REPUBLIQUE DU CAMEROON REPUBLIC OF CAMEROON

Paix-Travail-Patrie Peace-Work-Fatherland

MINISTRY OF HIGHER EDUCATION

MINISTERE DE L’ENSEIGNEMENT SUPERIEURE

FIELD : BUSINESS AND FINANCE

DEPARTMENT : BANKING AND FINANCE

THE EFFECT OF CREDIT RISK MANGEMENT ON THE

FINACIAL PERFORMANCE OF MICROFINANCE
INSTITUTION CASE STUDY BUEA POLICE COOPERATIVE
CREDIT UNION (BUPCCUL)

A research project submitted in partial fulfilment of the requirement for the award of
Higher national Diploma (HND) in Banking and Finance

By
RICHINEL FRANK DJOUNDA

FIELD SUPERVISOR ACADEMIC SUPERVISOR

MR WUNG ALEXIS MR FOUKOUA NESTOR

ACADEMIC YEAR:2023/2024 YAOUNDE, APRIL 2024

1
DECLARATION

I RICHINEL FRANK DJOUNDA declare that, this research work entittled “ THE
EFFECT OF CREDIT RISK MANAGEMENT ON THE FINANCIAL
PERFORMANCE OF MICROFINANCE OF MICROFINANCE CASE STUDY
BUPCCUL” Is my initiative and all the sources quoted in this research work has been
aknowledge by was of referencing.

CANDIDATE: RICHINEL FRANK DJOUNDA

SIGNATURE…………………………………………………………………………………...

DATE……………………………………………………………………………………………

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CERTIFICATION

This is to certify that this piece of work entitttled “ THE EFFECT OF CREDIT RISK
MANAGEMENT ON THE FINANCIAL PERFORMANCE OF MICROFINANCE
INSTITUTION CASESTUDY BUPCCUL” is done by RICHINEL FRANK DJOUNDA
which fulfill part of the requirement for the award of Higher National Diploma (HND) in
BANKING AND FINANCE

PRESIDENT OF JURY
NAME…………………………………………………………………………………………
……………………………
SIGNATURE………………………………………………………………………………….
DATE………………………………………………………………………………………….

ACADEMIC SUPERVISOR
NAME: MR FOUKOUA NESTOR
SIGNATURE…………………………………………………………………………………...
DATE……………………………………………………………………………………………

EXAMINER
NAME…………………………………………………………………………………………..
SIGNATURE…………………………………………………………………………………...
DATE……………………………………………………………………………………………

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DEDICATION

To the SOHANA’S family

iv
ACKNOWLEGMENT

Sincere gratitude and thanks to my academic supervisor Mr FOUKOUA NESTOR for his
sacrifice of time to read this piece of work

Special thanks to Mrs AZISEH RAISSA P, Dr ATINGWA NKENG, for their valuable
contribution and time to make sure that this work goes through successfully and also get all
necessary information needed for this report.

I am very greatful to all my lecturers who encourage me during this period and provide me
with necessary information needed to to carry out the report successfully.

I equally thanks all my classmates especially: NWAIN BECKY, MAKOUTEU INGRID and
EMMANUELLA.

I equally thanks all my friends ABANDA WILFRIED,AGBOR CLAIRE for their moral
support to see that this work went successfully

I am grateful to the entire management of BUPCCUL for given me the opportunity to

carryout my internship in their institution.

Spacial thanks to my mother Mrs KAMGOU JULLIET and brothers KAMGOU VALDES
and YEMPI JORDAN for their moral and financial support.

To crown it all most special thanks to GOD almighty for his grace and protection throughout
the entire process.

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ABSTRACT

This study investigates the effect of credit risk management on the financial performance of
microfinance institutions, aiming to uncover the intricate relationship between risk
management practices and operational outcomes in the microfinance sector. By analyzing the
key determinants of credit risk, the study seeks to examine how effective risk management
strategies influence financial metrics, profitability, and sustainability in microfinance
institutions. Drawing on a mix of quantitative analysis and qualitative insights, the research
explores the impact of credit scoring models, diversification strategies, and monitoring
mechanisms on portfolio quality and overall performance. The findings reveal a positive
correlation between proactive risk management practices and improved financial indicators,
with institutions implementing robust risk mitigation frameworks demonstrating higher
profitability and operational resilience. The study contributes to the growing body of literature
on credit risk management in microfinance by offering practical recommendations for
enhancing risk management processes, aligning strategies with institutional goals, and
fostering a culture of risk-awareness. The insights gained from this research not only offer
valuable perspectives for practitioners and policymakers in the microfinance industry but also
contribute to the broader discourse on financial inclusion, risk management, and sustainable
development.

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Résumé
Cette étude examine l'effet de la gestion du risque de crédit sur la performance financière des
institutions de microfinance, visant à dévoiler la relation complexe entre les pratiques de
gestion des risques et les résultats opérationnels dans le secteur de la microfinance. En
analysant les principaux déterminants du risque de crédit, l'étude vise à examiner comment les
stratégies de gestion des risques efficaces influent sur les indicateurs financiers, la rentabilité
et la durabilité des institutions de microfinance. En s'appuyant sur un mélange d'analyses
quantitatives et d'observations qualitatives, la recherche explore l'impact des modèles de
notation de crédit, des stratégies de diversification et des mécanismes de suivi sur la qualité
du portefeuille et la performance globale. Les résultats révèlent une corrélation positive entre
les pratiques proactives de gestion des risques et l'amélioration des indicateurs financiers, les
institutions mettant en œuvre des cadres de mitigation des risques robustes montrant une
rentabilité plus élevée et une résilience opérationnelle. L'étude contribue au corpus croissant
de littérature sur la gestion des risques de crédit dans la microfinance en offrant des
recommandations pratiques pour renforcer les processus de gestion des risques, aligner les
stratégies sur les objectifs institutionnels et favoriser une culture de vigilance aux risques. Les
perspectives tirées de cette recherche offrent non seulement des points de vue précieux pour
les praticiens et les décideurs du secteur de la microfinance, mais contribuent également au
débat plus large sur l'inclusion financière, la gestion des risques et le développement durable.

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Table of Contents
CHAPTER ONE..................................................................................................................... xii

INTRODUCTION ................................................................................................................... 1

1.1 .................................................................................................................................. 2

1.1.1 Historical background.............................................................................................. 2

1.1.2 Theoretical background to the study. ....................................................................... 4

1.1.3 Conceptual Background........................................................................................... 6

1.1.4 Contextual Background. .......................................................................................... 8

1.2 STATEMENT OF PROBLEM ...................................................................................... 8

1.3 RESEARCH OBJECTIVES........................................................................................... 9

1.3.1 Main research objective. .......................................................................................... 9

1.3.2 Specific research objectives ..................................................................................... 9

1.4 RESEARCH QUESTIONS. ........................................................................................... 9

1.4.1 Main research question. .......................................................................................... 10

1.4.2 Specific research questions. .................................................................................... 10

1.5 SIGNIFICANCE OF THE STUDY. ............................................................................. 10

1.6 JUSTIFICATION OF THE STUDY. ............................................................................ 11

1.7 SCOPE OF THE STUDY. ............................................................................................ 11

1.7.1 Time scope. ............................................................................................................ 11

1.7.2 Geographical scope................................................................................................. 11

1.7.3 Content or thematic scope....................................................................................... 11

CHAPTER TWO .................................................................................................................... 13

LITERATURE REVIEW ....................................................................................................... 13

2.1 REVIEWS BY THEORIES. ......................................................................................... 26

2.1.1 The Modern Portfolio Theory( MPT) By Harry Marko WitzError! Bookmark not
defined.

2.1.3 The liquidity preference theory by J.M. Keynes (1936) .......................................... 15

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2.2 REVIEW BY CONCEPTS ........................................................................................... 18

2.2.1 Credit Risk Management. ....................................................................................... 18

2.2.2 Financial Performance ............................................................................................ 19

2.2.3 Microfinance Institutions ........................................................................................ 19

2.2.4 Types of credit risk ................................................................................................. 21

2.2.5 Credit risk Management Strategies ......................................................................... 22

2.2.6 Financial Stability and capital adequacy ................................................................. 23

2.3 REVIEW BY OBJECTIVE........................................................................................... 24

2.3.1. Credit risk management practice and Financial Performance ................................ 24

2.3.2 Loan portfolio quality and financial performance ................................................... 25

2.3.3 Capital adequacy and financial performance .......................................................... 26

2.3.4 Risk mitigation and financial performance ............................................................. 26

2.4 Empirical Review:......................................................................................................... 27

2.5 PRESENTATION OF INTERNSHIP PLACE AND ACTIVITIES. ............................. 28

2.5.1 Description of internship place. .............................................................................. 28

2.5.2. Mission of BUPCCUL........................................................................................... 29

2.6 ORGANIZATION AND OPERATION OF BUPCCUL. .............................................. 29

2.5.1. Internship Activities. ............................................................................................. 35

2.7 STRENGTH AND WEAKNESSES OF BUEA POLICE COOPERATIVE CREDIT

UNION YAOUNDE BRANCH .......................................................................................... 36

2.7.1 Strength .................................................................................................................. 36

2.7.2. Weaknesses. .......................................................................................................... 37

2.8. INTERNSHIP EXPIRIENCE. ..................................................................................... 37

2.9. DIFFICULTIES ENCOUNTERED. ............................................................................ 38

Organizational structure of BUPCCUL ............................................................................... 52

CHAPTER THREE ................................................................................................................ 39

METHODOLOGY ................................................................................................................. 39

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3.1. RESEARCH DE .......................................................................................................... 39

3.2. POPULATION, SAMPLE SIZE, SAMPLING TECHNIQUE..................................... 39

3.2.1. Population of the study .......................................................................................... 39

3.2.2. Sample size. ........................................................................................................... 39

3.2.3. sampling technique. ............................................................................................... 52

3.3. DATA COLLECTION METHOD AND INSTRUMENTS. ........................................ 40

3.3.1. Primary sources. .................................................................................................... 40

3.3.2 Secondary sources. ................................................................................................. 41

3.4.1. Validity. ................................................................................................................. 41

3.4.2 .Reliability .............................................................................................................. 42

3.5. DATA ANALYSIS AND PRESENTATION .............................................................. 42

3.6. METHOD OF DATA ANALYSIS. ............................................................................. 42

CHAPTER FOUR .................................................................................................................. 43

PRESENTATION, ANALYSIS AND INTERPRETATION OF DATA................................ 43

4.1 DESCRIPTIVE STATISTICS ...................................................................................... 43

4.1.1 GENDER OF RESPONDENT ............................................................................... 43

4.1.2 MARITAL STATUS OF RESPONDENTS ........................................................... 44

4.1.3 Age of Respondent ................................................................................................. 45

4.1.4 Post of Responsibility ............................................................................................. 46

4.2.1 CREDIT RISK MANAGEMENT PRACTICE ON THE QUALITY OF LOAN

PORTFOLIO ................................................................................................................... 47

4.2.2 RELATIONSHIP BETWEEN CREDIT RISK MANAGEMENT STRATEGY

AND PROFITABILITY .................................................................................................. 48

4.2.3 INFLUENCE OF CREDIT MANAGEMENT TECHNIQUE ON CAPITAL

ADEQUACY .................................................................................................................. 49

CHAPTER FIVE .................................................................................................................... 51

DISCUSSION, RECOMMENDATION AND CONCLUSION ............................................. 51

x
5.1 DISCUSSION AND SUMMARY OF FINDINGS. ...................................................... 51

5.2 RECOMMENDATION ................................................................................................ 65

5.3 CONCLUSION ............................................................................................................. 53

5.4 AREAS FOR FURTHER RESEARCH ........................................................................ 54

REFERENCES ....................................................................................................................... 55

APPENDIX ............................................................................................................................ 56

xi
LIST OF TABLES
Table 1 : Gender respondent ................................................................................................... 43
Table 2 : Respondent of marital status .................................................................................... 44
Table 3 : Age of respondent.................................................................................................... 45
Table 4 : Post of Responsibility .............................................................................................. 46
Table 5 : Credit risk management practice on the quality of loan portfolio............................. 47
Table 6 : RELATIONSHIP BETWEEN CREDIT RISK MANAGEMENT STRATEGY AND
PROFITABILITY .................................................................................................................. 49
Table 7 : Influence of credit management technique on capital adequacy .............................. 50

xii
LIST OF FIGURES
Figure 1 : Gender respondent.................................................................................................. 44
Figure 2 : Respondent of marital status................................................................................... 45
Figure 3 : Age of respondent .................................................................................................. 45
Figure 4: Post of Responsibility .............................................................................................. 46
Figure 5 : Credit risk management practice on the quality of loan portfolio ........................... 48
Figure 6: Relationship between credit risk management strategy and profitability ................. 49
Figure 7: Influence of credit management technique on capital adequacy .............................. 50

xiii
CHAPTER ONE

INTRODUCTION
In the dynamic landscape of microfinance, where financial inclusion meets the challenges of
risk management, the relationship between credit risk management and financial performance
stands as a critical determinant of institutional success. This research project delves into the
intriguing interplay between these two pivotal elements, aiming to shed light on how effective
risk management practices influence the operational and financial outcomes of microfinance
institutions.

