Loan Management Final

THE IMPACT OF LOAN MANAGEMENT ON THE FINANCIAL PERFOMANCE
OF MICRO FINANANCE INSTITUTIONS IN BUEA.
A CASE STUDY OF P&T CREDIT UNION, BUEA BRANCH
BY
ANJEH EMMACULATE AMAH
JSFP/SB/20/0009
A RESEARCH REPORT SUBMITTED TO THE DEPARTMENT OF
BANKING AND FINANCE IN PARTIAL FULFILLMENT OF
THE REQUIREMENT FOR THE AWARD HIGHER NATIONAL DIPLOMA

(HND) IN BANKING AND FINANCE AT JSF POLYTECHNIC
APRIL, 2022
SUPERVISOR FIELD SUPERVISOR:

NJINJONG MARCELUS, PhD Mme KOFFI EDITH
JSF POLYTECHNIC P&T CREDIT UNION
DECLARATION
I Anjeh Emmaculate Amah declare that this research report is sincerely my own effort and
has never been submitted to any institution for any award.
Signature………………….… Date…………………………
CERTIFICATION
This research report submitted by Anjeh Emmaculate Amah on the topic “the impact of
loan management on the financial perfomance of micro finance institutions in Buea,
a case study of P&T credit union, Buea branch was carried out under my supervision
and is now ready for submission to JSF Polytechnic, Department of Banking and Finance
for the award of a HND in Banking and Finance.
Signature………………….… Date…………………………
NJINJONG MARCELUS, PhD
SUPERVISOR
Signature………………….… Date…………………………
FIELD SUPERVISOR:
Mme KOFFI EDITH
DEDICATION
To my parents Mr and Mrs. Agbor
ACKNOWLEDGEMENT
This work is the result of the effort of a considerable number of individuals to
whom I owe gratitude.
My sincere thanks go to the Almighty God who has guided me throughout this
period and has given me the strength and patient to carry through. And as well
grateful to my supervisor Dr. Njinjong Marcelus and the teaching staffs of JSF
Polytechnic for moulding me up, developing me in professional and
intellectual abilities.
I will specifically thank my family and friends Macmillian, Popina, Rose,
Amana Alibert and the rest who have supported me and given me moral and
spiritual support. May God Almighty supported me all.

TABLE OF CONTENTS
DECLARATION
CERTIFICATION............................................................................................ii
DEDICATION.................................................................................................iii
ACKNOWLEDGEMENT...............................................................................iv
ABSTRACT......................................................................................................ix
CHAPTER ONE
INTRODUCTION
1.1 Background to the study.............................................................................1
1.2 Problem statement.....................................................................................4
1.3 General objective.........................................................................................5
1.4 Specific objectives of the study..................................................................5
1.5 Research questions......................................................................................6
1.6 Scope of the study........................................................................................6
1.7 Significance of the study.............................................................................7
CHAPTER TWO
LITERATURE REVIEW
2.1 Introduction.................................................................................................8
2.2 Loan management policies.........................................................................8
2.3 Effect of loan management on financial performance of Micro finance

institutions........................................................................................................16
2.4 Strategies for improving financial performance by Micro Finance
Institutions.......................................................................................................18
CHAPTER THREE
METHODOLOGY
3.1 Introduction...............................................................................................22
3.2 Research design.........................................................................................22
3.3 Data sources and types.............................................................................23
3.3.1 Data sources............................................................................................23
Primary data sources......................................................................................23
Secondary data sources..................................................................................23
3.3.2 Data types................................................................................................24
Quantitative data.............................................................................................24
Qualitative data...............................................................................................24
3.4 Area and population of the study............................................................24
3.5 Sample size and selection techniques......................................................25
3.6 Data collection tools..................................................................................26
Questionnaires.................................................................................................26
Interview guide................................................................................................26
3.7 Data quality control..................................................................................26
Validity.............................................................................................................26
Reliability.........................................................................................................27
3.8 Data processing analysis and presentation.............................................28

Data processing...............................................................................................28
Data analysis....................................................................................................28
Data presentation............................................................................................28
3.9 Limitations and delimitations..................................................................28
3.10 Ethical Considerations............................................................................29
CHAPTER FOUR
DATA ANALYSIS, PRESENTATION AND INTERPRETATION
4.1 Introduction...............................................................................................31
4.2 Response rate.............................................................................................31
4.3 Demographic characteristics of the respondents...................................31
4.3.1 Age distribution of respondents............................................................33
4.2.3 Marital status..........................................................................................34
4.2.4 Education level.......................................................................................36
4.3.5 Occupation of respondents....................................................................38
4.4 Loan management policies employed by P&T Credit Union...............41
4.4.1 The nature of loan management policies employed by P&T Credit

Union................................................................................................................42
4.5 The effect of loan management on the performance of P&T Credit

Union................................................................................................................44
4.5.1 The effect of loan management on the financial performance of P&T

Credit Union....................................................................................................46
4.6 Strategies to improve financial performance.........................................48

CHAPTER FIVE
DISCUSSION OF FINDINGS, CONCLUSION AND

RECOMMENDATIONS
5.1 Introduction...............................................................................................51
5.2 Summary of Findings................................................................................51
5.2.1 Loan management policies employed by Micro Finance Institutions.

...........................................................................................................................51
5.2.2 Effect of loan management on the financial performance of Micro

Finance Institutions.........................................................................................52
5.2.3 Strategies for improving financial performance by Micro Finance

Institutions.......................................................................................................53
5.3 Conclusion..................................................................................................55
5.4 Recommendations.....................................................................................55
5.5 Suggestions for further research.............................................................58
REFERENCES................................................................................................59
LIST OF ABREVIATION
ROE Return On Equity.
ROA Return On Assets.
MFIs Micro Finance Institutions.
FTU Five Talents Uganda.
SACCO Savings And Credit Cooperatives.
FOSA Front Service Activities.
SPSS Statistical Package for Social Scientists.
GDP Gross Domestic Product.
HRPP Human Resource Policy and Procedures

ABSTRACT
This study was conducted to explore the impact of loan management on the
financial performance of micro finance institutions in Buea, a case study of
P&T credit union, Buea branch
Three research questions were designed for the study. The instrument used for
data collection was a questionnaire and interview. This research was a
descriptive study in design which used both qualitative and quantitative
approaches of data collection and analysis. Data was collected from 10
respondents who included males and females and their occupations were
classified ranging from farming to business among others and the data was
analyzed using frequency, percentages and an average of the percentage of
results was used to confirm the entire three objectives. As per the findings
from the study, it was reached and concluded that loan management affects the
financial performance of Micro Finance Institutions.
The researcher recommended that if the financial performance of MFIs is to be

enhanced loan repayments policies should made more flexible. Therefore as
discussed in this study, loan management should be taken as critical
component of financial performance. However, there is need to study other
aspects that affect the general performance of MFIs.
CHAPTER ONE
INTRODUCTION
This chapter presents the background to the study, statement of the problem,
objectives and research questions of the study, scope of the study, and
significance of the study.
1.1 Background to the study.
Loan is one of the many factors that can be used by a firm to influence demand
for its products. According to Horne and Wachowicz (1998), firms can only
benefit from loan if the profitability generated from increased sales exceeds the
added costs of receivables. Myers and Brealey (2003) define loan as a process
whereby possession of goods or services is allowed without spot payment upon
a contractual agreement for later payment.
Loan management is one of the most important activities in any company and
cannot be overlooked by any economic enterprise engaged in loan irrespective
of its business nature. It is the process to ensure that customers will pay for the
products delivered or the services rendered.
Loan management is concerned primarily with managing debtors and financing

debts. The objectives of loan management can be stated as safe guarding the
companies’ investments in debtors and optimizing operational cash flows.
Policies and procedures must be applied for granting loan to customers,
collecting payment and limiting the risk of non-payments.
Honker Faze Rashid(2009), Loan management is a term used to identify

accounting functions usually conducted under the umbrella of Accounts
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Receivables.. He explains that the process of loan management begins with
accurately assessing the loan-worthiness of the customer base. This is
particularly important if the company chooses to extend some type of loan line
or revolving loan to certain customers. Proper loan management calls for
setting specific criteria that a customer must meet before receiving this type of
loan arrangement. As part of the evaluation process, loan management also
calls for determining the total loan line that will be extended to a given
customer.
According to Nwankwo (2000), loan management constitutes the largest single

income-earning asset in the portfolio of most banks. This explains why banks
spend enormous resources to estimate, monitor and manage loan quality. This
is understandably, a practice that impact greatly on the lending behaviour of
banks as large resources are involved.
Myers and Brealey (2003) describe loan management as methods and

