[featured_image]

₦5,000.00

Buy Now
  • Version
  • Download
  • File Size 667.93 KB
  • File Count 1
  • Create Date January 28, 2022
  • Last Updated February 6, 2022

THE EFFECTS OF INTEREST RATE ON LOAN REPAYMENT IN MICRO-FINANCE INSTITUTIONS IN CAMEROON: THE CASE OF COMMUNITY CREDIT COMPANY (CCC) PLC, CAMEROON

ABSTRACT

Introduction and Background: It is now widely recognized that a developed and efficient system of financial intermediation is an important precondition for successful long-term economic growth. Equally, Cameroon like every nation needs a stable and efficient financial system in order to finance both private and public investment and expenditures. However, The statistics from the Bank of Cameroon (2017) indicate that the average annual effective interest rates in Enterprise lending MFIs have been going down while that of Consumer lending MFIs has been going up. These high spreads have frequently been attributed to such factors as high operating costs, financial taxation or repression, lack of competition, and high inflation rates.

Aim: The principal objective was to assess the effects of interest rates on loan repayment in Micro Financial Institutions (MFIs) in Cameroon. To achieve this the study was guided by four (4) specific objectives which were: 1) To investigate the factors that determine the interest rates in MFIs; 2) To determine the effects of changes in the interest rate on the repayment of loans in MFIs; 3) To establish whether interest rate influence the demand for credit in MFIs; and 4) To investigate the measures adopted to enhance the repayment of loans of MFIs.

Methodology: This study adopted a descriptive design involving both qualitative and quantitative data that was collected from semi-structured questionnaires with closed and open-ended questions. It used a systematic and purposive random sampling, whereas the analysis and interpretation of data were done with the help of computer software and statistical tools such as Statistical Package for Social Science (SPSS) version 20 and Microsoft Excel. Its sample size was 24 from the MFIs in Community credit companies irrespective of sex.

Findings: The study found that there are various factors that determine the determines the interest rates in MFIs among them include economic environment such as inflation and the market size, exchange rate volatility, the extent of competition in the markets, and discount rates, and as well as the level of government‟s borrowing and dependence on the domestic banking sector for the financing of its fiscal deficit. Other factors include diseconomies of scale; exchange rate volatility, discount rates, and cost of holding cash and operational costs as well as the size of the market in which the MFIs operate in. It was also found that there is a link between interest rates and loan repayment. The study showed that the rise and fall of interest rates affect borrowers‟ ability to repay loans. Unlike low interest rate, high interest rate poses a challenge for the borrowers to repay loans to MFIs and Banks thereby increasing the number of defaulters. In addition, it has been found that the rate of interest and cost of borrowing largely influence the demand for influence for the demand for credit in MFIs.

Further, the findings from the study revealed that MFIs in Cameroon had policies/ control strategies that guide the management of loans. These control strategies in some ways effective in ensuring loan repayments from the borrowers. However, these policies were not reviewed on a regular basis. Thus, a stringent policy on giving out loans in MFIs is more effective in loan recovery. To this effect, most of the respondents suggested the need by MFIs to come up with credit policies and devise strategies that will be effective in recovering loans; and conducting sound credit evaluation before granting loans to customers and above all ensuring that there are low-interest rates to allow customers to pay back in turn benefiting the MFIs.

Recommendations:

  • The MFIs ought to extend the repayment duration in times of inflation as per the indication from the respondents. Adjustments in loan repayments in time of inflation are not necessarily done to deal with default but also to save the bank from loss of revenue.
  • The government should encourage disclosure of costs by the lender so that the borrower is better able to plan for days of high inflation.
  • The government should in some way discourage banks from arbitrarily adjusting their rates in terms of high inflation.
  • The study also recommends that in as much as the government would need money from banks, they should look for other sources of income so that MIFs and banks are left to lend to customers who will invest in the economy and hence reduce high inflation.

 

CHAPTER ONE

BACKGROUND OF THE STUDY

1.1 INTRODUCTION

Until the beginning of the 1990‟s, the Cameroon banking sector operated under a Government controlled environment. During this period, the state-regulated both interest and exchange rates that included regimes of price and import controls, and subsidies. The holding, purchasing and transacting in foreign currency was also subject to Government controls. Despite the regulated environment, setting up of private owned CBS was encouraged by the State as long as they maintained rural branches (Brownbridge, 1996).