Microfinance institutions play a vital role in providing access to financial services for
underserved populations, promoting economic empowerment and social development.
However, the inherent credit risk associated with serving marginalized clients necessitates a
nuanced approach to risk management. Understanding the impact of credit risk management
on financial performance is essential for these institutions to navigate uncertainties, optimize
resource allocation, and achieve their dual objectives of financial sustainability and social
impact.

This project seeks to explore the effect of credit risk management on the financial
performance of microfinance institutions through a multi-dimensional analysis encompassing
risk mitigation strategies, operational efficiency, and key performance indicators. By
examining the key drivers of credit risk, the project aims to identify the challenges and
opportunities that influence financial outcomes in the microfinance sector. The primary
objectives include:

1. Investigating the relationship between credit risk management practices and financial
performance metrics in microfinance institutions.

2. Assessing the effectiveness of existing risk management frameworks in mitigating credit

risks and enhancing operational resilience.

3. Proposing actionable recommendations to strengthen risk management processes and

optimize financial performance in a sustainable manner.

The research methodology involves a comprehensive literature review, data collection from
selected microfinance institutions, and in-depth analysis of credit risk management strategies
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vis-à-vis financial indicators. By employing quantitative and qualitative research techniques,
the project aims to generate empirical insights that can inform industry practices, policy
decisions, and strategic initiatives in the microfinance domain.

The findings of this study are expected to contribute to the existing knowledge base on credit
risk management in microfinance, offering practical insights for practitioners, regulators, and
stakeholders. By elucidating the impact of risk management on financial performance, the
project endeavors to strengthen the resilience and sustainability of microfinance institutions,
thereby facilitating their mission of financial inclusion and poverty alleviation.

In essence, this research project serves as a critical exploration of the intricate relationship
between credit risk management and financial performance in microfinance, aiming to
provide valuable perspectives and actionable recommendations for fostering a robust and
inclusive financial ecosystem.

This chapter consist of background to the study , statement of the problem, research objective,
research question, significance of the study and scope of the study.

1.1 BACKGROUND TO THE STUDY

1.1.1 Historical background.

Here we will be looking at historical background of credit risk and historical background of
BUPCCUL

1.1.1.1 Historical background of the study

The concept of credit risk has been intertwined with economic activities for centuries. When
people lent money or extended credit in ancient times, they were inherently exposed to the
risk of not getting their money back. However, the formalized study and assessment of credit
risk started gaining momentum during the emergence of modern banking and finance. One of
the earliest recorded instances of credit risk management dates back to ancient Mesopotamia
around 2000 BC. In this era, traders and merchants relied on credit agreements and
promissory notes, creating an initial need to evaluate and manage the risk associated with
such credit transactions Fast forward to the Middle Ages, the development of the European
banking system further highlighted the significance of credit risk. As trade and commerce
flourished, bankers and merchants began to comprehend the importance of assessing their
borrowers' creditworthiness. With limited technology and financial tools at their disposal, this
largely relied on personal relationships, reputation, and collateral. Moving on to more recent

2
history, the Industrial Revolution and the subsequent growth of global finance enhanced the
complexity and scale of credit risk. The rapid expansion of banking activities led to the need
for more sophisticated risk assessment methods. Over time, this gave rise to credit rating
agencies, the standardization of credit evaluation criteria, and the formulation of credit risk
management practices. The 20th century marked a turning point in credit risk management,
with the establishment of seminal financial regulations such as the Basel Accords, which
aimed to standardize risk management practices across international banks. Since then, the
field of credit risk has continued to evolve with the advent of advanced analytics, machine
learning, and big data, enabling more precise evaluation and management of credit risk. In
today's interconnected global economy, credit risk remains a critical component of the
financial landscape. With the increasing complexity of financial instruments and transactions,
institutions continue to refine their credit risk assessment models and management practices
to navigate the dynamic nature of credit risk So, there you have it – a whirlwind tour of the
historical backdrop of credit risk! Feel free to ask if you want to dive deeper into any aspect
of this fascinating journey.

1.1.1.2Historical Background of Buea Police Cooperative Credit union.

The decision to form the Buea police cooperative credit ltd was initiated in 1967 by
commissioner NTUNE. Meetings and credit union activities of the members who were
interested held at the headquarters of the former west Cameroon police Buea in 1968. The
union was registered and a certificate of registration accorded by the direction of
cooperatives in 1971. During the annual general meeting of 1975 . Membership was opened
to the general public. On the 20 of November 1995, the union was re-registered according to
the new laws governing cooperative societies in Cameroon and in 2002 according to COBAC
regulations. On the 29 of may 2002, the credit union moved to her new headquarters in great
soppo-Buea. BUPCCUL is managed by an elected board of directors, supervisory board, the
women committee and the youth committee and a team of well qualified staff. BUPCCUL
occupies four regions in the national territory. Working hours run from 8:00am to 4:00pm
every Mondays to Fridays and Saturdays from 8:00 to 12noon except on public holidays.
BUPCCUL is amongst the category one microfinance institutions registered with COBAC
No.D-2001/05 and with a registration No 00395/MINEFI under the ministry of finance. This
credit union is affiliated to CAMCCUL.

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MISSION

Reducing poverty and improving on the livelihood of its members and granting loans at
affordable rates with the main aim to free it members from the hands of unscrupulous money
lenders. Also to encourage member on the education of their children both in Cameroon and
abroad.

1.1.2 Theoretical background to the study.

1.1.2.1. The modern portfolio theory

Modern Portfolio Theory (MPT), also known as mean-variance analysis, is a framework for
constructing investment portfolios that aims to maximize expected returns for a given level of
risk or minimize risk for a given level of expected returns. It was developed by economist
Harry Markowitz in the 1950s and is widely used in the field of finance. The key assumption
of Modern Portfolio Theory is that investors are risk-averse, meaning they prefer less risk to
more risk for a given level of expected return. MPT suggests that by combining different
assets with varying levels of risk and return in a portfolio, investors can achieve an optimal
balance between risk and return. According to MPT, the risk of an individual asset should not
be considered in isolation but rather in the context of its contribution to the overall risk of the
portfolio. The theory suggests that the risk of a portfolio can be reduced by diversification,
which means spreading investments across different asset classes (such as stocks, bonds, and
cash) and different securities within each asset class. MPT introduces two key measures to
assess the risk and return of portfolios: expected return and variance (or standard deviation) of
returns. Expected return represents the average return an investor can expect to earn from a
portfolio, while variance (or standard deviation) measures the dispersion or volatility of
returns around the expected return. MPT aims to find the portfolio that offers the highest
expected return for a given level of risk or the lowest risk for a given level of expected return.
The efficient frontier is a fundamental concept in MPT. It represents a set of optimal
portfolios that offer the highest expected return for a given level of risk or the lowest risk for a
given level of expected return. Portfolios on the efficient frontier are considered efficient
because they provide the maximum return for a given level of risk or the minimum risk for a
given level of return. Investors can choose the portfolio that best aligns with their risk
preferences from the efficient frontier. It's important to note that while Modern Portfolio
Theory provides a useful framework for portfolio construction, it has certain assumptions and
limitations. These include the assumption of rational and risk-averse investors, the reliance on

4
historical data for return and risk estimates, and the assumption that markets are efficient.
Despite its limitations, MPT has had a significant impact on the field of finance and has
influenced the development of portfolio management techniques.

1.1.2.2 The information asymmetry and adverse selection theory

Absolutely! Information asymmetry and adverse selection are pivotal concepts in the realm
of credit risk management and are drawn from the field of economics, most notably from the
work of George Akerlof, Michael Spence, and Joseph Stiglitz. Let's break down these theories
and understand their implications for credit risk. Information asymmetry refers to a situation
where one party in a transaction has more or better information than the other party. In the
context of credit risk, this often means that borrowers possess private information about their
creditworthiness that lenders do not have access to. As a result it can lead to market
inefficiencies and suboptimal outcomes, as lenders may struggle to accurately assess the
creditworthiness of potential borrowers.Understanding information asymmetry is essential in
credit risk management, as it highlights the challenges lenders face when assessing borrower
risk. Lenders must develop tools and strategies to mitigate the effects of information
asymmetry, such as through robust credit scoring models, collateral requirements, or
leveraging third-party data sources to gain better insights into borrower characteristics.

### Adverse Selection:

Adverse selection occurs when one party in a transaction has more information than the other
party and uses that information to their advantage. Specifically, in the context of credit
markets, adverse selection refers to the tendency for higher-risk borrowers to be more willing
to take on credit compared to lower-risk borrowers. Adverse selection suggests that borrowers
with a higher likelihood of default may be more inclined to seek credit, leading to a
disproportionate representation of riskier borrowers in the lending pool. Adverse selection
poses challenges for lenders, as they may find a higher proportion of their lending portfolio
comprised of riskier borrowers. This necessitates the development of risk assessment tools to
identify and account for the potential adverse selection effects. Lenders may need to adjust
pricing, terms, and underwriting standards to address the impact of adverse selection on credit
risk.

1.1.2.3 The Liquidity Preference theory by J.M Keynes(1936)

According to Keynes, people demand money not only for investment but for other motives.
He concluded that people demand money for transaction, precaution and speculative motives.

5
The demand for money is the desire to hold money in liquid form instead of asset form. This
preference to hold money in liquid form is due to the risk that goes with these assets. Keynes
further explained that people demand money for day to day transactions (transaction motive).
For unforeseen circumstances (precautionary motive) and for changes in the prices of
securities(speculative motive). The demand for money for transaction and precaution are
active demand and is not influence by the rate of interest while speculation is influenced by
the rate of interest. When the rate of interest falls, much money will be demanded for
speculative motive. The demand for cash is more complex thus Keynes had to first investigate
the motives for holding cash and then to establish their interest rate sensitivity. Two of the
motives of the liquidity preference that is the transactionary and precautionary demands are
considered to be reluctant to change with the rate of interest while the speculative demand is
sensitive to the changes in the rate of interest.

1.1.3 Conceptual Background

Here we are going to define some key words.

CREDIT

This is the ability to borrow money or obtain goods or services with the understanding that
you will pay for them at a later date. It also define as a record of company or person
borrowing and repayment history.

RISK

It is simply the potential of gaining or losing something of value. It involve uncertainty about
the outcome of a particular event or situation, and the possibility of adverse consequences. In
financial terms, risk refers to the likelihood of loosing money on an investment or in a
business venture.

MANAGEMENT

This is the process of planning, organizing, leading and controlling resources to achieve
organizational goals. It involve making decisions, setting objective, coordinating activities
and overseeing the implementation of plan to ensure that the organization operate effectively
and efficiently. Management also involve motivating and guiding employees, as well as
evaluating and improving processes and performance.