strategies adopted by firms to ensure that they maintain an optimal level of
loan and its effective management. It is an aspect of financial management
involving loan analysis, loan rating, loan classification and loan reporting.
Nelson (2002) views loan management as simply the means by which an entity
manages its loan sales. It is a prerequisite for any entity dealing with loan
transactions since it is impossible to have a zero loan or default risk. The
higher the amount of accounts receivables and their age, the higher the finance
costs incurred to maintain them. If these receivables are not collectible on time
and urgent cash needs arise, a firm may resort to borrowing and the
opportunity cost is the interest expense paid.
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Nzotta (2004) pointed out that loan management greatly influences the success
or failure of commercial banks and other financial institutions. This is because
the failure of deposit banks is influenced to a large extent by the quality of loan
decisions and thus the quality of the risky assets. He further notes that, loan
management provides a leading indicator of the quality of deposit bank’s loan
portfolio. A key requirement for effective loan management is the ability to
intelligently and efficiently manage customer loan lines. In order to minimize
exposure to bad debt, over-reserving and bankruptcies, companies must have
greater insight into customer financial strength, loan score history and
changing payment patterns.
According to the business dictionary financial performance involves measuring

the results of a firm’s policies and operations in monetary terms. These results
are reflected in the firms return on investment, return on assets and value
added.
Stoner (2003) as cited in Turyahebwa (2013), defines financial performance as

the ability to operate efficiently, profitably, survive, grow and react to the
environmental opportunities and threats. In agreement with this, Sollenberg
and Anderson (1995) assert that, financial
Performance is measured by how efficient the enterprise is in use of resources

in achieving its objectives.
Hitt, et al (1996) believe that many firms' low performance is the result of
poorly performing assets. MFIs earn financial revenue from loans and other
financial services in the form of interest fees, penalties, and commissions.
Financial revenue also includes income from other financial assets, such as
investment income. MFI‟s financial activities also generate various expenses,
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from general operating expenses and the cost of borrowing to provisioning for
the potential loss from defaulted loans. Profitable institutions earn a positive
net income (i.e., operating income exceeds total expenses).
Today, Microfinance institutions are seeking financial sustainability. Many

MFIs were restructured in order to achieve financial sustainability and finance
their growth. Sustainability is defined as the capacity of a program to stay
financially viable even if subsidies and financial aids are cut off (Woolcock,
1999). It embraces “generating sufficient profit to cover expenses while
eliminating all subsidies, even those less-obvious subsidies, such as loans
made in hard currency with repayment in local currency” (Tucker and Miles,
2004). Tucker and Miles (2004) studied three data series for the period
between March 1999 and March 2001 and found that self-sufficient MFIs are
profitable and perform better, on return on equity (ROE) and return on assets
(ROA), than developing-world commercial banks and MFIs that have not
attained self-sufficiency. In order to optimize their performance, MFIs are
seeking to become more commercially oriented and stress more on improving
their profitability; therefore self-sustainability.
1.2 Problem statement.
Proper loan management is a prerequisite for a financial institution’s stability

and continued profitability, while a deteriorating quality of loan management is
the most frequent cause of poor financial performance among MFIs.
According to Gitman (1997), the probability of bad debts increases as loan

standards are relaxed. Firms must therefore ensure that the management of
receivables is efficient and effective.
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Bart Baesens and Tony Van Gestel, (2009), argue that poor management of
loans in form of delays in collecting cash from debtors as they fall due has
serious financial problems, increased bad debts and affects customer relations.
Effective loan management practices and loan accounting practices should be

performed in a systematic way and in accordance with established policies and
procedures. To be able to prudently value loans and to determine appropriate
loan provisions, it is particularly important that banks have a system in place to
reliably classify loans on the basis of loan risk to facilitate repayment of loans
by customers (Kagwa, 2003) and goes ahead to stress that if loan management
is not properly handled, then the overall financial performance of an institution
is affected.
It is against this background that the researcher wishes to examine the impact
of loan management on the financial performance of Micro Finance
Institutions in Buea.
1.3 General objective
To examine the impact of loan management on the financial performance of

MFIs in Cameroon taking a case study of P & T credit union, Buea.
1.4 Specific objectives of the study
1. To establish the loan management policies employed by Micro Finance

Institutions.
2. To find out how loan management affects the performance of Micro

Finance institutions.
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3. To establish strategies to improve financial performance of Micro
Finance Institutions.
1.5 Research questions
1. What loan management policies are employed by MFIs?
2. How does loan management affect financial performance?
3. Which strategies can be adopted to improve financial performance of

MFIs?
1.6 Scope of the study
The study was limited to examining the impact of loan management on the
financial performance of MFIs in Cameroon and specifically it was to establish
the policies of loan management, establish the effect of loan management on
the financial performance of Micro Finance institutions and establish strategies
to improve their financial performance.
The research was carried out in of P & T credit union. It’s located in Buea
Municipality, South West Region, Cameroon.
The study was carried out for the period six months between February 2022-
August 2022. The study was based on the performance of P & T credit union
particularly Buea branch for the last four years of operation that is from 2018-
2021 in order to get the recent information about the performance of
Microfinance Institutions and loan management in Cameroon and specifically
P & T credit union.
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1.7 Significance of the study.
To P & T credit union management, the study was an eye opener to them
because it helped create awareness of the need to ensure proper loan
management so as to foster proper financial performance of P & T credit
union particularly Buea branch.
To the government, this study was of great value to them especially

Microfinance support organizations within the government so as to ensure
proper use of loans by MFIs to ensure effective payment by these institutions.
To future researchers, the research findings form a basis for future research
because it will always serve as a reference.
1.8 Limitations and delimitations.
The researcher faced challenges of non-responsiveness due to respondents’

confidentiality and some officers due to busy schedules and thus failing to
allocate sufficient time to the researcher. The researcher therefore had to
explain to every respondent the purpose of the study which was a hard task.
The researcher also faced delays in giving the required information. The
researcher was therefore required to show high level of patience in data
collection and hence was in position to obtain the required data.
Limited time to conduct research, The research was required to be completed

in a specified period of time which was so short that the information needed
was not fully generated however, he tried to motivate himself to complete the
research.
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Limited finance. The research required a lot of finance to help in transport
while in the field, buy stationary and other necessities which was not be easy
to get however, to solve this the researcher tried to mobilize resources from
friends, parents and well-wishers.
Some respondents did not cooperate thinking that the research was a profitable
venture and needed some financial motivation which was not be available to
overcome this, an explanation was given to make them understand that the
research is for academic purposes.
Some respondents were busy to attend to the research requests especially

during the process of interviewing however, to solve this, the researcher had
plead to them to have some time for him or reschedule him according to their
flexibility.
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CHAPTER TWO
LITERATURE REVIEW
2.1 Introduction.
This chapter looks at loan management and its impact on the financial
performance of MFIs in Cameroon and in Buea in particular. It consists of
existing literature from different writers concerning the factors that influence
MFIs performance and it will consist literature from different scholars,
magazines, text books, journals and newspapers.
2.2 Loan management policies.
Kakuru (2002) asserts that loan policy provides a frame work for the entire
loan management process. Loan policies are set of objectives, standards and
parameters to guide officers of the MFIs who grant loan portfolios. Thus they
are procedures, guidelines and rules designed to minimise costs associated with
loan while maximising the benefits from it (Ahimbisibwe,2002).The main
objective of loan policy is to have an optimal investment and debtors that
minimise costs while maximising profit.
Jhngan (2007) contends that loan depends on a person’s willingness and ability
to pay the borrowed money. In fact, loan of a person depends on his character,
capacity and capital. It is these three Cs on which loan depends. A person who
is honest and fair in his dealings possess the capacity of making his business a
success. Such a person can get loan easily. Financial institutions consider
customer’s character in making a decision on the level of loan worthiness of a
borrower. Most financial institutions value the borrower’s reputation, honesty
and integrity and account history as a sign of willingness to repay the borrowed
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funds. The financial institution might also consider knowledge and experience
in your area of business, your grasp of financial principles and the soundness
of your plans for the future of your business (Powell and Mylenko, 2004).
According to (Horne 2005), a sound loan policy promotes loan quality. Loan
policy objectives should encompass several elements. That is regulatory
environment, the availability of funds, the selection of risk, loans profitable
balance and term structure and the term structure of liabilities. The essence of
loan policy is to maximize the value of a firm (Puxty and Dood, 2000).
Tight loan standards make a firm lose a big number of customers and when
loan are loose the firm gets an increased number of clients but at a risk of loss
through bad debts. A loose loan policy may not necessarily mean an increase
in profitability because the increased number of customers may lead to
increased costs in terms of loan administration and bad debts recovery.
Character refers to the willingness of a customer to settle his obligations. This
mainly involves assessment of the moral factors. Social collateral group
members can guarantee the loan members known the character of each client;
if they doubt the character then the client is likely to default. Saving habit
involves analyzing how consistent the client is in realizing own funds, saving
promotes loan sustainability of the enterprise once the loan is paid. Other
sources should be identified so as to enable him serve the loan in time. This
helps micro finance institutions not to only limit loans to short term projects.
Such qualities have an impact on the repayment commitment of the borrowers.
It should be noted that there should be a firm evidence of this information that
point to the borrowers character (Vercammen, 1995).
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Riach (2010), observes that loan terms are normally looked at as the loan
period, terms of discount, the amount of loan and choice of instrument used to
evidence loan. Loan terms may include; Length of time to approve loans, this
is the time taken from applications to the loan disbursement or receipt. It is
evaluated by the position of the client as indicated by the ratio analysis, trends
in cash flow and looking at capital position. Maturity of a loan, this is the time
period it takes loan to mature with the interest there on. Cost of loan, this is
interest charged on loans, different micro finance institutions charge differently
basing on what their competitors are charging (Padilla and Pagano, 2000).
Rajan (2005), asserts that collection policy is a guide that ensures prompt
payment and regular collections. The rationale is that not all clients meet their
obligations, some just take it for granted, others simply forget while others just
don’t have a culture of paying until persuaded to do so. Many micro finance
institutions may send a letter to such individuals (borrowers) when say ten
days elapse or phone calls and if payment is not received with in thirty days, it
may turn over the account to a collection agency. Collection procedure is
required because some clients do not pay the loan in time some are slower
while others never pay (Stiglitz and Weiss, 1981).
Rajedom (2010), defines a collection effort as the procedure an institution

