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ASSESSING THE EFFECTS OF CREDIT RISK MANAGEMENT AND LOAN PERFORMANCE ON MICROFINANCE INSTITUTIONS IN CAMEROON
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Delivery: Within 24 hoursASSESSING THE EFFECTS OF CREDIT RISK MANAGEMENT AND LOAN PERFORMANCE ON MICROFINANCE INSTITUTIONS IN CAMEROON
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
Risks linked with credit generation must be managed cautiously, with credit risk being especially significant and expensive for financial institutions.However, its impact on performance surpasses that of other risks in the banking sector, posing a direct threat to institutional solvency (Chijoriga, 2021). Microfinance institutions play a significant role in driving economic growth by acting as intermediaries that collect surplus funds and lend them to investors for various projects (Kallberg & Udell, 2018). Although, MFIs were originally conceived as an alternative to traditional banks, which typically serve only a fraction of the population in developing countries (Gallardo et al., 2018), and informal moneylenders, microfinance has evolved significantly over time. Today, microfinance institutions boast over 100 million clients and demonstrate impressive loan repayment rates (Cull et al., 2019). The rapid expansion of the microfinance sector has led to increasing calls for regulation. However, complying with prudential regulations and the associated supervision can be particularly burdensome for microfinance institutions (Cull et al., 2019). Many MFIs are now seeking to transform into regulated entities to gain access to affordable local currency deposits, as regulation is often a prerequisite for accepting deposits in many countries. Additionally, regulation opens up various funding opportunities and helps reduce dependence on subsidies. Moreover, while loans constitute a substantial portion of commercial banks' assets, typically ranging from 50% to 75%. Hence, effective loan management not only influences the lending institution but also impacts borrowers and the overall country. On the other hand, mismanagement of loans can result in the accumulation of non-performing loans, which adversely affects the performance of commercial banks (Mac Donald & Koch, 2016).
Globally, credit risk remains one of the most critical risks faced by lending institutions. In order to manage risks, banks developed innovative and intricate methods for lending processes and explored new approaches to bundling debts. This involved transforming loans that were not easily tradable into types of securities that could be traded ultimately (Akume & Badjo, 2017). Alshatti (2018) found that practices in credit risk management directly impacted the financial performance of Cameroonian microfinance instituition. However, it was concluded that for commercial banks, having robust structures for credit risk management was crucial, which included employing individuals skilled in various areas such as monitoring, credit analysis, debt recovery, loan account application, and sales. Similarly, Omowunmi (2021) observed that only banks with well-defined lending and credit administration policies and procedures could thrive amidst the growing competition in the Cameroonian banking industry. In Cameroon, pre- and post-disbursement training, competitive interest rates, client monitoring, and accurate loan evaluation were all part of the strategy to reduce loan defaults (Akeem,2021). Therefore, a survey will be conducted to assess the effects of credit risk management and loan performance on microfinance institutions in Cameroon
1.2 Statement of the Problem
The persistent presence of nonperforming loans in the loan portfolios of financial institutions in Cameroon underscores a critical challenge in the country's banking sector. Despite considerable efforts to manage credit risk, the prevalence of nonperforming loans indicates the need for a deeper understanding of the factors contributing to this issue. One contributing factor to this challenge is the occasional confusion among credit experts within these banks. The overlapping roles of these experts make it difficult to establish clear priorities in terms of which types of risks to prioritize. This lack of clarity can hinder the effectiveness of credit risk management strategies and lead to inefficiencies in loan portfolio management. Moreover, financial institutions in Cameroon face a myriad of other risks beyond credit risk. These risks include interest rate fluctuations, market volatility, liquidity challenges, currency fluctuations, and operational uncertainties. The complexity and interconnectedness of these risks further exacerbate the challenges associated with managing credit risk effectively.
Additionally, the asymmetry of information between borrowers and lenders presents a significant challenge for financial institutions. In many cases, borrowers may possess more information about their projects or businesses than lenders do, making it difficult for lenders to accurately assess the viability of potential loan applicants. This information asymmetry can lead credit experts to err on the side of caution by financing projects with questionable viability rather than those with higher prospects of success.