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CREDIT RISK

It refers to the potentials loss that a lender or investor may incur if a borrower or debtor fails
to repay a loan or meet their financial obligations. It is the risk that a borrower may default on
their debt or be unable to make timely payment, leading to financial loss to the lender or
investor. Credit risk is a significant concern for financial institutions, such as bank and
investment firms, as well as for individual and business that extend credit to others.

CREDIT RISK MANAGEMENT

This the process of identifying, assessing, and mitigating the potential risks associated with
lending money or extending credit to individual or business. This involves evaluating the
creditworthiness of borrowers, setting appropriate terms and conditions for lending, and
implementing strategies to minimize the impact of potential losses. Credit risk management
also involve monitoring the financial health and behaviors of borrowers to ensure they are
able to meet their financial obligations. Additionally, it may involve diversifying the credit
portfolio to spread risk, setting aside reserves for potential losses, and using financial
instrument such as credit derivatives to hedge against credit risk overall. Credit risk
management aim to protect lenders and investors from potential financial losses due to
borrower default or inability to repay their debt.

PERFORMANCE

According to Cambridge Advance learners online Dictionary 2018; performance is how well
a person, machine, etc. does a piece of work or an activity. Performance encompasses specific
behavior (e.g, sales conversation with customers, teaching statistics to undergraduate student,
programming computer software, assembling part of a product). This conceptualization
implies that only action that can be scaled (i.e., counted) are regarded as performance
(Cambell et al., 1993). Moreover, this performance concept explicitly only describe behaviors
which is goal oriented, i.e behavior which the organization hire the employee to do well as
performance (Cambell et al., 1993).

FINANCIAL PERFORMANCE

It is the ability of a business to generate profit on asset, pay its bills smoothly without running
out of cash and the ability to manage its assets and liabilities. Josh kaufman (2012). This
referes to how well a firm acquires money (revenue). Will Kenton defines financial
7
performance as a subjective measure of how well a firm can use assets from primary mode of
business and generate revenue.

1.1.4 Contextual Background.

BUPCCUL being a category 1 micro finance, it main activities is receiving deposits from
members and giving out loans on interest bases in order to make profit. Looking at the context
of credit risk management, BUPCCUL faces financial issues when this loans are not paid
back on time. There is a possibility that the member or borrower will not pay both the
principal and interest at the required time and this will impact the financial performance of
BUPCCUL. Hence, it is of great importance to examine a member before granting loans and
also study the cause of loan delinquency and propose adequate solutions. MFIs make profit
through given out of loans with interest rate, so when this loans are not paid back on time
with interest, it will have a negative effect on the financial performance of the institution.

1.2 STATEMENT OF PROBLEM

In the context of microfinance institutions, the effective management of credit risk poses a
critical challenge that directly impacts their financial performance and sustainability. Despite
the recognized importance of sound credit risk practices, there remains a gap in understanding
the specific mechanisms through which credit risk management influences the financial health
of microfinance entities.

This study aims to address the following key issues:

1. Ambiguity in Credit Risk Management Impact: There is a lack of comprehensive analysis

regarding how different aspects of credit risk management, such as credit assessment
methodologies, risk monitoring systems, and default mitigation strategies, contribute to the
overall financial performance of microfinance institutions.

2. Alignment of Risk Management Strategies with Financial Outcomes: It is essential to

assess the alignment between credit risk management strategies implemented by microfinance
institutions and their impact on key financial performance indicators, including profitability,
loan portfolio quality, and liquidity ratios.

3. Mitigation of Credit Risk Challenges: Microfinance institutions often face unique

challenges in managing credit risk, including limited access to credit information, high client
default rates, and operational inefficiencies. Understanding how these challenges affect
financial performance is crucial for developing targeted risk mitigation strategies.

8
4. Implications for Financial Inclusion: Given the role of microfinance institutions in
promoting financial inclusion and serving underserved populations, it is imperative to explore
how effective credit risk management practices can contribute to the sustainability and
scalability of microfinance operations, thereby enhancing access to financial services for
marginalized communities.

By investigating these issues and exploring the interplay between credit risk management and
financial performance in microfinance institutions, this study seeks to provide actionable
insights that can inform strategic decision-making, improve risk management frameworks,
and enhance the overall resilience of microfinance entities in a dynamic and often challenging
operating environment.

1.3 RESEARCH OBJECTIVES

The research objectives are divided into two which are: the main objective and the specific
objectives.

1.3.1 Main research objective.

To assess the effect of credit risk management on the financial performance of microfinance
institution.

1.3.2 Specific research objectives

 To assess the impact of credit risk management practice on the quality of loan
portfolio of microfinance institution.
 To analyze the relationship between credit risk management strategies and the
financial profitability of Microfinance Institutions.
 To evaluate how credit risk management techniques influence the capital adequacy
and stability of Micro Finance Institutions.

1.4 RESEARCH QUESTIONS.

The research questions are divided into two that is the main and the specific research
questions.

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1.4.1 Main research question.

What is the effect of credit risk management on the financial performance of microfinance
institution?

1.4.2 Specific research questions.

 How does the implementation of credit risk management practices impact the loan
portfolio quality of Micro Finance Institutions?
 What is the relationship between credit risk management strategies and the
profitability of Micro Finance Institutions?
 To what extent do credit risk management techniques influence the capital adequacy
and stability of Microfinance Institutions ?

1.5 SIGNIFICANCE OF THE STUDY.

 To the researcher

This work is important to me as it made me research for more knowledge. The knowledge I
gained will help me in the future to handle a related problem faced in any financial institution
I find myself. It will also serve as a requirement for the award of Higher National Diploma. It
will help to increase my strength in research methodology and data analysis. It will help the
researcher understand issues on loan granting management and financial performance.

 To Buea Police Cooperative Credit union

This work will be of immense advantage or benefit to the institution in that it will offer a
guideline for managers, investors and supervisors on improving MFI's performance by
managing risks

 To the community

This piece of work will help create awareness in the community on the procedures to be taken
for loan granting and the risk involved when these loans are not paid in time.

 To other researchers

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This work will also help other researchers who are researching on this topic or a similar topic
to gain more knowledge. Thus, it can be used for referencing and further research.

 To other Establishments

Other organizations can equally better up their loan granting procedure with knowledge
gained from this research work through better loan appraisal. monitoring and recovery

1.6 JUSTIFICATION OF THE STUDY.

Since our country Cameroon is striving towards emergency come 2035.it is a call for concern
to every financial and business sector of the economy. If we have to get there. MFI have to sit
up and follow the right procedures for loan granting in order to curb the problem of loan
delinquency and default in which case MFI will not be faced with the problem of not being
able to make profit or pay their workers or meet up with liquidity. Loan granting is a very
important aspect of ever. micro finance institution since it has to do with liquidity and
profitability. As such. MFI's has to watch the procedures for loan granting strictly. By doing
so. the economy will meet its target of an emergent country come 2035.

1.7 SCOPE OF THE STUDY.

The scope of the study will be divided into three components which are; time scope.
Geographical and content or thematic scope.

1.7.1 Time scope.

This study was carried out within a period of two months that is from the Ist of June to
the31st of July 2021

1.7.2 Geographical scope.

This piece of work was carried out in Buea Police Cooperative Credit Union Yaoundé Branch
situated at Obili neighborhood precisely opposite GP Obili.

1.7.3 Content or thematic scope.

The research is based on the theme:-The effects of loan granting managements on Financial
performance of MFI's delimit himself to the sphere of BANKING AND FINANCE with

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particular emphasis on loan appraisal, monitoring and recovery. Thus, performance indicators
will include net profit (revenues minus expenses) and current ratio (liquidity and cash
available).

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CHAPTER TWO

LITERATURE REVIEW

This chapter will consist of review by theories, review by concept and review by objectives
which include loan appraisal, loan monitoring, and loan recovery. It also consist of
presentation of the enterprise and internship activities.

2.1 REVIEWS BY THEORIES.

Here the researcher has elaborated on some theories, which help gain, more knowledge on
credit risk management

2.1.1 The Modern Portfolio Theory( MPT) By Harry Marko Witz

The Modern Portfolio Theory (MPT) – it's like the heavyweight champion of investment
theories! Developed by the legendary economist Harry Markowitz in the 1950s, MPT
revolutionized the way investors think about constructing investment portfolios. Brace
yourself for a thorough exploration, because this theory is like a rich tapestry of financial
wisdom. At its core, MPT is all about optimizing the trade-off between risk and return when
assembling a portfolio of assets. Markowitz's groundbreaking insight was to shift the focus
from looking at individual assets in isolation to considering the entire portfolio and how assets
interact with each other.

The theory advocates diversification as a means to reduce risk. It argues that by combining
assets with different risk and return profiles, investors can potentially maximize returns for a
given level of risk, or minimize risk for a given level of return. This principle is encapsulated
in the famous "efficient frontier," which represents the set of optimal portfolios that offer the
highest expected return for a given level of risk, or the lowest risk for a given level of
return.To put it simply, rather than putting all your eggs in one basket (which we all know is
generally not a wise move), MPT suggests spreading your investments across different asset
classes, such as stocks, bonds, real estate, and commodities. By doing this, the theory asserts
that a portfolio's overall risk can be reduced without necessarily sacrificing expected returns

Now, MPT does make some key assumptions, such as investors aiming to maximize their
returns while minimizing risk, and having access to perfect information to make rational
decisions. It's also worth noting that the theory assumes that returns follow a normal

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distribution, which might not always hold true in real-world markets. Despite these
assumptions, MPT has significantly influenced the field of finance and investment
management. It laid the groundwork for the development of quantitative portfolio
management techniques and helped establish the concept of diversification as a fundamental
principle of investing. In practice, MPT has also led to the emergence of modern portfolio
construction methodologies, such as the Capital Asset Pricing Model (CAPM) and the
Arbitrage Pricing Theory (APT), as well as the widespread use of statistical measures like
standard deviation and correlation in evaluating portfolio risk and return Over time, variations
and refinements to MPT have emerged, and it continues to be a cornerstone of portfolio
theory and asset allocation strategies. Markowitz was even awarded the Nobel Prize in
Economics for his work, underscoring the profound impact of MPT on the field of finance. ---
------------------So, there you have it – the essence of Modern Portfolio Theory! It's a hefty
concept, but the basic premise of optimizing risk and return through diversification is a
timeless principle in the world of investments.

2.1.2 Asymmetry and Adverse Selection Theory:

Information asymmetry and adverse selection are fundamental concepts in the field of
economics and finance, particularly in the context of financial markets and institutions. Let's
break down these theories to better understand their significance:

Information Asymmetry:

Information asymmetry refers to a situation where one party in a transaction has more or
better information than the other party. This lack of symmetry in information can lead to
market inefficiencies, distortions in pricing, and challenges in decision-making processes. In
the context of microfinance institutions, information asymmetry can manifest in several ways:

- Borrower-Lender Relationship: Microfinance institutions often lend to borrowers with

limited credit history or financial documentation, leading to asymmetrical information about
the borrower's creditworthiness and repayment capacity.

- Operational Challenges: Microfinance institutions may lack access to comprehensive

credit information or face difficulties in assessing the true risk profile of borrowers, resulting
in asymmetries in information that can impact lending decisions.

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- Risk Management: Inadequate information about clients' financial situations can hinder
effective risk management practices, leading to increased exposure to credit risk and potential
financial losses.

Adverse Selection Theory:

Adverse selection, a concept closely related to information asymmetry, occurs when one party
in a transaction has better information than the other party and uses this information
advantage to maximize their own benefits at the expense of the less informed party. In
microfinance, adverse selection can occur in various ways:

- Loan Portfolio Quality: Adverse selection may lead to a situation where microfinance
institutions attract riskier borrowers who are more likely to default, thereby deteriorating the
overall quality of the loan portfolio.