However, The statistics from the Bank of Cameroon (2017) indicate that the average annual effective interest rates in Enterprise lending MFIs have been going down while that of Consumer lending MFIs has been going up. These high spreads have frequently been attributed to such factors as high operating costs, financial taxation or repression, lack of competition, and high inflation rates. Banks and Financial Institutions (MFIs), in their role as financial intermediaries, face substantial uncertainty which can add to spreads. This uncertainty is due to the indeterminate timing of loan demand and the supply of deposits. Uncertainty can be exacerbated by macroeconomic instability, owing to the limited contractual redress available to banks in the event of default (Chiumya, 2004).

1.2 BACKGROUND

Financial intermediation is essential for economic development, banks and Microfinance Institutions play a vital role in this process. Globally, the banking system in most developed countries has progressed as a powerful mechanism of planning for economic growth. Banks channelize savings to investments and consumption. Through that, the investment requirements of savers are reconciled with the credit needs of investors and consumers (Robinson, 2002).

Out of all principal roles of the banks, lending is the most important role in which banks provide working capital to commerce and industry. The importance of credit is not only because of its social obligation to cater the credit needs of different sections of the community but also because lending is the most profitable activity, as the interest rates realized on business loans have always been well above those realized on investments. Credit being the principal source of income for financial institutions and usually represents one of the principal assets of the banks, thus its proper management becomes all the more necessary. The extension of credit on sound basis is therefore very essential to the growth and prosperity of a financial institution (Wiilllliiam and Trochiim, 2006).

It is now widely recognized that a developed and efficient system of financial intermediation is an important precondition for successful long-term economic growth. For example, the Small and Medium Enterprise (SME) Sector has continued to play an important role in the economy of most countries. The sector„s contribution to the Gross Domestic Product (GDP) has increased from 13.8 per cent in 1993 to about 40 per cent in 2008. It is agreed that most SMEs heavily depend upon bank loans and generally experience a financing gap, even in developed countries (Uppal, 2014).

Equally, Cameroon like every nation needs a stable and efficient financial system in order to finance both private and public investment and expenditures. The financial sector in Cameroon comprises of banks and non-bank financial institutions (NBFIs) and are regulated and supervised by three agencies. The largest regulatory body is the Bank of Cameroon (BoZ) which supervises commercial banks and non-bank financial institutions which are licensed by the BoZ. The other two are the Pensions and Insurance Authority (PIA) which supervises Insurance companies and the Securities and Exchange Commission (SEC) which regulates the Capital Market which consists of the Community credit company  Stock Exchange (LUSE), Brokers, Dealers and Investment Banks (Sandi, 2009).

However, there are two (2) financial institutions that were created by an Act of parliament and they operate outside the financial system regulatory framework. These are the Development Bank of Cameroon (DBZ) and the National Savings and Credit Bank (NATSAVE). The Bank of Cameroon regulates and supervises eighteen (18) Commercial Banks and numerous non-bank financial institutions that include eleven (11) Leasing Companies, three (3) building societies and twenty-five (25) Microfinance Institutions. Others include forty-four (44) Bureaux De Change, and those institutions established by Acts of parliament which include one (1) Development

Bank (the Development Bank of Cameroon) and one Savings and Credit Institution (the National Savings and Credit Bank). There is also the Credit Reference Bureau (Credit Reference Bureau Africa Limited) (Bank of Cameroon, 2008).

Until the beginning of the 1990‟s, the Cameroon banking sector operated under a Government controlled environment. During this period, the state-regulated both interest and exchange rates that included regimes of price and import controls, and subsidies. The holding, purchasing and transacting in foreign currency was also subject to Government controls. Despite the regulated environment, setting up of private owned CBS was encouraged by the State as long as they maintained rural branches (Brownbridge, 1996).

