The Effect of Loan Management on the Profitability of Tole Tea Cooperative Credit Union (TTCCU)
Department: Banking and Finance
No of Pages: 63
Project Code: BFN8
References: Yes
Cost: 5,000XAF Cameroonian
: $15 for International students
ABSTRACT
The
study sought to determine the effect of The Effect of Loan management on the
profitability on the micro financial institution case study Tole Tea
Cooperative Union. The study adopted a descriptive survey design. The
population of study consisted of 30 board members and staff of Tole Tea cooperative
credit union.
A
purposive sampling techniques was used to carry out the research. Primary data
was collected using questionnaires where all the issues on the questionnaire
were addressed. Descriptive statistics were used to analyse data. Furthermore,
descriptions were made based on the results of the tables.
The
study found that loan conditions are carefully explained to members before they
sign loan file, the use of credit checks on regular basis enhances credit
management, Penalty for late payment enhances customer’s commitment to loan
repayment.
The
study established that loan planning, client cleaning, loan control
significantly affects performance of Tole Tea cooperative credit union also it
was discovered that loan management has a significant effect on the
profitability of Tole Tea cooperative credit union.
Loan
screening was found to have a higher effect on performance. The study
recommends that Tole Tea cooperative credit union Buea should support
monitoring of loans that are in arrear, also penalize clients for late payment
and limit access to repeat loans for defaulters for this will discourage loan
default.
CHAPTER ONE
INTRODUCTION
1.1 Background of the
Study
Micro
financial institution has a very loan history that can be tracked back during
the 19th century in Europe. Microcredit, started in Europe at the end of the
nineteenth century with the creation of the Raiffaisen example in Germany or
the local case of mutual agricultural credit in France, and in Africa with the
protective sackings, took truly its rise in the 1980s.
One
of the earliest and longest serving micro-credit organization providing small
loans to rural poor dwellers with no collateral is the Irish Loan Fund system
initiated in the early 1700’s by Jonathan swift.
His
idea began slowly in 1840s and became a widespread institution of about 300
branches all over Ireland in less than one decade. The principal purpose was to
advance small loans with interest for short periods.
However,
the pioneering of modern microfinance is often credited to Dr. Mohammad Yunus,
who began experimenting with lending to poor women in the village of Jobra,
Bangladesh during his tenure as a professor of economics at Chittagong
University in the 1970s.
The
concept of microfinance development in Cameroon can be traced back to the 19th
Century when moneylenders were informally performing the role of new formal
institutions. These informal lenders were mostly ‘‘Njangi’’ groups and
Cooperative Credit Unions.
The
first micro-finance institution in Cameroon was created in 1963 by Janson, a
Dutch Catholic Father in Njinikom, Bamenda of the North West Region of
Cameroon.
The
law of 1990 which allowed for freedom of association and creation of Common
Initiative Groups (CIG) came to foster the powerful existence and manifestation
of micro-finance institutions in Cameroon.
For many years in Cameroon, the micro-finance
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. Although
finance literature explains the emergence of the micro-finance industry as an
answer to an unfulfilled demand (Littlefield & Rosenberg, 2004), MFIs are
not evenly spread around the globe and Cameroon in particular.
Hardy
et al. (2002), by comparing Cameroon and Gabon concludes that even though the
countries have similarities (common currency, comparable per capita income,
etc.), the microfinance industry is more expanded in Cameroon than in Gabon.
The
environment in which MFIs operate plays a vital role in the cross-country
differences. While a lot has been written on factors influencing the
development of the financial sector as a whole, almost nothing has been written
on the factors determining microfinance profitability and its macro
environment.
Most
works on the microfinance industry focus on the institutional side of the
organizations (Hudon, 2006). The impact of MFIs on poverty reduction, economic
growth and women empowerment has increasingly received greater attention in
many developing countries like Cameroon.
Conversely,
much has not been done linking the development of the microfinance industry with
macro-economic activities. The Cameroon microfinance sector has made remarkable
progress during the last ten years, due to the dynamism of the main actors who
are the State, the MFI and development partners (Fotabong, 2008).
The
above progress is evident by the volume of microfinance activities, proximity
of the targeted vulnerable customers and the flexibility of the access
conditions to the services which help to fight against poverty.
However,
currently, the sector faces serious problems since 1990 because of the economic
crisis that made Cameroon to devaluate its currency in 1994.Also regarding
specific prudential standards, many microfinance establishments failed to
comply with the required standard for the solidarity fund.
The
difficulties can be outlined as problems involved in the control and
supervision of the sector, in the regulation framework, and in the
establishment of microfinance enterprises. The micro-finance sector in Cameroun
remains exposed to illegal practices.
All
the establishments approved for the first category equally carry out unapproved
operations patterning to the second category. The insufficiency in the control
of the microfinance sector due primarily to the insufficiency of financial,
human and material means at the disposal of the regulatory and control agencies
remain a big problem.
The
concept of loan management originated after the Second World War when it was
largely appreciated in Europe and later to Africa. Bank in USA give loans to
customer with high interest rate which sometime discourage borrower hence the
concept of loan didn’t become popular until the economic boom in USA in I885
when the bank had excess liquidity and wanted to lend excess cash (Ditcher,
2003).
In
Africa the concept of loan was in the 5O’s when most banks started opening the
credit section or department to give loan to white settler. In Kenya loan was
not popular to the poor. In I990’s loan given to customers who were not
credible enough called for an intervention.