follows to collect past due account. Collection policy refers to the procedures
micro finance institutions use to collect due accounts. The collection process
can be rather expensive in terms of both product expenditure and lost good
will. Methods used by Micro finance institutions could include letters, demand
letters, telephone calls, visits by the firm’s officials for face to face reminders
to pay and legal enforcements (Anderson, Williams and Sweeney, 2009). Thus
collection efforts aim at accelerating collections from slower payers to avoid
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bad debts. Prompt payments are aimed at increasing turn over while keeping
low and bad debts within limits. However, caution should be taken against
stringent steps especially on permanent clients because harsh measures may
cause them to shift to competitors. States that collection effort are directed at
accelerating recovery from slow payers and decreases bad debts losses (Padilla
and Pagano, 2000).
According to (I.M Pandey, 2002) an optimum loan policy is achieved through

proper adjustment of loan standards, loan terms and collection efforts. These
are controllable decision variables that should be considered in the extension of
loan to optimise investment in accounts receivables. Loan policy is a guide to
successful loan administration and benefits must be weighed against the costs
to ensure the benefits are worth the effort of administering the loan .Benefits
like increase in market share, retention of existing customers, acquisition of
new customers must be weighed against costs like administrative costs
incurred during assessment, supervision and collection of loan and bad debts.
Loan policy is aimed at having optimal investment where there is trade-off

between the benefits and costs associated with it, that point where the objective
of liquidity profitability and security are harmonised. Bad debt
underperforming loans and untimely payments can be minimised through
proper administration of the loan policy. This can be done by obtaining
collateral, third party guarantors, proper assessment of loan worthiness,
optimum interest rates and setting up a loan period and setting time limits
before which the loan is to be paid.
Loan management is the executive responsibility of determining customer’s

loan ratings as part of the loan control function (Terry 2000). A loan policy is
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the blue print used by a business in making decisions to extend loan to
customers. Thus, the main goal of a loan policy is to avoid extending loan to
customers who are unable to pay their accounts. Loan policy for some larger
businesses can be quite formal that is involving specific documents, guidelines
loan checks and customer loan applications while the policy for small
businesses tends to be quite informal and lacks items found formal for large
businesses. Many small business owners rely on their instincts as their loan
policy (Blair, 2002). Loan policy has direct effects on the cash flows of any
business. Hence, a loan policy that is too strict will turn away potential
customers, reduces sales and finally lead to a decrease in the amount of cash
paying customers ,increase in the business average collection period for
accounts receivables and eventually lead to cash inflow problems. A good loan
management policy should help management to attract and retain customers
without having negative impact on cash flows.
A financial institution’s policy affects the financial performance of that

institution especially when there is weakness in loan risk management which is
the main cause for lending institutions financial performance. The loan policy
of an organisation affects the capital adequacy, asset quality, management
quality, earnings and liquidity of a financial institution either positively or
negatively depending on how well loan policies are made and implemented
(Richard et al,2008)
Loan management likewise alludes to the proficient mix of four note worthy
loan approach parameters to ensure convenient collection of loans conceded to
clients and in the meantime build their trust in and the devotion to the financial
organisations (Van Harne, 2007).The main variable is an evolution of the
nature of the client’s record operations in the establishment. This takes into
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account the correct examination of the capacity of the clients to meet the
instalment promptly. The second strategy variable is that setting up the right
loan period. In this manner, the organisation should give sufficient time to
permit loyal customers the chance of deriving the full advantage of the loan.
The third parameter is the rebate given to clients as the way of inspiring them
to reimburse their loan facilities on time. Such rebate must sufficiently be
appealing before the goal can be accomplished. The last variable looks at the
level of expenditure that can be permitted in recovering of debts. The inference
here is that the organisation should not give out loan where the cost to be spent
on retrieving the obligation will probably surpass the obligation. To mix these
variables into a proficient workable framework obliges the establishment of a
watchful arrangement, controlling and coordination of all accessible human
and material assets.(Van Horne,2007)
Myers and Brealey (2003) consider it to be made up of techniques and

strategies used by an enterprise to ensure that an optimal level of loan and its
effectiveness management are kept. This is one aspect of monetary
administration including loan examination, loan assessment, and loan scoring
and loan reports. Nelson (2002) considers loan management as apparently the
way by which an enterprise superintends over its loan sales in a manner that
creates greater opportunities for making higher profits. This is prerequisite for
any business engaged in provision of lines of loan since it is not possible to
completely eliminate loan default or loan risk.
Franklin (2010) contends that loan management policy is the tenets and
systems set up by top administration that oversee the organisation loan division
and investigates execution in the augmentation of loan benefits against set
down procedures. It is essentially a situated composition of rules intended to
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minimise expenses connected with loan while expanding advantage from it
(Mc Naughton,1996). Loan administration arrangements involve the loan
strategies, loan measures and loan terms. This policy becomes the blueprint
which guides the conduct and expectations of all employees with the
responsibility of granting loan and also acts as a benchmark by which
performance can be measured against set standards.
Chodechai (2004) while investigating factors that affect interest rates, degree
of lending volume and collateral setting in the loan decision of banks, says:
Banks have to be careful with their pricing decisions as regards to lending as
banks cannot charge loan rates that are too low because the revenue from the
interest income will not be enough to cover the cost of deposits, general
expenses and the loss of revenue from some borrowers that do not pay.
Nnanna, (2005), further stressed that “Bank lending decisions generally are
fraught with a great deal of risks, which calls for a great deal of caution and
tact in this aspect of banking operations. The success of every lending activity
to a great extent therefore, hinges on the part of the loan analysts to carry out
good loan analysis, presentation, structuring and reporting.
Mwaura (2005) insists that lack of loan follow up, loan analysis, and hostile
lending of money are some of the factors that have contributed to financial gap
and poor performance. In Kenya, following the liberalization of the financial
sector in the 1990s (Omino, 2003), the back office model of SACCO
operations was found to be inadequate and as a result, many SACCO societies
introduced the front office services activities (FOSA) alternatively known as
the SACCO Savings
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According to Glen (2006),loan management policy typically take into account
a borrower’s current financial condition and paying capacity, the current value
and reliability of collateral and other borrower and facility specific
characteristics that affect the prospects for collection of principal and interest.
Financial institutions should put in place policies that require that remedial
actions be taken when policy tolerances are exceeded. These institutions
should also document their validation process and results with regular
reporting of the results to the appropriate levels of management. Additionally,
the validation of internal loan risk assessment models should be subject to
periodic review by qualified, independent individuals for example internal and
external auditors (Kagwa, 2003).
According to Pike and Neale (2009), a sound loan policy is the blueprint for
how the company communicates with and treats its most valuable asset, the
customers. Scheufler (2002) proposes that a loan policy creates a common set
of goals for the organization and recognizes the loan and collection department
as an important contributor to the organization’s strategies. If the loan policy is
correctly formulated, carried out and well understood at all levels of the
financial institution, it allows management to maintain proper standards of the
bank loans to avoid unnecessary risks and correctly assess the opportunities for
business development.
A well-structured loan grading management policy is an important tool in

differentiating the degree of loan risk in the various loan exposures of a bank.
This allows a more accurate determination of the overall characteristics of the
loan portfolio, probability of default and ultimately the adequacy of provisions
for loan losses. In describing a loan grading system, a bank should address the
definitions of each loan grade and the delineation of responsibilities for the
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design, implementation, operation and performance of a loan grading system
(Glen, 1996).
2.3 Effect of loan management on financial performance of Micro finance

institutions
Muninarayanappa and Nirmala (2004) in a related study opined that the