A key feature of this era was the existence of state-sponsored (or supported) financial institutions that offered term lending facilities to productive sectors. These included the Development Bank of Cameroon (DBZ), Export and Import Bank, Lima Bank, and the National Savings and Credit Bank. This was also during the period when State monopolies dominated the economy (i.e. about 85% of productive sector activities), accentuated by socialist policies that favoured subsidies to the wider population. State monopolies had preferential access to foreign exchange and credit supported by import and price controls, on the basis that they produced goods and services (Banda, 2010).

The change of Government from November 1991 marked the emergence of radical economic reforms. These reforms involved the introduction of market-based policies by the Government whose main thrust was to: Restore economic stability through fiscal and monetary policy reforms; liberalize markets by removing price controls, trade and other restrictions. This included the removal of foreign exchange controls, liberalization of interest rates and the operations of money markets; as well as creating an enabling environment for increased private sector participation in the growth of the economy (Tennant and Folawewo, 2007).

According to Sandi (2009), lending and borrowing rates had been negative in real terms. In a move to attain positive real interest rates that would promote savings in the country, the government decided to move away from a policy of controlling interest rates. In response to this, the Banking and Financial Services Act was introduced in 1994 that set out new regulations attuned to international practices of open economies. In addition, the Bank of Cameroon Act was amended paving the way for CBS to maintain Government accounts. As part of this development, BOZ no longer plays the direct role of providing commercial banking services to Government ministries and agencies but focuses on the implementation of monetary policy and regulatory functions.

The liberalization of the financial services sector was expected to improve access to credit at low and competitive rates to the private sector. In reality, this objective was not achieved thus, frustrating the growth of the productive sectors. Interest rate is still a major concern in the banking and lending industry in Cameroon. Currently, Cameroon has two types of MFIs; Enterprise lending and Consumer lending. Enterprise lending MFIs lend to institutions such as SMEs while Consumer lending MFIs lend to individuals. These Microfinance institutions have been accused of charging high-interest rates and exploiting the consumers (Ayyagari, et al., 2007).

The statistics from the Bank of Cameroon indicate that the average annual effective interest rates in Enterprise lending MFIs have been going down while that of Consumer lending MFIs has been going up as shown in Table 1 below.

Table 1.1: Average Annual Effective Interest Rates in Microfinance Institutions in Cameroon Average Annual Effective Interest Rates in Microfinance Institutions in Cameroon

MFI Type 2015 2016 2017
Enterprise Lending (a) 13.8% 8.2% 8.1%
Consumer Lending (b) 4.7% 7.6% 9.2%
Total (a + b) 18.5% 15.8% 17.3%

Source: Bank of Cameroon (2017)

These high spreads have frequently been attributed to such factors as high operating costs, financial taxation or repression, lack of competition, and high inflation rates. Banks and Financial Institutions (MFIs), in their role as financial intermediaries, face substantial uncertainty which can add to spreads. This uncertainty is due to the indeterminate timing of loan demand and the supply of deposits. Uncertainty can be exacerbated by macroeconomic instability, owing to the limited contractual redress available to banks in the event of default (Chiumya, 2004).

It is argued that the biggest cost component of loaning financial institutions is administration costs and not the cost of capital, thus hiking the interest charged on loan to the prime rate is illogic. According to Banda (2010) due to the instability of Interest Rates access to loans and credit facilities has been and is still a major problem for a large portion of Cameroon society. The problem is most significant amongst the disadvantaged and especially in rural areas where the majority of people do not have access to formal banking services due to a lack of collateral security. This also affects the management of loan and credit service in the bank which further has a bearing on the operation of financial institutions as lending as leading plays a significant role in realizing profit in these institutions. To this effect, a study on interest rates and loans is cardinal in ensuring appropriate management of such services. Hence, this study is focused on assessing the effects of interest rates on loan repayment in macro-financial institutions.

1.3 STATEMENT OF THE PROBLEM

Prior to Cameroon‟s economic reforms of the 1990‟s, the financial sector was heavily controlled. Under this regime of administrative controls, the financial system remained underdeveloped and repressed. Since 1992, following the financial reforms in Cameroon, interest rate controls were removed. Since then the number of a financial institutions in Cameroon has continued to increase day by day at a high rate, which has aggravated the competition between Commercial Banks and the Private Financial sector for loanable funds (FinScope Cameroon, 2006).