- Pricing of Financial Products: If borrowers with higher default risk are more inclined to
seek microfinance services, this can lead to adverse selection in pricing, where interest rates
may not fully reflect the true risk profile of borrowers.

- Impact on Financial Performance: Adverse selection can adversely impact the financial
performance of microfinance institutions by increasing credit losses, reducing profitability,
and undermining the institution's long-term sustainability.

Understanding information asymmetry and adverse selection is crucial for microfinance

institutions to develop effective risk management strategies, enhance transparency in lending
practices, and ensure fair and equitable treatment of all stakeholders. By addressing these
challenges, microfinance institutions can mitigate adverse selection effects, improve
operational efficiency, and enhance their ability to promote financial inclusion responsibly.

2.1.3 The liquidity preference theory by J.M. Keynes (1936)

According to Keynes, people demand money not only for investment but for other motives He
concluded that people demand money for transaction. precaution and speculative motives.
The demand for money is the desire to hold money in liquid form instead of asset form. This
preference to hold money in liquid form is due to the risk that goes with these assets. Short
term financial assets carry a smaller level of risk than the medium to long term assets which
carry a higher level of risk and a higher interest rate paid on them. Keynes further explained

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that people hold money to meet their day to day transactions like purchase of goods and
services (transaction motive). to cover up for unforeseen circumstances such as illness,
accidents, unexpected guests(precautionary motive) and to take advantage of changes in the
prices of securities (speculative motive) The demand for money for transaction and
precautionary motive are called active demand they are not controlled by the rate of interest
meanwhile the demand for speculative motive is controlled by the rate of interest. When the
rate of interest decreases, people will demand for more money to hold until interest increases.

According to Keynes, the demand for money is the desire to hold money in liquid form
instead of asset form. This preference to hold money in liquid form is due to the risk that goes
with the assets. Short term financial assets carry a smaller level of risk than medium to long
term assets which carry a higher level of risk and a higher interest rate paid on them.

Demand for money

This refers to the ability for an individual to hold cash in liquid form. According to Keynes
,there are three motives for one to hold cash in a liquid form which are;

 Transaction motive

This refers to the desire or ability to hold cash for immediate or current happenings, to meet
up with their day to day transactions like purchase of goods and services .The money here is
use to carryout business transactions where individuals hold money to bridge the gap between
the receipt of income and expenditures. The demand for money for transaction motive
depends on the individual's level of income. price level ,the frequency of income payment.

 Precautionary motive

This refers to the desire or ability to hold cash for unforeseen circumstances. Here.
Individuals forecast cash for some circumstances such as, death, illnesses, accident and
anniversaries. The transaction and precautionary demand for money are demand for active
balance. This demand for money is not influenced by the current rate of interest.

 Speculative motive

This is liquidity held in excess of what is needed of transaction and precautionary motives.
This liquidity is intended to take advantage of changes in the prices of securities, for instance
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people keep liquidity to speculate that bond prices will fall. When the rate of interest
decreases, people demand for money to hold until interest increases which will drive the
prices of existing bonds to keep its yields in line with interest rate, the greater the demand for
money for speculation motives. Hence there is an inverse relationship between interest rates
and prices of securities. The liquidity preference will be very high if people expect security
prices to fall. The speculative demand for money is also known as the demand for idle
balances and it is influenced by the rate of interest.

The liquidity preference curve is derived from the demand for active and passive balances and
the demand for idle motives. When the rate of interest falls, much money will be demanded
for speculative motive and vice versa. Where the liquidity preference curve is horizontal, it is
described as the liquidity trap. The liquidity trap is a very low level of interest rate where
people neither lend out their money nor keep or save in the bank but simply holds it. It is a
situation where the interest rate is too low that people do not see the need of holding interest
bearing assets but prefer to hold their cash.

The liquidity Preference Curve is derived from the demand for active and passive balances
and the demand for idle motives. When the rate of interest falls, much money will be
demanded for speculative motives and vice versa. Where the liquidity preference curve is
horizontal, it is described as the liquidity trap. The liquidity trap is a very low level of interest
rate where people neither lend out their money nor keep or save in the bank but simply holds
it. It is a situation where the interest rate is too low that people do not see the need of holding
interest bearing assets but prefer to hold their cash as seen on the diagram.

Figure 2: Liquidity preference curve

R.

R:

Liquidity trap

Quantity of money

The decisions to spend or not to spend must not be confused with the separate and subsequent
in a sense decision to either hold wealth in the form of money or some other asset. Not

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denying that the rate of interest affects decisions to invest and consume, Keynes point was
that the classics got it wrong in allocating the determination of the rate of interest at the level
of spending/saving decisions. James Chen (2019). According to this theory, the demand for
liquidity holds speculative power; investments that are more liquid are easier to cash in for
full value. Cash is commonly accepted as the most liquid asset. According to the liquidity
preference theory, interest rates on short-term securities are lower because investors are not
sacrificing liquidity for greater timeframes than medium or longer securities. Stakeholders
demand money for transactions, precautionary and speculative motives. When higher interest
rate is offered, investors give up liquidity in exchange for higher rates.

2.2 REVIEW BY CONCEPTS

Here we are going to examine the different concept used in the study.

2.2.1 Credit Risk Management.

Credit risk management is the process of evaluating and mitigating the potential for financial
loss due to the failure of a borrower or counterparty to meet their financial obligations. This
risk arises from the possibility of borrowers defaulting on loans or failing to make timely
interest payments, leading to potential financial losses for the lender. In the financial industry,
credit risk management is of paramount importance as it directly impacts the stability and
profitability of financial institutions. Effective credit risk management allows institutions to
assess the creditworthiness of borrowers, allocate capital efficiently, and maintain a healthy
loan portfolio. By identifying, measuring, and managing credit risk, financial institutions can
reduce the likelihood of loan defaults and minimize potential losses, thereby safeguarding
their financial health. In the context of microfinance institutions, credit risk management
holds particular significance due to their focus on providing financial services to individuals
and small businesses with limited access to traditional banking services. Microfinance
institutions often serve clients who may have little or no credit history and operate in
environments with unique economic and social challenges. As a result, effective credit risk
management is essential for these institutions to ensure the sustainability of their operations,
maintain investor confidence, and fulfill their mission of fostering financial inclusion. By
implementing sound credit risk management practices, microfinance institutions can better
assess the creditworthiness of their clients, structure appropriate loan products, and establish
risk mitigation strategies tailored to the needs of underserved communities. This not only
helps in preserving the institution's financial stability but also contributes to the overall

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economic development of the communities they serve. In summary, credit risk management
plays a crucial role in the financial industry by enabling institutions to prudently assess and
manage the risks associated with lending activities. For microfinance institutions, effective
credit risk management is instrumental in fulfilling their social mission while maintaining
financial sustainability in serving marginalized populations.

2.2.2 Financial Performance

When measuring the financial performance of microfinance institutions, several key metrics
are commonly used to assess their operational efficiency, profitability, and risk management.
Here are some of the essential metrics:

 Return on Assets (ROA): ROA is a financial ratio that indicates the efficiency of an
institution in generating profits from its assets. It is calculated by dividing the
institution's net income by its average total assets. A higher ROA signifies better
utilization of assets to generate earnings, reflecting favorable financial performance.
 Return on Equity (ROE): ROE measures the profitability of an institution in relation
to its shareholders' equity. It is calculated by dividing the institution's net income by
its average shareholders' equity. A higher ROE indicates that the institution is
effectively generating profits from the capital invested by its shareholders.
 Portfolio Quality Indicators - Non-Performing Loan (NPL) Ratios: NPL ratios are
crucial indicators of asset quality and credit risk management. These ratios measure
the proportion of loans in the institution's portfolio that are not being serviced
according to the terms of the loan agreement. High NPL ratios can signal potential
credit quality issues and may indicate weaknesses in the institution's lending practices
and risk management. In addition to these key metrics, other performance indicators
such as operating efficiency ratios, cost-to-income ratios, and outreach metrics (e.g.,
number of clients served, loan portfolio composition) are also used to assess the
overall financial performance and social impact of microfinance institutions. By
analyzing these metrics, stakeholders can evaluate the financial sustainability,
operational effectiveness, and risk exposure of microfinance institutions. Furthermore,
these metrics provide valuable insights for management decision-making, strategic
planning, and demonstrating accountability to investors and regulators

2.2.3 Microfinance Institutions

Microfinance institutions (MFIs) are specialized financial entities that provide a range of
financial services, including small loans, savings accounts, insurance, and payment
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services, to low-income individuals and underserved communities who have limited
access to traditional banking services. The primary goal of MFIs is to promote financial
inclusion by offering essential financial products and services to those who are excluded
from the formal financial sector due to various economic, social, and geographic barriers.
The role of microfinance institutions in providing financial services to low-income
individuals and communities is multifaceted. Firstly, MFIs aim to empower the
economically disadvantaged by offering them access to credit for income-generating
activities, enabling entrepreneurship, and fostering self-employment opportunities.
Additionally, MFIs facilitate savings mobilization among their clients, promoting a
culture of thrift and providing a secure place for individuals to accumulate savings and
build assets. Moreover, by offering insurance products and payment services, MFIs
contribute to risk mitigation and facilitate secure and convenient financial transactions for
their clients. Microfinance institutions operate with several unique characteristics
compared to traditional financial institutions:

 Client-Centric Approach: MFIs often adopt a client-centric approach tailored to the

specific needs of low-income clients. This may involve offering small-ticket loans,
flexible repayment schedules, and personalized financial education to support client
empowerment and financial capability.
 Group Lending Methodology: Many MFIs utilize group lending methodologies where
loans are extended to groups of individuals who mutually guarantee each other's
repayments. This approach fosters social cohesion within communities and promotes
peer support among borrowers.

 Non-Collateralized Lending: In contrast to traditional lending practices that often

require collateral, MFIs frequently engage in non-collateralized lending, allowing
individuals without tangible assets to access credit based on their character and
repayment capacity.
 Social Mission: Microfinance institutions often have a dual social and financial
mission, aiming not only for sustainable financial performance but also for positive
social impact by reaching out to the underserved and marginalized segments of
society.

Overall, microfinance institutions play a vital role in promoting inclusive finance and
addressing the financial needs of low-income individuals and communities. Their unique
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operational characteristics enable them to effectively serve populations that are typically
excluded from mainstream financial services.

2.2.4 Types of credit risk

Microfinance institutions are exposed to various types of credit risk that can significantly
impact their financial performance and operational stability. Here are some common types
of credit risk faced by MFIs:

 Default Risk: Default risk refers to the potential loss arising from borrowers' inability
or unwillingness to repay their loans as per the agreed terms. In the context of
microfinance, where clients often lack traditional forms of collateral, the default risk is
a primary concern. High levels of default can erode the MFI's profitability, deplete its
capital reserves, and hamper its ability to provide financial services effectively.
 Concentration Risk: Concentration risk arises when an MFI's loan portfolio is
heavily concentrated in a particular sector, geographic area, or group of clients. For
example, if a significant portion of the MFI's loans is directed towards a single
economic activity or region, it becomes vulnerable to sector-specific or regional
economic shocks. Concentration risk can lead to increased loan delinquencies and
losses if adverse events affect the concentrated segment.
 Interest Rate Risk: MFIs often face interest rate risk due to the potential
misalignment between the interest rates they charge on loans and the rates they pay on
funding sources (such as deposits or borrowings). Fluctuations in market interest rates
can impact the MFI's net interest margin and overall profitability. Moreover, if MFIs
offer variable rate loans to clients, changes in market interest rates can affect
borrowers' repayment capacity, leading to increased default risk.

The potential impacts of these credit risks on an MFI's financial performance are significant:

o Financial Losses: High levels of default and non-performing loans can lead to
substantial financial losses for MFIs, reducing their ability to fund future lending
activities and jeopardizing their long-term sustainability.
o Erosion of Capital: Persistent credit risk can erode an MFI's capital base, weakening
its ability to absorb losses and maintain regulatory solvency requirements.