success of loan risk management require maintenance of proper loan risk
environment, loan strategy and policies. Thus the ultimate aim should be to
protect and improve the loan quality. According to Salas and Saurina (2002)
growth in GDP, rapid loan expansion, bank size and capital ratio had a
significant impact on the performance of micro finance institutions.
Felix and Claudine (2008) examined the association between the performance
of banks and loan management. As part of their findings, they observed that
return on equity and return on assets both measuring profitability were
inversely related to the ratio of non-performing loan to total loan of financial
institutions thereby leading to an increase in profitability. Also, Hosna, et al.
(2009) in their study opined that loan risk has a significant positive effect on
the profitability of commercial banks in Sweden.
Kithinji (2010) examined the effects of loan management on commercial banks

profitability in Kenya. He observed that the level of loan was high in the early
years of the implementation of Basle II but decreased significantly inJournal of
Economics and Sustainable Development. The findings revealed that the bulk
of the profits of commercial banks are not influenced by the amount of loan
and non-performing loans suggesting that other variables other than loan and
non-performing loans impact on profits.
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Funso and et al (2012) investigated the quantitative effect of proper loan
management on the performance of commercial banks in Nigeria for the period
2000-2010. Findings from their study showed that the effect of loan risk on
bank performance measured by the return on assets of banks is cross sectional
invariant.
Kargi (2011) examined the impact of loan management on the profitability of

banks.He revealed that loan management has a significant impact on the
profitability of Nigerian banks. Hence, he opined that banks’ profitability is
inversely influenced by the levels of loans and advances, non-performing loans
and deposits thereby exposing them to great risk of illiquidity and distress.
Although, some considerable amount of literature exists on the interaction
between finance and loan management on banks liquidity position, however,
the same is not true in developing economies like Nigeria where there is a
relatively dearth in literature in this area, coupled with the huge institutional
differences between Nigeria and other developed economies. Hence this study
examined the relationship between loan management and bank performance in
Nigeria and their loans should be on a long term nature rather than of short
term period.
According to Odhiambo (2013) in his study on the relationship between

working capital management and financial performance of deposit taking
savings and loan co-operative societies licensed by SACCO society’s
regulatory authority in Nairobi. Interest rate on members’ deposits as measure
of financial performance was used as the dependent variable. The independent
variable (working capital management) was measured by cash conversion
cycle, current ratio, and debt ratio and turnover growth. The findings indicated
that efficient working capital management leads to better financial
18
performance of a SACCO; hence a positive relationship existed between
efficient working capital management and financial performance variable.
According to Gibson (2006), management should maintain a written loan

review policy that is reviewed and approved at least annually by the board of
directors. Policy guideline should include a written description of the overall
loan grading process and establish responsibilities for the various loan review
function. The sources and causes of problem loans cover a multitude of
mistakes a bank may permit a borrower to make, as well as mistakes directly
attributable to weaknesses in the bank’s loan administration and management.
Some well-constructed loans may develop problems due to unforeseen
circumstances on the part of the borrower; however, bank management must
endeavor to protect a loan by every means possible in order to preserve its
performance
2.4 Strategies for improving financial performance by Micro Finance

Institutions.
Kohansal and Mansoori (2009) were of the view that, lenders devise various
institutional mechanisms aimed at reducing the risk of loan default. These
include pledging of collateral, third-party loan guarantee, use of loan rating and
collection agencies, etc.).
Kay Associates Limited (2005) cited by Aballey (2009) states that bad loans
can be restricted by ensuring that loans are made to only borrowers who are
likely to be able to repay, and who are unlikely to become insolvent. Loan
analysis of potential borrowers should be carried out in order to judge the loan
risk with the borrower and to reach a lending decision.
19
Loan repayments should be monitored and whenever a customer defaults
action should be taken. Thus banks should avoid giving loans to risky
customers, monitor loan repayments and renegotiate loans when customers get
into difficulties (Ameyaw-Amankwah, 2011). MFIs need a monitoring system
that highlights repayment problems clearly and quickly, so that loan officers
and their supervisors can focus on delinquency before it gets out of hand
(Warue, 2012). Sheila, (2011) is of the view that proper and adequate appraisal
is key to controlling or minimizing default. This is the basic stage in the
lending process.
According to Anjichi (1994), the appraisal stage is the heart of a high quality
portfolio. This includes diagnosing of the business as well as the borrower.
Before beginning the process of collecting information on the client for the
purpose of determining loan limits, the loan officer should have specific
information available which will guarantee that the data and figures provided
by the client will have a pro-margin error (Sheila, 2011).
The majority of the information is obtained by the loan officer through direct
interaction with the client in such a way that each loan analysis provides
valuable insights for evaluating the application for the future client. However,
most clients withhold a great deal of information making the evaluation a
difficult and unreliable exercise. Furthermore, the loan officer should visit the
home or the work place of the client with the main objective of determining
whether the client needs the loan programs or not. This information will help
the loan officer to assess the ability to effectively utilise the loan.
Hunte (1996), observed that the time to assess the applicant’s loan worthiness
also matters. This is because he believes that a shorter time is not enough to
fully assess the applicant. This is in agreement with Bigambah (1997) who
20
contends that it is necessary to analyze the client before a loan is issued; the
applicant has to be screened to assess his or her loan worthiness. That is the
ability to repay the loan, the business and the guarantee to secure the
repayment of the loan.
Bigambah (1997) observed that the loan default in Uganda has identified loan
appraisal as the key factor. In a number of cases, the information received is
not verified, in some cases the information received is doctored or falsified. It
must therefore be emphasized that loan risk analysis is another important
element in loan appraisal. When lending out money, the lender should
consider the borrowing proposition and subsequent repayment in isolation
from security. It should be noted that, the borrower should be screened basing
on the future and the past. Lending should be based on capital, character,
capability, purpose, amount, repayment, term and security. Basing on the
knowledge above, the lender should investigate on the customer’s record,
ability and experience. Security tends to come towards the end and is
considered only after the borrowing proposition has met the criteria. This
process of appraising the client will help the officer to assess the ability of the
borrower to utilize the loan effectively. Furthermore; the loan officer will be
able to predict the likely changes or effect on the business for which the money
is being lent out.
According to Sheila (2011), another stage in the lending process which is

critical to minimizing default is the disbursement stage. This stage is regarded
as the most demanding to borrowers which often times leads to failure to meet
their loan obligations. This is because most of the financial institutions take
long to disburse funds to successful applicants. This affects the borrowers in
that they take long to buy inputs needed to carry out their activities hence end
21
up spending it unnecessarily. The most affected are those involved in the
agricultural sector because their activities are usually in line with the prevailing
weather conditions. If the people involved in the agricultural sector receive the
loan late, this will delay the planting season hence they end up not making any
profit in time or may yield less as a result they are not able to pay their loans in
time.
Anjichi (1994) lamented that, many of the agonies and frustrations of slow and
distressed loans can be avoided by good loan supervision which helps in
keeping a good loan good. This is done by visiting the borrowers’ premises to
investigate the general state of affairs, checking on the state of borrowers’
morale and physical stock of finished goods.
Anjichi (1994) adds that, the general business policy and advice should be
considered. If the MFI is sensitive to business development, it can revise its
own loan policies and loan procedures as well as advising its customers. It can
also monitor the disbursed loans by the use of loan tracking sheets, checking
the amount deposited and the remaining balance of the borrowers. He further
says that early recognition of the loan default is crucial, and therefore tries to
give guidelines on managing loan losses.
22
CHAPTER THREE
METHODOLOGY
3.1 Introduction.
This section presents and shows the analysis of the research findings in respect
to the impact of loan management on the performance of MFIs in Buea. It
involves the research design, the sample size and selection procedures, the
types of data and collection techniques, the area and population and the mode
of analysis that will be used by the researcher in the study.
3.2 Research design.
A research design provides the glue that holds the research study together. A
design is used to structure the research, to show how all the major parts of the
research study (the samples or groups, measures, treatments or programs, and
methods of assignment) work together to try to address the central research
questions (William, M. 2006). According to Sarantakos (1993), this is the most
significant element of the research process where the whole research is
designed, options considered, decisions made and details of the research.
The study applied qualitative approaches of data collection. This is because it

helped the researcher to get closer to the people and understand what was
going on and what people understand in regards to the topic.
23
3.3 Data sources and types
3.3.1 Data sources.
Primary data sources.
Data from primary sources is first hand testimony or direct evidence

concerning atopic under consideration. They present information in its original
form, neither interpreted nor condensed nor evaluated by other writers. In this
study, primary data was obtained from clients and staff of through self-
administered questionnaires and interviews. This source of data was adopted
because of the decency of data and greater control over the data obtained.
Secondary data sources.
Data from secondary sources is got from documents or recordings that relate or
discuss information originally presented elsewhere. They are mainly reports
that use primary data to solve research problems written for professional or
scholarly audience. In this study, secondary data was obtained from published
literatures that are text books, journals, magazines, internet and other related
literature. In this study, this source was adopted because it is easy and cheaper
to collect, it is readily available and less time consuming.
3.3.2 Data types
Quantitative data.
Quantitative data refers to data which can be expressed numerically and

