THE IMPACT OF LOAN DELINQUENCY ON THE FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN CAMEROON: CASE STUDY AFRILAND FIRST BANK, LIMBE

ABSTRACT

All over the world financial institutions face massive risk on non-performing loans. As a result of the foregoing, financial institutions are obliged to review their lending policies. This study seeks to find out the impact of loan delinquency on the financial performance of commercial banks in Cameroon. Specifically, its seeks to find out the causes, challenges and the impact of loan delinquency on the performance of commercial banks in Cameroon. In order, to achieved this study objectives, a sample of 30 participants were selected to participate for the study using a structure questionnaire by means of convenient sampling techniques from BICEC Bank Limbe. It was found that multiple borrowing was the highest cause of loan delinquency bedeviling commercial banks in Cameroon. Further the findings indicated that provisioning for bad debt affects commercial banks most as a result of loan delinquency. Disposing off collateral and claiming of insurance were major challenges encountered by commercial banks. Regression analysis revealed that, there is a strong significant relationship between bank loan delinquency on its financial performance at p< 0.05. The study, therefore, recommended that the government should make it compulsory for all lending organizations to sign up and provide information of all their loans disbursed to the credit reference offices, commercial banks and other financial institutions need to implement and enhance their current credit risk management procedures.

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF STUDY

An efficient and well-functioning financial sector is essential for the development of an economy and for the achievement of a high and sustainable growth of any country. One of the indicator of financial sector health is loan qualities. Most un-sound financial sector show high level of non-performing loans, within a country.

The causes of loan defaults vary with different country and there are many reasons for loans fails to perform and thus affecting financial performance of commercial banks. Some of which includes, interest regulations, depressed economic conditions high real interest rate, inflation, lenient terms of credits, credit orientation poor credit monitoring, growth in loans, among others.

Historically, banking is intertwined with the history of money which came as a result of the activities of the gold smith who safeguarded gold on behalf of gold owners, in their vault and had to issue receipt to them and also used it for granting of loans to those who needed this gold said (Davies, 2002). In Babylonia of 2000BC, people depositing gold were required to pay amounts much as one sixtieth of the total deposit. So the thirst for profit, longing to become rich instilled daring into the goldsmith” why not become a gold lender” and payment of interest on the gold and that’s how the goldsmith put money into circulation through lending, (Louis, 1936).

The development of banking spread from Northern Italy throughout the Holy Roman Empire and in the 15th and 16th century to the Northern Europe. During the 20th century, development in telecommunication and computing caused major changes in the size and geographic spread. The financial crises of 2007-2008 caused many bank failures, including some of the world’s largest banks according to Antiochus

Before the evolution of banking in Cameroon, small groups of contributions existed in which money circulated amongst members providing credit or loans and savings facilities on interest. Such small groups were called ‘Njangi’ or ‘Tontine’ groups. As a result, to come out with a Banklike institution, microfinance institutions were created which accepted deposits, as well as granted loans out to customers thereby transferring funds from the surplus unit to the deficit unit, Tegwi P.N, (2012).

The first bank was created in Cameroon when trade started at the coast of Cameroon. An attempt to explain the operation of commercial banks began with the inception of banking institution. Lending has become a vital role in banking operation because of its direct effect on the economic growth and business departments. Banks like any other business, have the commercial objective to maximize profit, they do this by granting loans and generate interest from such loans, and this translated into profits for banks. (Tegwi,P.N, 2012).

Loan portfolios is the largest assets and the biggest source of income for banks, therefore, most banks advance huge amount portion of financial resources as loans to clients. Globally, banks grants loans to customers as a way to enhance financial performance. To this effect banks in Cameroon are engaged in granting loans to their customers.

Loans however exposes banks to the greatest number of risks. Non-performing loans (NPLs) affects the economic growth therefore causes of loans defaults should be established to reduce the level of non-performing loans (Muriithi, 2013). Non-performing loans are those selected assets from which bank cannot generate any incoming cash flow as loan repayment installment. In many cases, borrowers become default and the full amount of the loan cannot be recovered. To manage and safeguard the banking business from the Non-performing loans, different credit policies are used, one of those is to increase the loan loss provisions (LLPs).

Typically loans that have not received payments for three months are considered to be non-performing though specific contract time may differ occasionally (Chege, 2014). The loan default rate is the most predator of banks financial performance in terms of profitability, ROA and ROE.

1.2 STATEMENT OF PROBLEMS

Interest rates are ordinarily the drivers of commercial banks’ performance. They are the ones that determine the size of the profit margin for every transaction between a commercial bank and its customers. Yet, there are many reported cases of defaults in loan repayment in commercial banks. Interest rate regulations partly contribute to Non-performing loans. When borrowers default in their loan repayment, the concerned banks are financially affected. There will be limited finances to run its operations and also to loan out to other potential borrowers. In the event that the challenge of nonpayment persists for long, the banks will have huge bad debts, the situation will lead to downsizing of its workforce, stall in its market expansion and finally collapse (Kariuki, 2013).

The sustainability of commercial banks in Cameroon depends largely on their ability to collect loans as efficiently and effectively as possible. In order words, to be financially viable or sustainable. Commercial banks must ensure high portfolio quality based on 100% repayment, or at worst loan default cost recover and efficient lending.

However, there have been complains by commercial banks regarding high rate of default by their clients, which presupposes that most commercial banks are not achieving the internationally accepted standard portfolio at risk of 3% which is a cause for concern because of its consequences on business, individual and the economy of Cameroon at large. Loan default has started creeping deeply into the operation of commercial banks in Cameroon. Hence, the study seeks to examine the reasons behind the defaulted loans and how this can be controlled or minimize.

1.3 OBJECTIVES OF THE STUDY

1.3.1 Main objectives

The main objective of the study is to find out the impact of loan delinquency on the financial performance of commercial banks in Cameroon.

1.3.2 Specific objectives

Specifically, this study seeks to;

2. To find out the causes of loan default among commercial banks in Cameroon
3. To find out the challenges/difficulties do management of commercial banks encounter in recovery of delinquent’s loans
4. To determine the impact of loan delinquency on the performance of commercial banks in Cameroon.

THE IMPACT OF LOAN DELINQUENCY ON THE FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN CAMEROON: CASE STUDY AFRILAND FIRST BANK LIMBE