Although Cameroon has made some progress since the deregulation of its banking system, interest rate spreads (IRS) remain absolutely high. This has reduced the customers‟ borrowing and loan repayment capacity leading to an increased number of loan defaulters. Banda (2010) observes that when interest rates are high, it is generally regarded as a considerable impediment to the expansion and development of financial intermediation, as it discourages potential savers with low returns on deposits and limits financing for potential borrowers, thus reducing feasible investment opportunities and therefore the growth potential of the economy. The purpose of this study, therefore, aims at assessing the effects of interest rates on loan repayment in Macro-Financial Institutions.

1.4 OBJECTIVES OF THE STUDY

1.4.1 GENERAL OBJECTIVE

To assess the effects of interest rates on loan repayment in Micro Financial Institutions (MFIs) in Cameroon

1.4.2 SPECIFIC OBJECTIVES
  • To investigate the factors that determine the interest rates in MFIs;
  • To determine the effects of changes in the interest rate on the repayment of loans in MFIs;
  • To establish whether interest rates influence the demand for credit in MFIs; and
  • To investigate the measures adopted to enhance the repayment of loans of MFIs.

1.5 RESEARCH HYPOTHESES

  • HO: High-interest rates do not affect loan repayment in MFIs
  • HA: High-interest rates affect loan repayment in MFIs
  • HO: Interest rates do not influence the demand for credit in MFIs HA: Interest rates influence the demand for credit in MFIs

1.6 SCOPE OF THE STUDY

This research will be conducted within selected boundaries or confines in order to make it easier to accomplish. It will be carried out in three (3) Micro Finance Institutions that is: Unity Finance, FINCA Cameroon, and Bay Port Financial Services in Community credit company. This site has been chosen because it will be cheaper and easier to research from the selected location because the researcher resides in the same area.

1.7 SIGNIFICANCE OF THE STUDY

MFIs make profits mainly through the provision of loans to enterprises and individuals by charging interest on loans advanced. Therefore, an increase in loan default means a reduction in income for MFIs. Equally, an increase in interest rate would result in an increase in loan default as well as reluctance by enterprises and individuals to take up loans.

Therefore, this study provides information to policymakers in formulating appropriate policies and possible solutions that may address loan and credit management in MFIs which affect their financial performance. The study will benefit MFIs management by providing a wide knowledge base to make better decisions and devise strategies on how to curb losses incurred through loan default by setting interest rates that will both be profitable to their institutions and the customers. The study further will be valuable to other scholars and researchers in this field as it will contribute to the body of knowledge and provide them with empirical studies that they can use in their study. Above all, it will recommend areas that may require further research and may be of interest to scholars and researchers.

1.8 OPERATIONAL DEFINITIONS

1.8.1 Inflation

This is a persistent increase in the general price level of goods and services in an economy in a period of time.

1.8.2 Loan default

Default in simple terms is failure to honour an obligation that is due. In Finance default occurs where a debtor has not met his or her financial obligation according to the debt contract.

1.8.3 Economy Growth

This refers to an increase in the country‟s Gross Development Product GDP.

1.8.4 Interest rate

This is the money that is charged by a bank to anyone who gets a loan.

1.8.4 Interest rate: This is the money that is charged by a bank to anyone who gets a loan.

1.8.5 Repayment

This is the act of taking back the money one has borrowed from a financial institution.

1.8.6 Loan

This is the amount of money someone brows from a financial institution

Attached Files

THE EFFECTS OF INTEREST RATE ON LOAN REPAYMENT IN MICRO FINANCE INSTITUTIONS IN CAMEROON THE CASE OF COMMUNITY CREDIT COMPANY (CCC) PLC.docx
IMPACT OF FINANCIAL ACCOUNTING ON THE CORPORATE PERFORMANCE OF BUSINESS ORGANISATIONS. CASE STUDY IN THE BUEA MUNICIPALITY, CAMEROON
AN ASSESSMENT OF DEPRESSION AMONG PRACTISING RADIOGRAPHERS IN SOUTH EAST NIGERIA

Leave a Comment

Your email address will not be published. Required fields are marked *