associated with measuring scale that is, it deals with things which can be
measured objectively.
24
Quantitative data was collected to formalize the problem concept to be used
and to generate the hypothesis to be tested. It put emphasis on the cause
behaviour with reference to the topic.
Qualitative data.
Qualitative data is a categorical measurement expressed not in terms of

numbers but rather deals with the characteristics and descriptions that cannot
easily be measured.
Qualitative data was collected in order to form an explanation, understanding,

interpretive and naturalistic approach to its subject matter for attempting to
make sense
3.4 Area and population of the study.
According to Mugenda and Mugenda (1999) and Sapsford (1999), population

is the entire set of individuals’ events or objects having observable
characteristic about which business of research findings can be made.
This study was carried out in the P & T credit Union, which is found in Buea,
the South West Region, Cameroon. Buea (Bakweri: Gbea) is the capital of the
Southwest Region of Cameroon. The town is located on the eastern slopes of
Mount Cameroon and has a population of 300,000 (Helders et al, 2008). The
study population comprised of business community, selected farmers,
households, civil servants who are clients P & T credit union, Buea branch.
25
3.5 Sample size and selection techniques.
Sampling is the process of choosing the units of the target population which
are to be included in the study. (Sarandakos 1998)
The sample size comprised of 10 members from the business community, 3

selected farmers, 3 civil servants and 4 staff . The researcher used purposive
and Non-probability sampling strategy can be labeled as accidental sampling
or convenience sampling will be used for the selection from the business
community, selected farmers, households, civil servants who are clients P & T
credit union, Buea branch from the target population for the study since the
researcher had to select those respondents from the population who were
obtainable or convenient to reach (Patten & Bruce, 2009). The researcher had
to use existing contacts to obtain access to participants and could therefore not
select a random sample of participants.
Purposive sampling looked at information rich areas especially the staff and
thus was used by the researcher because of the nature of the data required.
These techniques were used because of the specific targeted population and the
nature of the data required.
3.6 Data collection tools.
The researcher used the following tools.
Questionnaires.
This is a carefully designed instrument for collecting data in accordance with

the specifications of the research objectives, questions and hypotheses (Amin
2005).He further argues that this data collection method is less expensive
compared to other methods .The researcher therefore used this method since it
26
increases the chances of getting valid information that is filled at the
respondent’s convenience. This tool was used to collect data from business
community, selected farmers, households, community development officers
and staff of five talents Uganda administered by the researcher.
Interview guide.
In depth interview guide; Here, the researcher sets an in depth interview guide
to collect data from the respondents. In depth interview guide involved face to
face interaction between the researcher and the respondents. This method was
used because it allows probing further for greater depth and explanation. Yes
and No questions or fixed response were used. Interviews allowed participants
to express themselves using their own words.
3.7 Data quality control.
Validity.
Validity is the ability to give the researcher exact information as he intends to

get it. It alludes to the concern that what the researcher finds with the survey is
a fair representation of what is being measured. (Saunder et al, 2012).The
researcher contacted the research supervisor to know the items that are valid to
use in collecting data. This was done with the intention to improve the
legitimacy and precision of the data that was gathered for investigation. The
researcher first presented the research instruments to the supervisor for
approval. All items rated as valid were totaled up and divided by number
numbers in the research instrument. After, content validity index was applied.
Any instrument with content validity index of50% and above was regarded as
valid for use.
27
Reliability.
Reliability is the ability to give consistent results. It measures the level of

variance of actual results from the research tool that has been adopted. The
tendency towards consistency found in repeated instruments to a group of
respondents is referred to as reliability
The researcher therefore pre-tested the questionnaire and was the most used
instrument on the ten clients, the board committee and board of governance of
P & T credit Union branch.
3.8 Data processing analysis and presentation.
Data processing.
Data collected was checked for completeness, categorized, coded and entered
into a computer where it will be summarized info frequency tables.
Data analysis.
The data obtained was scientifically analyzed by Statistical Package for Social
Sciences (SPSS).The SPSS package was opted because it handles a large
number of variables. Pearson correlation index was used in order to correlate
loan management on the financial performance of MFIs. This is because the
index measures the degree and direction of the relationship between variables.
Data presentation.
Quantitative data was presented in form of descriptive statistics using

frequency tables. Qualitative data was sorted and grouped into themes. The
researcher thereafter evaluated and analyzed the adequacy of information in
28
answering the research questions through coding of data, identifying categories
and parameters that emerge in the responses to the variable of study.
Qualitative data will be presented by narrative text.
3.10 Ethical Considerations

Ethics is the part of human philosophy concerned with appropriate conduct and
virtuous living” (Given, 2008). Ethics in research involves the entire research
process, from the nature of the problem being investigated, the reporting of the
theoretical framework, the context in which the research is conducted, the data
collection instruments and methods used, the participants, the procedures used
to analyse the data and the way in which the data is reported (Neuman, 2000).
From the beginning of research as well as in the data collection phase a clear
explanation of what the research was about was given. No changes were made
to the original research question after the research had been completed.
The researcher obtained the necessary ethical authorization from JSF
Polytechnic before the research started. Permission to access the data from P &
T credit.
Ethical issues associated with the participants that were addressed in this
research were: “informed consent, right of refusal to take part without penalty,
right to withdraw without penalty, confidentiality and anonymity, deception
and security and safety to prevent any emotional or physical harm” (Plowright,
2011).
When using the secondary data, respondents were numbered and the numbers
were used to identify respondents were assured of confidentiality and
anonymity. In this study the researcher kept identifying information about
respondents separately from their responses.
29
The researcher did not discuss the research with anyone outside the research
milieu and ensured that no individuals could be identified and she was
intellectually honest about the source of her ideas in any discussion about the
research.
The data was kept secure once collected and stored safely to report the results
of the research with integrity and accuracy. No values were excluded from the
analysis. The whole investigation the researcher attempted to maintain
objectivity and integrity and to employ professional judgment.
3.11 ACTIVITIES CARRIED OUT BY THE INTERN
On the first day of my internship, the intern was taken to the Human Resource
Department and from there, I was given a contract to sign and this contract stated the
law I had to abide as an intern in the Buea P&T credit union. The contract equally
stated duration of the internship and the compensation given at the end of the
internship. Afterwards the intern was taken to her department and was being
introduced to employees in the department and the employees started interacting with
me and making me know some norms to follow in the Buea P&T credit union like
opening time is 8:00 am and closing at 4:00pm and Saturday closing time is at
1:00pm but we are to come thirty minutes in the morning and close all together when
closing this is to witness we all left the office at once. The intern had to come thirty
minutes before time and working days for interns is from Tuesday to Saturday and
Monday to Saturday for the manager, cashier and accountant and when they can’t
make it on Monday, they work hand in hand at home. The intern was made to
understand that the camera in the union are fully working and through this,
everything you do can be seen. Not much was done on the first day because I was
looking at what others did and learning from them and I equally asked questions.
30
CHAPTER FOUR
DATA ANALYSIS, PRESENTATION AND INTERPRETATION
4.1 Introduction
This study was carried out on the impact of Loan management on the financial
performance of Micro Finance Institutions in Buea. This chapter presents the
findings obtained from different respondents, their demographic characteristics,
data analysis in form of charts and tables and their relevant interpretation following
the objectives of this research study.
4.2 Response rate

The study comprised of a simple size of 10 respondents and all the respondents as
planned in the sample size participated in the study and this therefore shows that
the response rate was 100%
4.3 Demographic characteristics of the respondents.

4.3.1 Sex distribution of respondents
Demographic factors are assumed the most indicators of performance in the

financial sector. Thus, in this research process the sex characteristics of
respondents was considered in the study and according to the findings, the
following information was considered and the findings are shown in table 4.1.
Table 4.2showing the gender of respondents.
Sex Frequency Percentage%
Male 2 20
Female 8 80
Total 10 100
31
Source: Primary/field data 2022
Graph 4.1 showing the gender of respondents.
Female
40%
Male
60%
According to the
table above out the 10 people who participated in the study, most of the
respondents were males who made 60% of the study while 40% were females.
According to the information obtained from the field the males are the ones who
always access loans at P&T credit union Buea due to the fact that they are the ones
who possess collateral and are therefore versed with loan management policies
employed by this institution.
Therefore according to the above table the leading respondents were males 6(60%)
and the least number of the respondents were females 4(40%) in this study having
respondents who are males and females as shown above therefore implies that the
study was gender sensitive and therefore the views of all sexes were captured and
represented in this study.
32
4.3.1 Age distribution of respondents.
The age of respondents was investigated to find out if there was a certain age
bracket that dominated the study. The findings from the respondents were revealed
in table1.
Table 4.1 showing the age distribution of respondents.
Age Frequency Percentage (%)
18-27 01 10
28-37 2 20
38-47 3 30
48-57 2 20
58 and above 02 20
Total 10 100
Source: Primary/field data, 2022
This is also illustrated by the graph on page 25
Graph 4.1 Bar graph showing the age distribution of respondents.
18-27
10%
58 and above
20% 28-37
20%
48-57
20%
38-47
30%
33
As shown in the above table and graph, the age bracket that dominates the
population of study was 38-47 and constitutes 30% of the study followed by those
of the age bracket of 28-37 and 48-57 and 58yrs and above with a similar
percentage of 20%.Also according to the above table, the study constituted 10% of
the respondents whose age bracket was 18-27. This therefore implies that the
information was reliable since it was obtained from mature respondents who were
able to attempt to the questionnaire with ease and were familiar with the how loan
management affects the performance of MFIs since most of them had an
experience with loans from this particular case study. Having a big number of
respondents aged from 38-47 years implies that data was collected from mature
respondents and can thus be relied on in this study.
4.2.3 Marital status