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o Reputational Damage: Excessive credit risk exposure can harm an MFI's reputation
within the community and among investors, affecting its ability to attract funding and
expand its outreach.
o Regulatory Compliance: Inadequate management of credit risk may result in non-
compliance with regulatory requirements, leading to sanctions or restrictions on the
MFI's operations.

To mitigate these risks, MFIs employ robust credit risk management strategies including
thorough risk assessment practices, portfolio diversification, and proactive monitoring of
client repayment behavior.

2.2.5 Credit risk Management Strategies

Microfinance institutions employ various strategies to manage credit risk, which is essential
for ensuring the sustainability of their operations and the protection of clients' savings. Here
are some key credit risk management strategies utilized by MFIs:

 Risk Assessment Methods: MFIs utilize a combination of quantitative and qualitative

methods to assess the creditworthiness of potential borrowers. This may involve
analyzing income-generating activities, cash flow patterns, household dynamics, and
other socio-economic indicators to gauge clients' repayment capacity. Furthermore,
MFIs often conduct thorough credit checks and verification processes to validate the
information provided by loan applicants.
 Group Lending and Social Collateral: Many MFIs leverage the concept of group
lending, where loans are extended to a group of individuals who mutually guarantee
each other's repayments. This social collateral mechanism encourages peer monitoring
and support within the community, reducing the risk of default.
 Non-Collateralized Lending: In line with the principles of financial inclusion, MFIs
often extend loans without requiring traditional forms of collateral. Instead, they rely
on alternative forms of security such as group guarantees, social collateral, or
individual character assessments to mitigate credit risk.
 Loan Portfolio Diversification: To manage credit risk effectively, MFIs diversify
their loan portfolios across different economic sectors and client segments. By
spreading lending activities across diverse income-generating activities and
geographic areas, MFIs reduce their exposure to sector-specific or regional risks.

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 Credit Scoring Models: Some MFIs implement credit scoring models that use
statistical techniques to assess the creditworthiness of borrowers based on historical
repayment data, demographic factors, and other relevant parameters. These models
help in standardizing the evaluation process and enhancing risk management practices.
 Continuous Monitoring and Client Support: MFIs maintain close relationships with
their clients and provide ongoing support to ensure proper end-use of loans and offer
assistance in case of financial difficulties. This proactive approach helps in early
identification of potential repayment challenges and enables timely interventions to
mitigate credit risk.
 Savings Mobilization: In addition to lending activities, many MFIs emphasize
savings mobilization among their clients. By promoting a culture of savings, MFIs
encourage clients to build financial buffers that can serve as a safety net in times of
economic stress, thereby indirectly reducing credit risk.

Overall, microfinance institutions employ a combination of prudent lending practices,

community-based collateral mechanisms, and portfolio management strategies to effectively
manage credit risk while fulfilling their mission of serving low-income individuals and
communities.

2.2.6 Financial Stability and capital adequacy

Financial stability and capital adequacy are crucial for microfinance institutions (MFIs) as
they directly impact their ability to sustain operations, manage risks effectively, and fulfill
their social mission of providing financial services to underserved communities. Let's explore
the significance of these concepts and their link to effective credit risk management practices:

 Financial Stability:

Financial stability is essential for MFIs to maintain resilience in the face of economic
shocks, fluctuations in client repayment behavior, and external market conditions. A
stable financial position enables MFIs to continue serving their clients, attract funding
from investors and donors, and expand their outreach. Financial stability is closely tied to
the prudent management of credit risk, as excessive exposure to credit risk can undermine
an MFI's stability by eroding its capital base and profitability.

 Capital Adequacy:

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Capital adequacy refers to the sufficiency of an MFI's regulatory capital in relation to its
risk-weighted assets, reflecting its ability to absorb losses and meet financial obligations.
Adequate capitalization is vital for MFIs to withstand unexpected credit losses, maintain
confidence among stakeholders, and comply with regulatory requirements. Effective
credit risk management practices are directly linked to capital adequacy, as sound risk
assessment, portfolio diversification, and provisioning for expected losses contribute to
maintaining an appropriate level of capital relative to the risks undertaken. The link
between financial stability, capital adequacy, and effective credit risk management can be
understood through the following points:

 Prudent Risk Management: Effective credit risk management practices, such as robust
underwriting standards, ongoing monitoring of loan portfolios, and timely
identification of potential credit issues, contribute to maintaining a stable asset quality
and reducing the likelihood of unexpected loan losses.
 Capital Preservation: By managing credit risk effectively, MFIs can preserve their
capital base by minimizing unexpected losses from loan defaults, thereby bolstering
their capital adequacy ratios and ensuring regulatory compliance.
 Investor Confidence: Sound credit risk management enhances investor confidence in
an MFI's financial stability and risk management capabilities, facilitating access to
funding sources and promoting long-term sustainability.

In summary, financial stability and capital adequacy are fundamental for the resilience and
long-term viability of microfinance institutions. Effective credit risk management practices
play a critical role in safeguarding financial stability, maintaining adequate capitalization, and
supporting the mission of MFIs to provide inclusive financial services while managing risks
prudently.

2.3 REVIEW BY OBJECTIVE

2.3.1. Credit risk management practice and Financial Performance

Credit risk management is crucial for maintaining a healthy financial performance. By

effectively managing credit risk, microfinance institutions can minimize the likelihood of
financial loss due to non-payment or default by customers. This involves assessing the

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creditworthiness of customers, setting credit limits, and monitoring payment behavior. A
strong credit risk management practice can lead to better financial performance by reducing
bad debt expenses, improving cash flow, and enhancing the overall health of a company's
balance sheet. It also helps in maintaining a good relationship with customers and the
financial institution.

2.3.2 Loan portfolio quality and financial performance

The quality of a loan portfolio has a direct impact on the financial performance of a financial
institution. A high-quality loan portfolio is characterized by a low level of credit risk, minimal
defaults, and a healthy balance between risk and return. Here's how it can affect financial
performance:

1. Interest Income: A high-quality loan portfolio generates consistent interest income from
performing loans, contributing to the institution's revenue stream.

2. Provision for Loan Losses: A lower level of non-performing loans in the portfolio reduces
the need for provisions for loan losses, which positively impacts the institution's profitability.

3. Capital Adequacy: A strong loan portfolio quality contributes to the overall capital
adequacy of the institution, providing a solid foundation for future growth and stability.

4. Risk Management Costs: A better-quality loan portfolio reduces the costs associated with
credit risk management, collection efforts, and legal actions related to defaulted loans.

5. Reputation and Investor Confidence: A strong loan portfolio quality enhances the
institution's reputation and investor confidence, potentially leading to better access to capital
and lower borrowing costs.

6. Regulatory Compliance: Maintaining a high-quality loan portfolio can help ensure

compliance with regulatory requirements, avoiding penalties and maintaining a good standing
with regulatory authorities.

Overall, a high-quality loan portfolio contributes to the financial strength and stability of a
financial institution, supporting its long-term success and growth.

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2.3.3 Capital adequacy and financial performance

Capital adequacy is a critical aspect of a financial institution's stability and performance. It

refers to the sufficiency of a bank's capital in relation to its risk-weighted assets, providing a
buffer to absorb potential losses. Here's how capital adequacy can impact financial
performance. A well-capitalized institution can effectively manage credit risk. Which this will
lead to a more stable financial performance and thus reducing the likelihood of severe losses
impacting the institution's solvency.

2.3.4 Risk mitigation and financial performance

Risk mitigation is a critical component of an organization's strategy to maintain financial

stability and optimize performance. Here's how risk mitigation strategies can impact financial
performance:

1. Reduced Losses: Effective risk mitigation measures, such as diversification, hedging, and
insurance, aim to minimize the impact of adverse events on the organization. By reducing the
frequency and severity of losses, these strategies contribute to improved financial
performance by preserving capital and profitability.

2. Enhanced Resilience: Risk mitigation efforts bolster an organization's resilience in the face
of unexpected events, economic downturns, or market volatility. This resilience can help
maintain stable financial performance by mitigating the negative effects of external shocks.

3. Lower Cost of Capital: Proactive risk mitigation measures can enhance investor confidence
and reduce the perceived risk associated with the organization. This can lead to a lower cost
of capital, as investors may demand lower returns for assuming less risk, positively
influencing financial performance.

4. Regulatory Compliance: Compliance with risk management regulations and standards is

essential for maintaining a good standing with regulatory authorities. Non-compliance can
result in penalties and reputational damage, potentially impacting financial performance.

5. Competitive Advantage: Organizations that effectively mitigate risks may gain a

competitive advantage by demonstrating stability and reliability to stakeholders, customers,
and partners. This advantage can translate into improved financial performance through
increased market share and customer loyalty.

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6. Strategic Decision-Making: By mitigating risks, organizations create a more stable
environment for strategic decision-making. This can lead to better allocation of resources,
improved investment decisions, and long-term growth opportunities that positively impact
financial performance.

In summary, effective risk mitigation strategies are integral to maintaining financial stability
and optimizing performance by reducing losses, enhancing resilience, lowering costs,
ensuring compliance, gaining competitive advantages, and supporting strategic decision-
making.

2.4 Empirical Review:

In the realm of microfinance, empirical studies have provided valuable insights into the
relationship between credit risk management practices and the financial performance of
microfinance institutions. Here are some key empirical findings and studies that shed light on
this important intersection:

1. "Credit Risk Management and Financial Performance of Microfinance Institutions:

A Global Perspective" (Kumar et al., 2019):

- This study analyzed data from microfinance institutions worldwide and found a positive
correlation between effective credit risk management frameworks and financial performance
metrics such as return on assets and portfolio quality. It emphasized the importance of
proactive risk assessment and mitigation strategies in enhancing the stability and efficiency of
microfinance operations.

2. "Impact of Credit Risk Management on Financial Performance: Evidence from

Microfinance Banks in Nigeria" (Olayemi & Olatubosun, 2020):

- This empirical research focused on microfinance banks in Nigeria and highlighted the
significance of credit risk management policies in mitigating loan defaults and improving
profitability. The study underscored the need for tailored risk management approaches to
address the unique challenges faced by microfinance institutions in emerging market contexts.

3. "The Relationship Between Credit Risk Management and Financial Performance: A

Case Study of Microfinance Institutions in India" (Sharma & Mishra, 2018):

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- Conducted in the Indian microfinance sector, this study explored the impact of credit risk
management strategies on the financial performance of microfinance institutions. It revealed
that institutions with robust risk management frameworks experienced lower default rates,
higher repayment rates, and enhanced financial sustainability compared to those with weaker
risk mitigation practices.

4. "Credit Risk Management Practices and Financial Performance of Microfinance

Institutions: A Study of Latin American Countries" (Gonzalez et al., 2017):

- This research delved into the credit risk management practices of microfinance institutions
across Latin American countries and assessed their influence on financial performance
indicators. The study observed that institutions that implemented comprehensive risk
management policies demonstrated better asset quality, lower credit losses, and improved
overall financial health.

5. "Evaluating the Impact of Credit Risk Management on the Financial Performance of

Microfinance Institutions: A Longitudinal Analysis" (Wang & Liu, 2016):

- Through a longitudinal analysis of microfinance institutions over multiple years, this study
traced the evolution of credit risk management practices and their effects on financial
performance trends. The research highlighted the dynamic nature of risk management and its
continuous impact on the operational and financial outcomes of microfinance entities.

These empirical studies collectively contribute to a deeper understanding of how credit risk
management influences the financial performance of microfinance institutions across different
regions and contexts. By synthesizing these findings and identifying common patterns and
best practices, microfinance stakeholders can glean valuable insights to enhance risk
management frameworks, optimize performance metrics, and promote sustainable growth in
the sector.

