce risk and vulnerability, but it can lead poor
individuals to substitute microcredit for non-existent income in an
unsustainable way.
Growing
dependency upon microcredit, coupled with high interest rates, means that a growing
proportion of the unstable income of the poor is siphoned off to cover interest
charges. A key claim for microfinance was that it would help to detach the poor
from local loan sharks charging higher interest rates a claim made by Muhammad
Yunus when promoting microfinance to international donors.
In
fact, by conferring social legitimacy upon microfinance, rather than loan
sharks, the stage was set for the poor to become open to the idea of going into
debt. The poor have to rely on loans from either moneylenders, at high interest
rates, or friends and family, whose supply of funds will be limited.
Microfinance
institutions attempt to overcome these barriers through innovative measures
such as group lending and regular savings schemes, as well as the establishment
of close links between poor clients and staff of the institutions concerned.
Microfinance
institutions provide small loans to marginalized individuals in developing
regions and help elevate them out of poverty. Millions have utilized these loans
to start self employed businesses, send their children to school, and feed
their families. Microfinance institutions boast near perfect repayment rates of
loans and keep their practices sustainable.
Poor
borrowers, on the other hand, tend to take out conservative loans that protect
their subsistence, and rarely invest in new technology, fixed capital, or the
hiring of labor. Microfinance banks exist in a variety of forms that provide
needed financial help in underdeveloped economies.
Microfinance
banks exist in different forms, some of which include nongovernmental
organizations, credit union type businesses, wire services, commercial and
state banks. These banks specialize in providing small loans also known as
microloans to people who would otherwise have limited or no access to financial
assistance.
Both
individuals and businesses within underdeveloped countries can use micro
financing to fund small business enterprises within their local communities.
1.2 Problem Statement
Cameroon
economy in the early 70s and 80s was on a good footing with every sector
performing at its best. Agriculture was the main contribution to the gross
domestic product (GDP).In the 1980s, with the discovery of oil, petroleum
became the highest contribution to the Gross Domestic Product, pushing
agriculture to the second position.
The economic wellbeing at this time attracted so many foreign investors who invested in the banking sector as well as other sectors in the economy. Towards the last quarter of 1980s and 1990s the country began to face a recession due to devaluation of a country’s currency folding up most of Cameroon’s Commercial banks including National Development Bank.
This
was caused by the excess fraud and corruption in the banking system, with many
none performing and profitable loans given out by these banks leading into
serious liquidity. The impact of this failure was felt badly directly by the
economy as many Cameroonians companies were folding up due to lack of funding.
This
lead to the raise of microfinance institutions (CAMCCUL) which started in
Cameroon in 1968 with the aim of
providing financial services and products such as very small loans, savings,
micro leasing, micro insurance and money transfer to assist the poor in
expanding or establishing their business.
It
is on this bedrock that we evaluated if microfinance institutions provide
credit facilities to the poor.
1.3. Objective of the
study
The
main Objective of this study is,
- To critically examine the functions of Micro finance institutions in providing credit facilities to the poor.
Specific Objective
Includes:
- To analyze the aims of Microfinance Institutions towards nearness to small businesses.
- To measure the interest rates charges of Micro finance institutions.
- To examine the effects of Micro finance to small businesses.
- To make recommendations
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