Most
suggestion Were for the evaluation of customer’s ability to repay the, but this
did work as loan default continued (Modurch, 1999). The concept of loan
management became widely appreciated by Microfinance Institutions (MFI) in the
9O’s, but again this did not stop loan default to this date (Modurch, 1999).
Loan
is one of the major sources of fund for investment, it is the major source of
earning of financial institution most especially for microfinance institution and
thus loan management is one of the most important activities in every financial
institution and cannot be overlooked.
The
success of lending out loan depend on the methodology applied to evaluate and
to award the loan (Ditcher, 2003) and therefore the loan decision should be
based on a thorough evaluation of the risk condition of lending and the
characteristic of the borrower.
Numerous
approaches have been developed in client appraisal process by financial
institution (Horn, 2007). Many lending decisions by Microfinance institution
frequently base on their subjective felling about the risk in relation to
expected repayment by the borrower.
Microfinance
institutions commonly use this approach because it is both simple and
inexpensive. While other company would have its own method to determining risk
and quality of the client depending on the target group the following
evaluation concept are useful for most occasions.
These
concepts are referred to as the 5C’s of credit appraisal (Edward, 1997); these
elements are Character, Capacity, Collateral, Capital and Condition (Edward,
1997). Loan policies should be well documented so that the loan officer will be
able to know the area of prohibition and the area where they can operate.
Also,
such policies should be subjected to periodic review to make the credit union
kept abreast with dynamic and innovation nature of the economy as well as
competing with other changing sector (Fernando, 2006).
Some
risk can be measured with historical and projected financial data, while other
such as those associated with the borrower’s character and willingness to repay
a loan are not directly measured (Butteworth. 1990).
As
with any financial institution, the biggest risk in microfinance is lending
money and not getting it back. Loan risk is a great concern for MFI’s because
most micro lending is unsecured. Many banks do not extend loan to people
without securities and guaranties due to the high default risk for repayment of
interest and is some case the principal amount itself.
Therefore,
these institutions required to design sound loan management that entails the
identification of existing and potential risk inherent in lending activities.
Timely identification of potential loan default is important as high default
rates leads to decrease cash flow, lower liquidity level and financial distress
(Butterworth, 1990).
1.2 Statement of the
Problem
Sound
loan management is a prerequisite for a financial institution’s stability and continuing
profitability, while deteriorating loan quality is the most frequent cause of
poor financial profitability and condition.
According
to Gatuhu (2011), the probability of bad debts increases as credit standards
are relaxed. Firms must therefore ensure that the management of receivables is
efficient and effective. Such delays on collecting cash from debtors as they
fall due has serious financial problems, increased bad debts and affects
customer relations.
If
payment is made late, then profitability is eroded and if payment is not made
at all, then a total loss is incurred. On that basis, it is simply good
business to put loan management at the “front end” by managing it
strategically.
The
potential that microfinance has as a tool for alleviating poverty by providing
financial services to under privileged members of the society is well
documented (UN, 2013). Through MFIs, the poor have been able to grow their
savings, rural and remote areas have been reached and cooperatives have been
strengthened.
Nonetheless,
despite the potential benefits that accrue from micro financing, the
profitability of some of these micro-financing institutions has been found
wanting.
Although
factors such as structural fragility, supply of credit not able to meet demand,
and limited ability to meet demand from enterprises have been associated with MFIs
poor profitability, poor loan management features prominently in discourse as
the major challenge.
Loan
management play a vital role in the profitability of every microfinance
institution with regards to this study there are problems that seek answers.
Some
of the problems faced in loan management are poor screening method in knowing
unsuitable or bad business ideas, poor method of accessing the borrower’s
ability to manage project and failure to document available collateral sources.
What
some MFIs do concerning loan management which is not working, they fail to
evaluate fully if the creditor is capable of paying back the loan. For example,
they may check if the creditor has collateral for his loan and fail to check
the past financial record of the creditor.
Another
thing MFIs is doing concerning loan management that is not working is that they
wait till when the loan is due before they start calling the creditor to come
and complete the payment of the loan.
This
will cause the institution not to recovery its loan on time since it took them
a long time to tell and make their creditor know that he has to complete the
payment of the loan on time and this may cause the institution to face the
problem of loan delinquency which can also lead to bankruptcy of institution.
There
have been attempts in the past to study Micro financing and Micro lending but
much focus has been on the impact of MFIs in poverty alleviation, especially in
Cameroon but much less has been done to investigate the effect of loan
management on profitability of MFIs institutions in Cameroon, therefore this
research addresses that gap.
The
research question of this study is: What is the effect of loan management on
the profitability of Microfinance institutions?
1.3 Research Question
Main
Research Questions of this study is: What is the effect of loan management on
profitability of Tole cooperative credit union Buea?
In
line with the main research question here are some specific research questions
- To what extends does loan planning affect the profitability of Tole cooperative credit union Buea?
- What is the effect of between client screening on the profitability of Tole cooperative credit union Buea?
- How does loan control affect the profitability of Tole cooperative credit union Buea ?
1.3 Research Objectives
- To investigate the effect of loan management on profitability of Tole cooperative credit union Buea
- To examine to extends to which loan planning affect the profitability of Tole cooperative credit union Buea.
- To evaluate the effect of client screening on the profitability of Tole cooperative credit union Buea.
- To assess the effect of loan control on the profitability of Tole cooperative credit union Buea
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