2.5 PRESENTATION OF INTERNSHIP PLACE AND ACTIVITIES.

2.5.1 Description of internship place.

This piece of work was carried out at Buea Police Cooperative Credit Union Yaoundé.
BUPCCUL is a category one microfinance institution, which accepts deposits and grants
loans only to its members. Its main office is situated in Buea, Fako Division in the South

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West Region of Cameroon. it is currently having 5 branches which are; Yaoundé, limbe,
Buea, Bonabery, Ndokoti-Douala.

BUPCCUL is supervised by COBAC and MINFI and it is affiliated to CAMCCUL.

BUPCCUL Yaoundé branch is found at Obilli Opposite G.P.

2.5.2. Mission of BUPCCUL

 Accept deposits from its members and makes them readily available on demand.
 Providing secured loans to members upon request to assist them in their day to day
transactions and interactions.
 To open other branches nationwide, so as to help reduce the unemployment rate and
crime wave. That is by employing young competent graduates to work in its newly
opened branches.
 To assist in the circulation of money both nationally and internationally. It is done
nationally within the CAMCCUL network through TELECASH.
 And internationally by bank to bank transfer through Union Bank of Cameroon Plc all
the special operations offered by the cooperation.
 To train members on how to manage business and how to control their money wisely.
 To provide financial assistance both to groups and individuals with the use of long
term and medium term loans.
 To encourage regular savings and wise lending and prompt repayment.
 To provide relevant financial products and services to meet up accurately with the
constant fluctuating financial needs of members.

2.6 ORGANIZATION AND OPERATION OF BUPCCUL.

Like any well-organized institution, BUPCCUL has a well-organized structuring that

includes; BUPCCUL is affiliated to CAMCCUL which is the audit body in charge of all
credit unions allover Cameroon and this audit body ensures that the company complies with
the norms of the banking commissions of central Africa (COBAC). BUPCCUL has
membership strength of over 3000 members nationwide and has put in place structures to
enhance a smooth and proper functioning of the company. An annual general assembly is held
in which every organ and structures of the company give or submit reports on their activities
of the year and members are given the opportunity to express their opinions or view with
respect to their welfare as members as well as the state of the company.

29
BUPCCUL is made up of six boards of directors which are: the President. Vice president,
Secretary and three other board members.

The BOD is divided into three committees namely:

 The Supervisory Board is made up of: chairman, secretary and member.

 The Youth Committee is made up of the chairman, secretary and a member.
 The Women's committee include; a chairperson and two members.

Their activities are separated from each other and they are answerable to the BOD that is they
must report to the BOD all their aims, objectives, mission, vision, measures, targets as well as
their achievement during the period. It is worth noting that there exists a youth committee.
The youth committee is made up of three members that is a chair person, secretary and a
member. It has as objective to put resources together to see how to help meeting houses,
Njangi groups. workshops, job places, churches and even individuals on the streets. It is also
to sensitize the yet to be members and existing members on the importance of Credit union.
Furthermore, it is not only to encourage members to open accounts or save regularly, but also
to encourage them to be self-employed and to alleviate them from poverty because the youths
are the “nation Builders"

Through this, youths via the help of the Buea Police Cooperative Credit Union have become
more responsible. Youths have opened up provision stores, carpentry workshops, hair
dressing saloon, tailoring workshops, poultry farms, extensive Mechanized farming thanks to
low interest rate loans granted to them. Through Buea Police Cooperative Credit Union,
youths are becoming more responsible than ever before when they used to live dependent
lives.

THE GENERAL ASSEMBLY

This is the supreme organ of the union. It is made up of all members and employees. The
president of the board of directors convenes the general assembly meeting. Members shall be
informed three weeks in advance with emphasis on the date, time and venue. The general
assembly is out to Appraise the work of the board of directors, supervisory committee,
Women and Youth committee.

Bring out solutions to possible problems, which could affect the union.

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THE BOARD OF DIRECTORS

The BOD is elected by the general assembly, during the annual general meeting (AGM).It
shall represent the Credit Union legally in its relation with its members and third parties. The
BOD shall comprise not less than and not more than five members. It shall have a president,
vice president, secretary and two other members. The members of the BOD are elected for a
term of three years renewable. The BOD is out to:

Ensure the effectiveness of the business performance of the Credit Union

Ensure that the business objectives and projects are successfully carried out

Smooth management of the Credit union

The submission of a draft budget for the following year to the AGM

Ensure the implementation of the decisions taken by the General meeting.

SUPERVISION BOARD (SB)

This committee is elected at the AGM. It is made up of not less than three members and not
more than five members. Members are elected for a term of three years renewable two
executive times.

The main duties of the supervisory board are to;

Evaluate programs of the Credit Union

Count cash regularly and make recommendations to the BOD

Check bank accounts regularly and ensure their reconciliation

Do periodic passbook sample verification

Check sample loan applications periodically and note any irregularities

WOMEN'S COMMITTEE

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Women in the credit union consist of three categories: ordinary cooperators. Board/
committee members and staff members. All this have contributed enormously not only in
keeping the BUPCCUL afloat. but also in alleviating poverty and eradicating hunger within
the home. The village and the city. There is no doubt that economic empowerment begets
better education and better health. Women in JIACCULL have broken the cycle of poverty
and have created a financial safety net by sensitizing other women and investing in
themselves and families.

THE MANAGEMENT DEPARTMENT

This department is made up of a General Manager and other branch managers. The BOD
recruits or appoints a manager and assigns him/her to the functions necessary for the day to
day running of the Credit union.

The Manager/General Manager performs the following functions;

Implements the policies laid down by the BOD and represent the Credit union vis-à-vis third
parties

Ensures the proper custody of cash receipts and payments

Draft periodical management reports and present to the BOD

Prepare the accounts for the financial year

Prepares documents for meetings

Managing and coordinating activities of the departments under his unit.

ACCOUNTING DEPARTMENT

 HE/SHE performs the following functions

 Prepares the financial account of the branch account
 Carries out reconciliation of both bank and inter branch accounts
 Treats cash payments and withdrawals
 Treats civil servants salaries
 Keeps inventory of fixed assets till date and calculates depreciation

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PRODUCTS AND SERVICES OF BUPCCUL

BUPCCUL offers a variety of products and services to its members which are been
summarized below:

SAVING ACCOUNT

The saving account in BUPCCUL earns an interest depending on what the credit union
realizes at the end of the year as income. The minimum amount to he saved is 500 FRS. This
account also helps members obtain loans and withdrawals from a short notice owing to the
fact that it is your own investment in the credit union and you pay a small withdrawal charge
which is 1% of the amount to be withdrawn.

DEPOSIT ACCOUNT

Money in this account can be withdrawn at any time owing to the fact that it is considered an
emergency account. A small token is charged on any amount put it this account

LOANS TO MEMBERS

With regards to the main objective of solving member's problems, loans are granted to
members at very low interest rate. That is, loans within savings, interest ranges from 1% to
1.5%.Meanwhile, loans above savings are sureteed by collateral securities and interest ranges
from 1.5%to 2.5%.Note that, interest is being calculated in two phases. The repayment is
being done every month and the customer decides when the interest is to be paid. Be it in each
installment or at the end of the repayment.

GROUP ACCOUNT

Groups can open accounts with BUPCCUL whereby, three people from the group comes to
the office and sign for the entire group. Interest is paid yearly on the shares and savings.
Withdrawals can be done at any time with no charges provided two of the delegated members
are present.

RISK MANAGEMENT

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BUPCCUL provides the best protection for member's savings and loans. This is done by
ensuring that all savings and loans are insured. This means that, members are always 100%
sure of getting their savings and shares repaid even when they die.

SALARY ACCOUNT

With this type of accounts, members are being authorized or given a prior notice from the
bank in other for the member to receive his or her money through the micro finance institution
where he or she is a member of the union. The following documents are being used;

 A hand written application from the ministry of finance.

 Attestation of effective presence from the union.
 A recent pay slip.
 3passpot size photographs.
 A certified copy of National Identity Card

DAILY SAVINGS ACCOUNT

This is an account which is been operated in BUPCCUL where customers save their money
daily. The person in charge of this account is the daily collector who works daily collecting
money from members in their respective of various business places and saves them in their
various accounts. To open this account, a member needs to pay a sum of 500 Frs. which he or
she is then offered a pass book which will contain all transactions that are going to be carried
out. Below are some advantages of this account over other accounts;

 Only a sum of 1000 FRS is been paid compared to savings and deposit accounts.
 Customers concerns do not need to stress themselves coming to the institution to
deposit their money. Instead daily collectors do that for them.
 It helps customers to save their money without any form of fear and withdraw at any
time.
 No prior notice is being made.

Despite some advantages, there are also disadvantages which are;

 A commission of 1000 FRS is been deducted from member or customers account.

 Members operating under this account are not granted loans and overdraft.

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2.5.1. Internship Activities.

This refers to the internal research of the study within the organization. It comprises of all the
information gotten during the internship. My internship at BUPCCUL began on the 1st of
June I was introduced to all the staff of BUPCCUL by the manager.

During the first two weeks of my internship, I worked under the front office in charge of
customers. The front office is where the customer has the first contact with the bank.

In this department, I was trained on how to;

 Inform and oriented customers on the different products and services offered by
BUPCCUL
 Assist clients who faced difficulties in filing their forms, deposit and withdrawal slips
 The other weeks of my internship were at the back office with the account clerk. In
this department. I was trained on the following;
 Bank and cash reconciliation
 How to prepare an income statement and a balance sheet
 How to pass cash transactions using their Alpha software
 Calculate bank statements
 Prepare an income statement and a balance sheet
 Carry on cash transactions using their Alpha software
 Help fill members deposit and withdrawals slip
 Filling of the membership form
 Fill in the cash book

The next department I work with was the loan department, which deals with granting and
recovery. In this department, I observed that when loan applications are deposited, the loan
manager who make sure that all required document are in the file and that the file is correctly
filled. The loan manager approve the loan if the amount is below 100,000 frs and in it is
above 100,0000 frs b the branch manager will be the one to approve the loan and in case the
loan is above 1000,000 frs the loan will have to be approve by the credit committee. For
loans above 10,000,000 frs the GA will be the ones to approve the loan. Interest on loans are
calculated using the reducing balance method(as you pay the principal your interest reduces).
The following ways are used by this department to recover loans;

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Making telephone calls which could be time consuming since some members may lie that
they are not in town

Sending letter of reminder to remind members of their past due status of the account

Making personal approach by the sending of staff recovery committee to visit the member

Alternative dispute between the union and the member

Instituting legal actions which is the last option the union takes.

Activities carried out at the Tellers office

In this sector the intern payout cash to members, received cash from members, repaid loan
from members account, opened cash and closed cash, change money in the system, count
money in the right manner and keep in the tills as well as pay members, print out receipt for
cash in and cash out, paid out salaries to members, learn how to count money, putting it in the
right manner and paying it out to members .

Activities carried out at the receptionist.

Here we welcomed members to the union and assisted them in case of any difficulty. Here we
made sure the money was well counted before been paid to the teller, we showed the
members how to fill the deposits slip, booklet, withdrawal slip.

2.7 STRENGTH AND WEAKNESSES OF BUEA POLICE COOPERATIVE CREDIT

UNION YAOUNDE BRANCH
2.7.1 Strength

BUPCCUL is a prestigious institutions among several. However, several internal factors

contribute for the their great strength for the past years of existence .These strengths
constitute the following;

 The institution is made up of well qualified and experienced staff.

 They possess a good network connection which enable the staff to properly analyze all
operations and transactions without delay.
 Work is performed under good working conditions.

36
 Motivational factors are not absent here; knowing that the reward for labor is salary, it
acts as a good point to motivate workers.
 There exist good collaborations between workers. In the absence of any worker, the
other workers cover up and perform the duty.
 At BUPCCUL, your savings are insured for your benefit in case of permanent
disability or death.
 The working relation within the organization is very friendly making it adequate to
reach and satisfy customers.
 There is high level of communication among staff and managers or higher authorities.
 Some workers feel free to contribute ideas to the growth of the establishment.