The aspect of marital status was also considered and according to the findings, the
following was revealed as shown in table4.3.
Table 4.3 showing marital status of respondents.
Marital status Frequency Percentage
Single 1 10
Divorced 3 30
Married 4 40
Widowed 3 730
Total 10 100
34
Graph 4.3 showing marital status of respondents.
Single
10%
Widowed
20%
Divorced
30%
Married
40%
From table 3 shown above, out of the 10 respondents, 40% were married and these
through the interview explained that they accessed loans for their families 10%
were single while 30% were divorced and 20% were widowed. This seemed an
important aspect of the study due to the fact they were of sound knowledge and
were therefore able to understand the topic with eases and thus provided reliable
information.
This shows that there was a big number of married respondents comprising of
4(40%) of respondents followed by those who are divorced 3(30%) compared the
other marital statuses which seemed to be an advantage for this study.
4.2.4 Education level

Educational background of employee is an important factor to be considered with
regard to making business decision. Education improves the skill, capacity,
communication and access to development endeavors. Therefore, education being
an important factor, it was analyzed to investigate whether most of the respondents
35
were educated up to a certain level. This helped the researcher to know whether
they were able to understand what is meant by loan management and financial
performance as regards to Micro Finance Institutions.
Table4.4 showing the level of education of the respondents.
Level of education Frequency Percentage%
Primary 1 10
Secondary 3 30
Tertiary 2 20
University 4 40
Others 0 00
Total 10 100
Source: Primary data/field data, 2022
Graph 4.4 showing the level of education of the respondents.
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
Primary Secondary Tertiary University Others
Table 4.4 shows that all respondents were educated at different levels as it
corresponds to their qualifications. According to the above table, many
respondents completed university and these comprised of 40% of the respondents,
36
30% of the respondents completed secondary level of education while 20% had
completed tertiary level of education and 10% of the study respondents had
finished primary level of education.
As shown in the above table, the leading number of the respondents had completed
University level 4(40%) followed by those who completed Secondary level with
3(30%) while the least number of the respondents completed tertiary and primary
levels of education shown by 2(20%) and 10(10%) respectively while none of the
respondents had attended any other of education as shown by 0(0%) of the
respondents.
Therefore having a bigger number of respondents who had completed University

level of education implies they had adequate knowledge about loan management
and financial performance of MFIs which shows that data collected were provided
by people understanding the subject under study.
4.3.5 Occupation of respondents.

The occupation of the respondents was put into consideration during this study so
as to identify people who normally make use MFIs as regards to accessing loans
and other services offered by MFIs.
Table 4.6 showing duration of occupation by the respondents.
Occupation Frequency Percentage%
Farmer 2 20
Business 5 50
Civil servant 3 30
Religious leader 0 00
Others 0 00
37
Total 10 100
Graph4.6 showing duration of occupation by the respondents.
0
Farmer Business Civil servant Religious leader Others
According to the table4.5, out of the total number of the respondents, 50% were
engaged in business, 30% were farmers while 20% were civil servants.
As shown in the above table, most of the respondents were from the business
community as shown by 5(50%) followed by farmers 3(30%). In the least
positions, civil servants were represented by 2(20%).
Having a large number of respondents belonging to the business community
implies that the respondents were familiar with loan management practices since
most of them always acquired loans for the expansion of their businesses which
therefore shows that the information obtained from them was viable and reliable
for this study.
38
4.3.6 Duration of the occupation.
The study sought to find out the duration the respondents had been engaged in their
occupation. This aspect was also considered so as to help the researcher identify
the length the respondents have spent in their particular occupations.
Table 4.6 showing duration of occupation by the respondents.
Working years/Duration Frequency Percentage%
<1yr 0 0
1-3 yrs 2 20
4-6yrs 3 30
>7 yrs 5 50
Total 10 100
Graph4.6 showing duration of occupation by the respondents.
0
<1yr 1-3 yrs 4-7 yrs >7 yrs
39
Table 4.6 shows the working experience of respondents, where 50% of respondents
have been actively involved in their occupation for a period above 7 years, 30%
have been working for a period of 4-6 years and 30% had worked for a period
between 1-3 years.
The above table clearly shows that 5(50%) of the respondents were leading and
had been employed for a period of 7years and above followed by 3(30%) who had
been employed for a period between 4-6 years and the least number of respondents
had been employed for a period between 1-3 years shown by 2(2%) while none of
the respondents had been employed for less than one year.
From the above findings therefore a big number of the respondents have been
involved in work related activities from where they earn income for survival which
therefore shows that the respondents were well versed with the topic under
consideration.
4.4 Loan management policies employed by P&T Credit Union

The study sought to determine whether the institution had adopted loan
Management practices. From interviews and questionnaires, the researcher asked
respondents whether there were loan management policies employed by their
institution so as to be able to identify these policies and their effectiveness and
their response was as follows.
Table 4.7 showing response of the respondents on whether their institution

has loan management policies.
Do you have loan management Percentage Frequency

policies?
Yes 9 90
40
No 1 10
Total 70 100
Source: Primary/field data 2022.
From the findings as shown by table 4.7 above 90% of the respondents indicated
that their institution had adopted loan management practices, whereas 10%
indicated that their institution had not.
This table therefore shows that a leading number of respondents 9(90%) agrees
that their institution has loan management policies while a least number of
respondents 1(10%) disagrees. This therefore implies that the institution surely has
loan management policies.
4.4.1 The nature of loan management policies employed by P&T Credit Union
To probe further whether the respondents who had agreed that their institution had
loan management policies, the researcher asked them to identify these policies and
their findings are illustrated in table 4.8.
Table 4.8 showing the nature of loan management policies employed by P&T
Credit Union
Loan management policy Frequency Percentage
Loan restructuring 1 10
Liquidate the collateral 3 30
Notice of default 1 1
Sending loan collection agency 2 20
Credits follow up 00 0
Check credit limit 1 1
41
Evaluation of customers credit 1 10
worthiness
Use of maturity invoice 00 0.0
Taking legal action 1 10
Use of penalty 00 0.0
Client appraisal 00 0.00
Others 00 0.00
Total 10 100
From the above table, as part of loan management policies, 30% of the respondents
agreed that the institution liquidates the collateral presented before accessing the
loan, 20% claimed that the institution sends a loan collection agent to collect the
loan and the interest, 10% said that the institution restructures the loan by
extending the loan repayment period, sending, a notice of default through use of
telephones and letters, analyses the credit worthiness of the borrower by checking
their loan experience with the institution and other institutions and taking of legal
action in case of total default while other policies had not been employed by the
institution as shown by the above table.
As shown by the above table, the leading number of respondents 3(0%) agreed that
their institution liquidates the collateral followed by 2(20%) who said that the
institution sends loan collection agency and then loan restructuring 1(10%) as the
most used policies of the institution. While the least used policies of the institution
according to the respondents were sending notice of default 1(10%), evaluation of
42
customers credit worthiness 1(10%) and taking legal action 1(10%).While other
MFIs use policies such as credits follow up, checking credit limit use of maturity
invoice, use of penalty and client appraisal among others, these were not employed
by P &T credit union according to the respondents as shown by 0(0%)
respectively.
Therefore, from the above findings, the institution uses loan management policies
and this has helped to increase its profitability through reducing cases of loan
default by the borrowers which shows that the institutions level of profitability is
maintained.
4.5 The effect of loan management on the performance of P&T Credit Union
The respondents were asked whether loan management policies affect the financial
performance of the institution and their response is displayed in the table below.
Table 4.9 showing respondents’ view on whether loan management affects

financial performance.
Does loan management affect financial Frequency Percentage

performance?
Yes 56 80
No 14 20
Don’t know 00 00
Total 70 100
From the findings shown by the above table 80% of the respondents agreed that
loan management affects the financial performance of MFIs and particularly Five
43
Talents Uganda and 20% disagreed with the fact that loan management affects
financial performance.
The researcher sought to investigate whether loan management affects financial

performance and the leading number of the respondents said yes 56(80%) while
the least number of the respondents 14(20%) said that loan management does not
affect financial performance and none of the respondents said that they do not
know whether loan management affects financial performance and this is shown by
0(0%).
Thus from the above findings loan management affect financial performance of
MFIs and should therefore be taken as a vital component of Micro Finance
Institutions for their continued performance and profitability.
4.5.1 The effect of loan management on the financial performance of P&T