However, addressing these challenges requires a comprehensive approach to credit risk management that takes into account the unique characteristics of the Cameroonian microfinance sector. This approach may involve enhancing risk assessment methodologies, improving information-sharing mechanisms, and strengthening internal controls and governance structures within financial institutions. Also, financial institutions can mitigate credit risk more effectively and improve the overall quality of their loan portfolios. Hence, it is in the light of these that the study seeks to assess the effects of credit risk management and loan performance on microfinance institutions in Cameroon
1.3 Objectives of the Study
The main purpose of this study is to assess the effects of credit risk management and loan performance on microfinance institutions in Cameroon. Specifically, the study will;
Determine the extent credit terms are adopted by microfinance institutions in Cameroon.
Determine the impact of credit appraisals on the loan performance of in Cameroon.
Investigate the relationship between credit risk control
and loan performance in microfinance institutions.
Identify challenges faced by microfinance institutions in managing credit approvals and maintaining loan performance.
1.4 Research Questions
The following questions have been prepared for the study:
To what extent do microfinance institutions in Cameroon adopt credit terms in their lending practices?
What is the impact of credit appraisals on loan performance within microfinance institutions in Cameroon?
How is the relationship between credit risk control and loan performance in microfinance institutions in Cameroon?
What are the challenges faced by microfinance institutions in Cameroon in managing credit approvals and maintaining loan performance?
1.5 Research Hypothesis
H0: There is no significant relationship between credit risk management and loan performance on microfinance institutions in Cameroon
Ha: There is a significant relationship credit risk management and loan performance among microfinance institutions in Cameroon
1.6 Significance of the Study
The results will aid loan experts in understanding the effects of credit risk management better, enabling them to enhance the efficacy of their strategies to reduce the incidence of non-performing loans that undermine profitability. For microfinance institutions and commercial banks, this study holds significant value in comprehending the impact of robust credit risk management and guiding officials in crafting more effective policies to manage credit default risk. As for customers, this research will provide insight into the diverse tools utilized by microfinance institution to evaluate loan applications and empower them to make informed decisions.Further more, subsequent researchers will use it as a literature review. This means that other students who may decide to conduct studies in this area will have the opportunity to use this study as available literature that can be subjected to critical review. Invariably, the result of the study contributes immensely to the body of academic knowledge with regard to the impact of talent management on the performance of the employee: A case study of selected banks in Douala, Cameroon.
1.7 Scope of the study
The scope of this study is boarded on the impact of talent management on the performance of the employee: A case study of selected banks in Douala, Cameroon. Empirically, this study will determine the extent credit terms are adopted by microfinance institutions in Cameroon, the impact of credit appraisals on the loan performance of in Cameroon, investigate the relationship between credit risk control and loan performance in microfinance institutions, and identify challenges faced by microfinance institutions in managing credit approvals and maintaining loan performance.
Geographically, the study will be delimited to employees of some selected banks in Douala, Cameroon.
1.8 Limitation of the study
In the course of carrying out this study, the researcher experienced some constraints, which included time constraints, financial constraints, language barriers, and the attitude of the respondents. In addition, there was the element of researcher bias. Here, the researcher possessed some biases that may have been reflected in the way the data was collected, the type of people interviewed or sampled, and how the data gathered was interpreted thereafter. The potential for all this to influence the findings and conclusions could not be downplayed.
More so, the findings of this study are limited to the sample population in the study area, hence they may not be suitable for use in comparison to other schools, local governments, states, and other countries in the world.
1.9 Definition of Terms
Credit Management: this is the process of controlling and monitoring the credit extended to customers or clients. It involves assessing the creditworthiness of potential borrowers, setting credit limits, establishing terms of payment, and ensuring timely collection of payments.
Microfinance: defined as the provision of financial services to impoverished or low-income clients, including consumers and entrepreneurs who would otherwise be underserved by traditional financial institutions (Ledgerwood, 2020)
Microfinance institution: (MFI) is an organization that provides financial services, such as loans, savings, and insurance, to low-income individuals or communities, often in developing countries.
This material content is developed to serve as a GUIDE for students to conduct academic research
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