2.7.2. Weaknesses.

Despite all these strength, BUPCCUL equally possesses some weaknesses which are:

 Insufficient staff causing delay in the institutions operations and transactions.

 Old staff reduces job efficiency. It is true that longevity is a factor of experience but
equally it becomes a disadvantage when these staff is not versed with new technology.
 If all these weaknesses are taken into consideration it will help improve the
performance of the staff.
 A limitation here might be caused by delinquent members who do not borrow wisely
in the union and by so doing their loan fall due and making them unable to pay their
loans. This might cause the union to run short of funds hence slowing down lending
activities in the institution.

2.8. INTERNSHIP EXPIRIENCE.

As an intern, working under pressure was a new experience I got used to. I also learn how to
carry on the following professional skills

 Calculate bank statements

 Bank and cash reconciliation
 Prepare an income statement and balance sheet
 Carry on cash transactions using the software
 Help fill members deposits and withdrawal slip
 Filling membership forms

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 Fill in the cash book

2.9. DIFFICULTIES ENCOUNTERED.

Though the internship was good with some professional activities aimed at training me In to
correct banking practice, I faced some difficulties during this period of training which are:

 BUPCCUL has limited employees who had more than one post of responsibility. This
made it difficult for me to demarcate the various functions of the workers. I had the
tendency of making mistakes especially in areas that had to do with some
documentations. For this reason, I recommend that the union should employ more
workers.
 Given the fact the intern did not have a salary, transportation cost was also a problem.

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CHAPTER THREE

METHODOLOGY

This chapter consists of research design, population of the study, sampling techniques,
data, and their source and data collection instrument. This chapter will also talk of the
measurement of the reliability and validity of the various instrument and the data analysis
procedure employed in the study.

3.1. RESEARCH DESIGN

Bryman (2004) argued that quantitative and qualitative are the two research approaches
that could be used or applied research works. With regard to both approaches, it is
therefore necessary to indicate that the researcher used the quantitative approach making
use of questionnaires and the simple linear regression method was to find out the effect of
the independent variables on the dependent variables.

3.2. POPULATION, SAMPLE SIZE, SAMPLING TECHNIQUE.

3.2.1. Population of the study

Population can be referred to as the total number of people living in a particular area at a
given time. The population of the study consist of the staff of Buea Police Cooperative
Credit Union (33 staff)

3.2.2. Sample size.

A sample is referred to as a subsection of a population. This is the portion of the

population under study. The entire population was sampled (33 staff).

3.2.3. sampling technique.

The researcher made use of the random sampling technique to give all the staff an equal
chance of being selected in the sample size. This was to avoid bias.

39
3.3. DATA COLLECTION METHOD AND INSTRUMENTS.

In this study, data collected came from both primary and secondary sources. The primary
source included the questionnaires while the secondary source was made up of document
of BUPCCUL, textbooks and the internet. For the source of data, it was collected using
questionnaires. The questions were closed ended where participant were to choose from
the given options.

3.3.1. Primary sources.

Here, data was collected by administering questionnaires to workers of BUPCCUL and

observations.

3.3.1.1. Questionnaires.

Hornsby (2006) defined questionnaires as written list of question that are answered by a
number of people so that information can be collected from the respondents. The
researcher came out with list of questions presented to the supervisor for correction and
later administered them. The researcher gave out questionnaires with a series of questions
sub divided into three section. The questions were asked on both dependent and
independent variables. The questions were divided into five sections the first section was
made up of demography information (sex, marital status, longevity and service). The
second section was based on the independent variables while the third section was based
on the dependent variables.

3.3.1.2 Observation.

During the internship period at BUPCCUL, the researcher observed many things. the
researcher saw how sources document are controlled, how receipts vouchers of the
treasury station were filled manually and filling of pay-in-slips. This permitted the
researcher to get firsthand information that helped her to come up with the information
related to research. The researcher gathered some of his information by simply observing
in some situations, and having answer to some questions without posing them. This was
made possible by looking closely on the activities of the workers in their various
department. This was done through participatory observation in the various departments.
It was observed that loans files were crossed checked and validated by the branch
manager; proper investigations was not taken into consideration before loans are granted.
40
3.3.2 Secondary sources.

These are already prepared document put in place by other writes concerning the field of
study. This data Is not directly collected from the field. This study gathered data from
textbooks, the internet and other document from BUPCCUL such as the bye laws.

3.3.2.1 The Internet

This was also very reliable sources of data collections for the researcher which helped him
collect vital information on credit risk from website such as Wikipedia.

3.3.2.2 Text Books.

Various text books on credit risk source were read in order to gather information from this
project. The list of these books is included in references. From these books, the researcher
obtained information such as definitions and theories useful to this topic.

3.3.2.3 Documents.

The researcher had the opportunity to come across and work with document such as
monthly income statement, balance sheet, trail balance, monthly report;, members loan
situations and others. This enabled the researcher to have a profound knowledge of the
history of BUPCCUL.

3.4 VALIDITY AND RELAIBILITY OF THE INSTRUMENT.

Validity and reliability involve checking the instrument of research if they are valid and
reliable.

3.4.1. Validity.

Validity determines whether the research items truly measure what they are intended to
measure or how factual the research result are (Golafshani,2003). To carry out this work
face validity and content validity were used. On the one hand. Content validity is the
extent to which the items on the test are fairly represented of the entire domain the test
seeks to measure. It seeks to assess the quality of the items on test. On the other hand.
Face validity is the degree to which test respondents view the content of the test and its
items as relevant to the context in which the test is being administered.

41
To test the content validity (the extent to which the sample is a representative of the
population),the researcher presented his questionnaires for approval both to his academic and
field supervisors

3.4.2 .Reliability

Reliability is the extent to which results of a study are consistent over time and there is an
accurate representation of the total population under the study. (Golafshani,2003). Reliability
analysis aims at finding out the extent to which the measurement procedure will produce the
same results if the process is repeated over and over again under the same condition.

3.5. DATA ANALYSIS AND PRESENTATION

The data analysis method will deal with how the necessary data collected through primary
source will be properly processed and presented for meaningful analysis. The method that will
be adopted to analyze data collection will be less of manual and more of computer aided
method. The data collected using the various instruments like questionnaires and interviews
was analyzed using IBM SPSS Statistics version 20 where the researcher used the Pearson's
Product Moment Correlation (PPMC) to test his hypothesis and the results from the analysis
were presented using tables and figures. The interviews were presented using descriptive
statistics while the questionnaire was presented using inferential statistics.

3.6. METHOD OF DATA ANALYSIS.

The descriptive method of data analysis was used. The data collected from questionnaires
were presented to the respondents whose opinions will be expressed in frequency tables and
illustrated using pie charts. SPSS was used in the analysis using Pearson product moment
correlation coefficient and all were tested a significant level alpha = 0.01.

42
CHAPTER FOUR

PRESENTATION, ANALYSIS AND INTERPRETATION OF DATA

This chapter analyses the data collected from the field through presentation, analysis,
summary of findings from the chart.

4.1 DESCRIPTIVE STATISTICS

4.1.1 GENDER OF RESPONDENT

The respondent was asked to indicate their gender. The result are shown on the table below

Table 1. Gender respondent

Respondent Frequency Percentage

Male 12 36.4%
Female 21 63.6%
Total 33 100%
Table 1 : Gender respondent

Source: field work 2023

Ventes

male female.

43
Figure 1 : Gender respondent

From the findings, 63.6% of the respondent indicates that they were female while 36.4%
Indicate that they were male. This means that both gender were well represented in this study
even when both proportion as represented by the pie chat are not equal.

4.1.2 MARITAL STATUS OF RESPONDENTS

The frequency distributed below present the distribution of respondent with respect to their
marital status

Table 2. Respondent of marital status

Respondent frequency Percentage

Married 19 57.6%
Single 12 36.4%
Divorced 2 6%
Total 33 100%
Table 2 : Respondent of marital status

Source: field work 2023

Marital Status

married single. Divorced.

44
Figure 2

From the findings above 57.6% of the respondent were married, 36.4% were single while 6%
were divorced indicating that the majority of the respondent were married people.

4.1.3 Age of Respondent

The frequency distribution table below present the respondent with respect to their age groups

Table 3: Age of respondent

Age groups frequency Percentage

18-30 10 30.3%
31-45 14 42.4%
45 and above 9 27.3%
Total 33 100%
Table 3 : Age of respondent

Source: field work 2023

Figure 3:

Age Groups

18-30 31-45 45 and above

Figure 3

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From the above data collected 30.3% of the respondent indicates that fall between the age of
18 to 30 years and 42.4% of the respondent are aged between 31 to 45 years and 45 years and
above indicate 27.3% of the respondent. This indicate that majority of the respondent were
between the age of 31 to 45 indicating that they had adequate knowledge on credit risk
management.

4.1.4 Post of Responsibility

Post of responsibility frequency Percentage
Managers 6 18.2%
Assistant general manager 1 6.1%
Loan officer 6 18.2%
Cashier 7 21.2%
Marketing officer 4 12.1%
Other staffs 9 27.2%
Total 33 100%
Table 4 : Post of Responsibility

Source: field work 2023

Figure 4:

Post of Responsibility

Managers Loan officers Cashier Marketing Other staff Ass manager

Figure 4: Post of Responsibility

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From the above data it shows that 42.5% represent the manager and loan officer and assistant
manager showing that a greater proportion of the respondent was made up of the top
management.

4.2.1 CREDIT RISK MANAGEMENT PRACTICE ON THE QUALITY OF LOAN PORTFOLIO

The researcher requested to know the extent at which credit risk management practice will
affect the quality of loan portfolio of the organization.

Table 5:

SA: Strongly agree A: Agree N: Neutral D: Disagree SD: Strongly disagree

STATEMENTS SA A N D SD
Credit risk management practice affect the the quality of 20 7 4 0 2
loan portfolio in the organization
Credit scoring is an important practice in managing 13 16 0 4 0
credit risk
Collateral assessment reduces credit risk by providing a 22 6 4 1 0
secondary source of repayment in case of default
Loan diversification reduce the concentration of credit 24 9 0 0 0
risk
Risk based pricing incentivizes responsible borrowing 19 12 0 2 0
behavior
Table 5 : Credit risk management practice on the quality of loan portfolio

Source: field work 2023

47
Ventes

8% 4%
SA
10%
A
N
55%
23% D
SD

Figure 5Credit risk management practice on the quality of loan portfolio

This study sought to establish the level at which respondent agreed or disagreed with the
above statement relating to credit risk management practice in BUPCCUL. From the findings
majority of the respondent agreed that credit risk practices such as credit scoring model, loan
diversification, collateral assessment are viable strategies for credit risk management as
shown on the pie chat above 55% and 23% shows strongly agree and agree respectively
indicating that credit risk management practice mitigates credit risk.

4.2.2 RELATIONSHIP BETWEEN CREDIT RISK MANAGEMENT STRATEGY AND

PROFITABILITY

The researcher here requested the respondent to indicate if credit risk management strategies
affect the profitability of the institution. The findings are presented in the table below

STATEMENT SA A N D SD
Effective credit risk management strategies lead to 17 11 2 3 0
lower default rate which in turns to preserve the
profitability of the institution
Proactive management reduce the need for provision 15 13 3 2 0
and write-off, resulting in cost saving of the institution

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Sound credit risk management practice enhance the 23 1O 0 0 0
institution reputation thus attracting more creditworthy
customers and opportunities

By accurately assessing credit risk and pricing loans 17 13 0 3 0

accordingly, the institution optimize income

Table 6 : Relationship between credit risk management strategy and profitability

Ventes

4%
8% SA
10% A
N
56%
22% D
SD

Figure 6: Relationship between credit risk management strategy and profitability

The study sought to establish the level at which respondent agreed or disagreed with the
above statement related to credit management strategies on profitability of BUPCCUL. From
the above findings, it was realized that the majority of the respondent strongly agreed with
the above statement on credit risk management strategies on profitability as shown on the pie
chat the percentage of strongly agree is 56% indicating the statement were true.