Credit Union
Table 4.10 showing the effect of loan management on financial performance
How does loan management Yes No

affect financial Frequency percentag frequency Percentage
performance? e
It increases profitability 8 80 20
It increases working capital 9 90 1 10
It increases customer base 3 30 7 70
It increases compliance by 10 100 00 00

debtors
44
It makes the institution more 4 40 6 60
competitive
It reduces risks associated 6 60 4 40

with lending
It reduces bad debts 6 60 4 40
Others 00 00 00 00
According to the above table, out of the 70 respondents who filled the
questionnaire,80%agreed that loan management increases profitability while 20%
disagreed with this view. When asked whether loan management increases
financial performance in terms of increasing working capital, 90% percent of the
respondents supported this view claiming that the institution is left with sufficient
income to run its operations while 10% did not agree with this view.30% of
respondents reported that loan management increases customer base while 70% did
not support this view citing that in cases where the institution takes legal action in
case of default, this scares away customers. 100% of the respondents claimed that
proper loan management increases customer compliance and they are able to clear
their debts especially in situations where the institution sends notices of default to
the would be defaulters. As an effect of loan management on financial
performance, 40% of the respondents in their view agreed that it increases the
institutions competition power relative to other institutions whereas 60% of the 70
respondents did not support this view. As shown by table 11. 60% of the
respondents claimed that proper loan management is an important factor in terms
of financial performance of their institution since it reduces the risks associated
with bad debts while 40% said that this is not always the case. Table 11 also shows
45
that 60% of the respondent agreed that proper loan management reduces bad debts
especially through liquidating the collateral while 40% of the respondent did not
support this idea. When asked to give other effects of loan management, none of
the respondents stated any other effect as shown by the above table.
As shown by the above table, according to the respondents the leading effect of
loan management is that increases compliance by debtors 70(100%) followed by
that it increases working capital 9(90%) and increasing working capital 8(80%).
The least effects of loan management as identified by the respondents were that it
reduces bad debts 6(60%), it reduces risks associated with lending 6(60%), makes
the institution more competitive 4(40%) and that increases customer base
3(30%).When the researcher asked the respondents to give any other effect of the
respondents to give other effects of loan none of the respondents give the effect as
shown by 0(0%).
4.6 Strategies to improve financial performance.

The researcher sought to inquire whether there are strategies to improve financial
performance and the response from the respondents is discussed in the table below.
Table 4.11 strategies to improve financial performance
Are there strategies to improve financial Frequenc Percentag

performance y e
Yes 10 100
No 00 0.00
Total 10 100
46
From the above all the respondents unanimously agreed that there are strategies to
improve financial performance and this is shown by 100% of the respondents
saying yes while none of the respondents said that there are strategies that can be
employed to improve financial performance. This therefore implies that any
financial institution should put into consideration these policies depending on its
nature of operation.
Therefore from the above table, the leading number of respondents 70(100%)
agreed that there are strategies that can be adopted to improve financial
performance.
For the researcher to validate this fact he asked the respondents to identify some of
these strategies and the findings are discussed in table 4.12
Table 4.12 strategies to improve financial performance.
Strategy Frequency Percentage
Strengthening human resource 01 10
Regular audits 01 10
Compliance reviews 6 60
Increased staff supervision 00 0
Proper budgeting 00 0
Addressing non repayment of debts 1 10
Follow up evaluation 1 10
Others 00 0
Total 70 100
47
According to the above table, 60% agreed that as a strategy to improve financial
performance, the institution should always examine compliance reviews by
debtors, 10% suggested that the institution should use both addressing non
repayment of debts and conducting follow up evaluation while 10% of the
respondents suggested the need to strengthen human resource and 10% of the
respondents proposed that there is need for the institution to strengthen human
resource as a strategy to improve financial performance.
As explained by the above table, the leading number of the respondents said that
there is need to review compliance reviews as shown by 6(60%) followed by
addressing non repayment of debts and follow up evaluation as shown by 1(10%)
for both least policies suggested were conducting regular audits. other strategies as
proposed by the researcher in the questionnaire were not seen as being effective
according to the respondents such as increased staff supervision and proper
budgeting as shown by 0(0%).
When asked by the respondents to state other strategies that can be employed by
the institution to improve financial performance none of the respondents suggested
this strategy and this is shown by 0(0%) for other strategies.
48
CHAPTER FIVE
DISCUSSION OF FINDINGS, CONCLUSION AND

RECOMMENDATIONS
5.1 Introduction
The main objective of this study was to establish the impact of loan management
on the financial performance of Microfinance institutions in Buea taking P&T
credit union Buea as a case study. This chapter therefore presents a summary of the
findings, conclusions, recommendations and suggestions for further research.
5.2 Summary of Findings.
5.2.1 Loan management policies employed by Micro Finance Institutions.
The study revealed that taking P&T credit union Buea that was taken as a case
study has loan management policies in its operation. This was shown by 90% of
the respondents agreeing to this view which agrees with Rajan (2005), who asserts
that loan management policy is a guide that ensures prompt payment and regular
collections. The rationale is that not all clients meet their obligations, some just
take it for granted, others simply forget while others just don’t have a culture of
paying until persuaded to do so. This implies that all Deposit taking microfinance
institutions should observe clear guidelines on how to approach and manage the
loan risks that they may face from time to time.
This is also supported by Kakuru (2002) who asserts that loan policy provides a
frame work for the entire loan management process. Loan policies are set of
objectives, standards and parameters to guide officers of the MFIs who grant loan
49
portfolios. Thus they are procedures, guidelines and rules designed to minimise
costs associated with loan while maximising the benefits from it
(Ahimbisibwe,2002). The main objective of loan policy is to have an optimal
investment and debtors that minimise costs while maximising profit.
This therefore calls for use of client friendly policies as shown in the study the
most commonly used policy of loan management is liquidating the collateral which
was rated at 35% followed by sending loan collection agency rated at 25% then
followed by sending notice followed as indicated by 7.41% of the respondents.
However there is need to use more friendly policies that do not scare away
potential clients such as undertaking loan reviews and credit follow ups because
they are easy and cheap to implement by the institution and attract clients.
5.2.2 Effect of loan management on the financial performance of Micro

Finance Institutions.
The study also revealed that loan management policies have a great effect on loan
management policies of the institution. This was evidenced by 80% of the
respondents agreeing that loan management affects financial performance of P&T
credit union Buea while 20% disagreed claiming the loan management does not
affect financial performance. When the researcher asked the respondents to state
the extent to which loan management affects financial performance, 60% of the
respondents said that loan management affects financial performance to a greater
extent while 20% of the respondents said that financial performance of the
institution is affected by loan management to a smaller extent. This was confirmed
by 100% of the respondents claiming that it increases compliance by debtors, 90%
agreeing that it increases working capital and 80% stating that it increases
profitability. On the other hand, 60% of the respondents tied on the same
50
percentage saying that loan management reduces the risks associated with lending
and making the institution more competitive as well. This therefore confirms Kargi
(2011) who examined the impact of loan management on the profitability of banks
and revealed that loan management has a significant impact on the profitability of
banks.
Also as viewed by Odhiambo (2013) in his study on the relationship between

working capital management and financial performance of deposit taking
institutions and the findings indicated that efficient working capital management
leads to better financial performance of a SACCO hence a positive relationship
existed between efficient working capital management and financial performance
variable.
This was further supported by Felix and Claudine (2008) who examined the
association between the performance of banks and loan management. As part of
their findings, they observed that return on equity and return on assets both
measuring profitability were inversely related to the ratio of non-performing loan
to total loan of financial institutions thereby leading to an increase in profitability.
Also, Hosna, et al. (2009) in their study opined that loan risk has a significant
positive effect on the profitability of commercial banks in Sweden.
5.2.3 Strategies for improving financial performance by Micro Finance