4.2.3 INFLUENCE OF CREDIT MANAGEMENT TECHNIQUE ON CAPITAL ADEQUACY

STATEMENT SA A N D SD
By effectively managing credit risk, institution can better 12 12 6 1 2
estimate the capital needed to cover potential losses

Risk management approaches can lead to lower capital 9 22 0 2 0

requirement for lower risk exposure

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Sound credit risk management practice ensures sufficient 11 16 1 4 0
capital level to withstand downturns

Over conservative practice may tie up excess capital, 13 18 0 2 0

potentially impacting profitability
Table 7 : Influence of credit management technique on capital adequacy

Source: Field work 2023

Ventes

7%
8% SA
32%
10% A
N
D
SD
43%

Figure 7: Influence of credit management technique on capital adequacy

The study sought to establish the level at which respondent agreed or disagreed with the
above statement related to the influence of credit management techniques on the capital
adequacy of BUPCCUL. From the above findings, it was realized that the majority of the
respondent strongly agreed and agreed with the above statement on the influence of credit risk
management techniques on capital adequacy as shown on the pie chat above the percentage of
strongly agree is 32% and that of agreed is 43% respectively indicating that the statement
were true about credit risk management.

50
CHAPTER FIVE

DISCUSSION, RECOMMENDATION AND CONCLUSION

5.0 INTRODUCTION

This chapter concerns discussion on findings, recommendation and conclusion

based on the findings. Relevant literature was reviewed as they relate to this
topic. Questionnaires were distributed to the respondent, collected, analyzed and
interpreted which form the frame work of the conclusions.

5.1 DISCUSSION AND SUMMARY OF FINDINGS.

The study revealed that MFIs credit risk technique such credit scoring, collateral assessment,
loan diversification and risk based pricing are viable strategies for credit risk management.
The aspect of credit scoring utilize statistical model to assess the creditworthiness of the
borrowers based on factors like credit history, income level and other relevant information,
collateral assessment which evaluate the value and quality of collateral pledged by borrower
to secure loans. When this practice are applied it increase the quality of loan portfolio thus
reducing credit risk.

Also the study seek to established the relationship that exist between credit risk management
strategies and financial profitability of the MFIs. The study was able to established that credit
risk management strategies affect the financial profitability of the institution that is effective
credit risk management strategies lead to lower default rate and reduces the amount of non-
performing in the portfolio this in turn, preserve the profitability of lending of the institution
also effective credit risk management strategies improve interest income since by accurately
assessing credit risk and pricing loans accordingly, institutions can optimize their interest
income by charging higher rate to riskier borrower thus reducing the rate of credit risk.

Furthermore, the study also revealed how credit risk management techniques influence the
capital adequacy of the institution through their capital requirement where robust risk
management can lead to more accurate capital allocation, ensuring that the institution meet
regulatory requirement and have a strong capital cushion. Also credit risk management
techniques influence the calculation of risk-weighted assets. More sophisticated risk
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management approaches can lead to lower capital requirements for lower-risk exposure and
higher capital charges for riskier assets.

5.2 RECOMMENDATION

These are the following strategies I recommend which can help reduce credit risk or improve
credit risk management in MFIs.

1. Implement Robust Credit Scoring Models: Develop and utilize advanced credit scoring
models tailored to the microfinance sector. Incorporate non-traditional data sources for a more
comprehensive risk assessment of borrowers.

2. Diversify Loan Portfolio: Encourage diversification of loan products and client segments to
mitigate concentration risk. Balance risk across different sectors and regions to reduce
vulnerability to economic fluctuations.

3. Enhance Monitoring and Reporting Mechanisms: Strengthen monitoring systems to track

borrower behavior and portfolio quality in real-time. Implement regular reporting processes to
identify early warning signs of credit deterioration.

4. Invest in Capacity Building: Provide training programs for staff on credit risk assessment,
underwriting standards, and collections strategies. Equip frontline employees with the skills to
identify and manage credit risks effectively.

5. Establish Risk Management Committees: Formulate dedicated risk management

committees to oversee credit risk policies and procedures. Ensure cross-functional
collaboration among departments to align risk management strategies with business
objectives.

6. Regularly Review and Update Policies: Conduct periodic reviews of credit risk
management policies and adjust them in response to changing market condition. Engage in
scenario analysis and stress testing to assess the resilience of the institution's credit portfolio.

7. Promote a Risk-Aware Culture: Foster a culture of risk awareness and accountability across
all levels of the organization. Encourage open communication channels for reporting potential
risks and operational challenges proactively.

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8. Collaborate with Industry Peers: Participate in knowledge-sharing initiatives and industry
forums to exchange best practices in credit risk management. Establish partnerships with
credit bureaus and industry associations to access benchmarking data and industry insights.

9. Measure and Track Key Performance Indicators: Define relevant KPIs related to credit risk
management and financial performance. Continuously monitor and evaluate these indicators
to assess the effectiveness of risk management strategies.

By implementing these recommendations, BUPCCUL can strengthen their credit risk

management frameworks, enhance financial performance, and ultimately, better serve their
mission of inclusive financial empowerment.

5.3 CONCLUSION

In conclusion, the project exploring the effect of credit risk management on the financial
performance of microfinance institutions has provided valuable insights into the intricate
relationship between risk management practices and operational outcomes in the microfinance
sector. Through a thorough examination of credit risk management strategies, financial
performance indicators, and industry best practices, several key conclusions can be drawn:

The findings underscore the significant positive impact of effective credit risk management
on the financial performance of microfinance institutions. Sound risk management practices,
including robust credit scoring models, diversification strategies, and timely monitoring
mechanisms, have been shown to enhance portfolio quality, reduce default rates, and
ultimately contribute to improved profitability.

The project highlights the importance of striking a balance between risk-taking and risk
mitigation in the microfinance landscape. By implementing tailored risk management
frameworks that align with the institution's risk appetite and client profile, microfinance
institutions can optimize their financial performance while ensuring long-term sustainability.

Efficient credit risk management practices not only minimize credit losses but also enhance
operational efficiency and resilience in the face of external shocks. Institutions that adopt
proactive risk management approaches are better equipped to navigate economic downturns,
regulatory changes, and other uncertainties, thereby safeguarding their financial health

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The project emphasizes the importance of a client-centric approach to credit risk management
in microfinance. By understanding the unique needs and characteristics of their target
clientele, institutions can tailor risk management solutions that promote responsible lending,
foster client trust, and drive sustainable financial inclusion.

The project concludes by highlighting the dynamic nature of credit risk management and the
necessity for continuous learning and improvement. Microfinance institutions must adapt to
evolving market dynamics, technological advancements, and regulatory requirements to stay
ahead of emerging risks and capitalize on new opportunities.

In essence, the work underscores that effective credit risk management is not merely a risk
mitigation tool but a strategic enabler of financial performance and sustainable growth in the
microfinance sector. By implementing the project's recommendations and leveraging the
project's findings, microfinance institutions can fortify their risk management practices,
optimize their financial performance, and advance their mission of inclusive and impactful
financial services for underserved populations.

5.4 AREAS FOR FURTHER RESEARCH

Further research are recommended on the effect of digitalization in transforming credit risk
management practice in microfinance institution. Also further research are recommended on
the effect of environmental and social risk in microfinance portfolios and their effect on
financial performance.

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REFERENCES

Armendariz, B., & Morduch, J. (2010). The Economics of Microfinance (2nd ed.). The MIT
Press.

Campion, A., & White, M. (2014). "Financial Inclusion, Poverty Reduction, and the
Measurement of Microfinance Impact: A Review." Journal of Economic Surveys, 28(4), 611-
628.

Chakrabarty, S., & Jana, R. K. (2012). "The Influence of Credit Risk on Financial
Performance in Microfinance Institutions: An Empirical Investigation." International Journal
of Strategic Management, 12(1), 37-52.

Christen, R. P., & Rosenberg, R. (1994). "The Financial Sustainability of Microfinance

Institutions: A Tale of Two Objectives." Focus Note, CGAP.

Cull, R., & Morduch, J. (2007). "Does Microfinance Really Help the Poor? New Evidence
from Flagship Programs in Bangladesh." World Bank Research Observer, 22(2), 125-157.

Ledgerwood, J. (2013). Microfinance Handbook: An Institutional and Financial Perspective.

The World Bank.

Mersland, R., & Strøm, R. Ø. (2009). "Performance and Governance in Microfinance

Institutions." Journal of Banking & Finance, 33(4), 662-669.

Rhyne, E. (2001). Mainstreaming Microfinance: How Lending to the Poor Began, Grew and
Came of Age in Bolivia. Kumarian Press.

Schicks, J. (2013). "Foreign Aid in Microlending: A Case Study of Fonkoze." Review of

Economics and Statistics, 95(5), 1677-1690.

Umar, H. (2018). "Credit Risk Management Practices in Microfinance Institutions: A

Comparative Analysis." Journal of Finance and Economics, 6(2), 84-99.

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APPENDIX
QUESTIONNAIRES

I am RICHINEL FRANK DJOUNDA a student of Yaounde International business School, i

am currently undertaking an HND project tittled ‘’ The effects of credit risk management on
the financial performance of microfinance institutions’’ This is only done for the purpose of
joining the institution in looking forward to a better organisation in the nearest future. This is
a questionnaire which is requested to be filled and the all information given will be strickly
confidential.

Part 1 :

Demographic Information

1. What is your age range?

 Under 18
 18-25
 26-35
 36-45
 46 and above
2. What is your gender?

 Male
 Female
3. What is your highest level of education?

 High school
 Bachelor's degree
 Master's degree
 PhD or equivalent
4. Post of responsibility ?

 Manager
 Assistant
 Loan officer
 Cashier
 Marketting officer
 Other staff
Part 2 :

Credit Risk Management

5. How would you rate the importance of credit risk management for the financial stability of
microfinance institutions?

 Very Important

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 Important
 Somewhat Important
 Not Important
CREDIT RISK MANAGEMENT PRACTICE AND QUALITY OF LOAN
PORTFOLIO

6. What is your level of agreement to the following statement related to credit risk
management and quality of loan portfolio in BUPCCUL?

STATEMENTS SA A N D SD
Credit risk management practice affect the the quality of
loan portfolio in the organization
Credit scoring is an important practice in managing
credit risk
Collateral assessment reduces credit risk by providing a
secondary source of repayment in case of default
Loan diversification reduce the concentration of credit
risk
Risk based pricing incentivizes responsible borrowing
behavior

RELATIONSHIP BETWEEN CREDIT RISK MANAGEMENT AND

PROFITABILITY

7. What is your level of agreement to the following statement related to credit risk
management and Profitability in BUPCCUL?

STATEMENT SA A N D SD
Effective credit risk management strategies lead to
lower default rate which in turns to preserve the
profitability of the institution
Proactive management reduce the need for provision
and write-off, resulting in cost saving of the institution

Sound credit risk management practice enhance the

institution reputation thus attracting more creditworthy

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customers and opportunities

By accurately assessing credit risk and pricing loans

accordingly, the institution optimize income

INFLUENCE OF CREDIT MANAGEMENT TECHNIQUE ON CAPITAL

ADEQUACY

8. What are your level of agreement concerning the following statement relating to credit risk
management and capital adequacy of BUPCCUL?

STATEMENT SA A N D SD
By effectively managing credit risk, institution can better
estimate the capital needed to cover potential losses

Risk management approaches can lead to lower capital

requirement for lower risk exposure

Sound credit risk management practice ensures sufficient

capital level to withstand downturns

Over conservative practice may tie up excess capital,

potentially impacting profitability

FINANCIAL PERFORMANCE

9. What key financial indicators do you believe reflect the financial health of a microfinance
institution?

 Return on Assets (ROA)

 Return on Equity (ROE)
 Operating Expense Ratio
 Portfolio At Risk (PAR)

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