Institutions
The researcher went ahead to ask the respondents whether there are strategies that
can be adopted to improve financial performance of the institution and all the
respondents all the respondents unanimously agreed that there are strategies to
improve financial performance and this is shown by 100% of the respondents
saying yes. To validate this, the researcher asked them to identify some of these
51
strategies and according to the findings, 70% agreed that as a strategy to improve
financial performance, the institution should always examine compliance reviews
by debtors, 10% suggested that the institution should use both addressing non
repayment of debts and conducting follow up evaluation while 10% of the
respondents suggested the need to strengthen human resource and 10% of the
respondents proposed that there is need for the institution to strengthen human
resource as a strategy to improve financial performance.
This is in line with Ameyaw-Amankwah (2011) who said that loan repayments
should be monitored and whenever a customer defaults action should be taken. He
further stressed that banks should avoid loans to risky customers, monitor loan
repayments and renegotiate loans when customers get into difficulties. This was
further supported by Warue,(2012) who claimed that MFIs need a monitoring
system that highlights repayment problems clearly and quickly, so that loan
officers and their supervisors can focus on delinquency before it gets out of hand.
His view was also supported by Kohansal and Mansoori (2009) who were of the
view that, lenders devise various institutional mechanisms aimed at reducing the
risk of loan default. These include pledging of collateral, third-party loan
guarantee, use of loan rating and collection agencies, etc.). Furthermore, according
Kay Associates Limited (2005) as cited by Aballey (2009) were of the view that
that bad loans can be restricted by ensuring that loans are made to only borrowers
who are likely to be able to repay, and who are unlikely to become insolvent. Loan
analysis of potential borrowers should be carried out in order to judge the loan risk
with the borrower and to reach a lending decision.
52
5.3 Conclusion
This study aimed at examining the impact of loan management on the financial
performance of MFIs in Buea taking P&T credit union Buea Branch as a case
study and 10 respondents from this institution were selected using purposive and
convinient sampling techniques and they received and responded to the self-
administered questionnaires
The study findings reveal that there is a close relationship between loan
management and financial performance. Through the assessment of respondents’
views on this relationship, the researcher found out that the loans were well
managed, because all indicators considered at this level show that the employees
working in loan department have experience.
The study revealed that the use of proper loan management policies lead to
increase in financial performance of MFIs in P&T credit union Buea since it
increases an institutions profitability, increases debtors compliance as well as
reducing risks associated with bad debts among other and therefore there is need to
stream line these policies so as to ensure continued profitability of the institution
5.4 Recommendations
On the basis of the results and conclusions of this study, the following policy
implications are suggested so as to be considered in the future intervention
strategies which are aimed at improving the financial performance of MFIs
particularly P&T credit union Buea.
The loan policies and procedure of the Micro Finance Institutions should
incorporate the ideas of the clients and employees to become more competitive in
53
the finance sector and meet its vision. In other words, it is better for the Bank to
make its credit policy flexible to meet its potential loan clients and thereby putting
a good administrative set up that improves Credit lending and administration.
The periodic repayment schedule of the Micro Finance Institution should be
flexible by considering the operation of the clients’ business as repayment duration
has its impact on the performance of loan collection.
As it is disclosed in the analysis part of the study most of the loan clients and the
institutions have complaints on the loan policies such as taking legal action that
includes taking people to prison and guidelines regarding valuing property offered
for collateral, loan discretion, length of loan processing time, repayment schedule,
and excessive requirements for analysis. These are the major factors impeding
client reputation and retarding to attract potential loan clients. Hence, the
institution should made remarkable changes on its loan policies and procedure
guidelines regarding the above aforesaid drawbacks in order to solve the current
problems and achieve the client reputation.
The current loan processing and approving direction of the institution is moderate
inclined to be conservative especially regarding collateral analysis and its
liquidation. This is highly retarding the loan growth of the institution. Hence, there
is need to follow creative way of loan processing and approving direction that
assists to meet the loan demand of potential loan applicants and the required level
of loan growth as it is the main source of income for the banking industry.
Supply necessary of logistics support for monitoring clients. Sometimes loan
officers need to move long-distance and remote areas for group meeting, visiting
individual clients, collection etc. For doing so, they need some sorts of logistics
support. Managers should provide necessary transportation or allowances.
Managers should not think loans officers as a robot or machine. Redesigning or
54
merging of group or branch offices could play an important role to reduce this type
of hassles.
Effective Implementation of Human Resource Policy and Procedures (HRPP):
Managers should initiate HRPP and stick to that procedural issues for all staff of
the organization. Code of conduct and ethical behavior should be included in the
policies and require time to time monitoring on the implementation. All issues
related to staff, program operation and organizational support should be specified
in an understandable way so that employees can get the exact meaning of the
policies. There could be an internal team to look after implementation of all the
procedural issues and if there is any deviation occurs then the team could treat the
case in a flexible way with logical perspective to adjust with the need of the time,
work place as well as frequency.
Provide need based training on stress management and competency as well as
initiate mentoring program: Managers should fix logical budget for loan officers
training on different issues like developing competency, dealing with delinquent
clients, time management, stress management and other soft skills training. These
sorts of training could help loan officers to prepare themselves to face challenges
in the workplace. Managers can introduce mentoring program for the new and
existing staff so that proper guidance and advice are available to all staff.
5.5 Suggestions for further research.

This study is under taken on the impact of loan management on the financial
performance of Micro Finance Institutions taking P&T credit union Buea as a case
study. It has focused on loan management while there are also other factors that
affect the financial performance of MFIs and its therefore worth to study in
comprehensively other factors that affect MFIs financial performance in details
and not necessarily P&T credit union Buea but other MFIs.
55
56
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60
APPENDIX
APPENDIX 1: QUESTIONNAIRE
In fulfillment for the award of HND in Banking and Finance, option of JSF
Polytechnic, am conducting a research on Loan Management on the financial
performance of Micro Finance Institutions in Buea: a case study of P&T Credit Union. I
will be grateful if you answer the following questions below according to the best of
your understanding. All answers will be used strictly for academic purpose only.
ANJEH EMMACULATE AMAH

Thanks for your cooperation
Instruction
Place a tick [ √ ] where necessary and fill the blank spaces
Section A:Demographic Introduction
1. Sex; Male [ ] Female [ ]

2. Age; 18-27 [ ] 28-37[ ] 38-47 [ ] 48-57 [ ] 58 and above [ ]
3. Marital status; Single [ ] Divorced [ ] Married [ ] Widowed [ ]
4. Level of education; Primary [ ] Secondary [ ] University [ ]
Others specify ………………………………………………………………………
5. Occupation; Farmer [ ] Business [ ] Civil servant [ ] Religious leader [ ]

Others Specify……………………………………………………………………….
6. Duration of the occupation; <1yr [ ] 1-3 yrs [ ] 4-7 yrs [ ] >7 yrs [ ]
SECTION B: SPECIFIC QUESTIONS.
Loan management policies.
7. Do you have loan management policies at your institution? Yes [ ] No [ ]
61
8. If yes, what loan management policies does your institution employ?
Loan restructuring/review [ ] Liquidate the collateral [ ] Notice of default [ ]
Sending loan collection agency [ ]
Others (specify)……………………………………………………………………………………
How loan management affects financial performance
9. In your view, does loan management affect the financial performance of your
Yes [ ] No [ ] Don’t know [ ]
11. If yes, to what extent? To a larger extent [ ] To a smaller extent [ ]
12. In your view, which aspect is mostly affected by loan management?
Profitability [ ] Working capital [ ] General performance [ ]
None of the above [ ]
Others (specify) ……………………………………………………………………
Strategies to improve financial performance of MFIs
13. In your view, are there strategies to improve financial performance? Yes[ ] No[ ]
14. If yes, what are these strategies?
Strengthening human resource [ ] Regular audits[ ] Compliance reviews[ ]
Increased staff supervision [ ] Proper budgeting[ ] Addressing non repayment of debts[ ]
Follow up evaluation [ ]
None of the above (specify)……………………………………………………………………
15. What is your general comment on the impact of loan management on the financial
performance of Micro Finance Institutions in Buea?
…………………………………………………………………………………………………
……………………………………………………………………………………………
Thank you
62
APPENDIX 2: INTERVIEW GUIDE
1. Do you have loan management policies?

2. What loan management policies does your institution employ?
3. Does loan management affect financial performance of your institution?
4. To what extent does loan management affect financial performance of your
institution?
5. How does loan management affect your financial performance?
6. Are there strategies to improve financial performance of your institution?
7. What are these strategies?
8. What is your general comment on the impact of loan management on the financial
performance of micro finance institutions in Buea?
Thank you.
63

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THE IMPACT OF LOAN MANAGEMENT ON THE FINANCIAL PERFOMANCE

OF MICRO FINANANCE INSTITUTIONS IN BUEA.

A CASE STUDY OF P&T CREDIT UNION, BUEA BRANCH

ANJEH EMMACULATE AMAH

A RESEARCH REPORT SUBMITTED TO THE DEPARTMENT OF

BANKING AND FINANCE IN PARTIAL FULFILLMENT OF

THE REQUIREMENT FOR THE AWARD HIGHER NATIONAL DIPLOMA

SUPERVISOR FIELD SUPERVISOR:

NJINJONG MARCELUS, PhD

This work is the result of the effort of a considerable number of individuals to

whom I owe gratitude.

spiritual support. May God Almighty supported me all.

1.1 Background to the study.............................................................................1

1.2 Problem statement.....................................................................................4

1.3 General objective.........................................................................................5

1.4 Specific objectives of the study..................................................................5

1.5 Research questions......................................................................................6

1.6 Scope of the study........................................................................................6

1.7 Significance of the study.............................................................................7

2.2 Loan management policies.........................................................................8

2.3 Effect of loan management on financial performance of Micro finance

3.2 Research design.........................................................................................22

3.3 Data sources and types.............................................................................23

3.3.1 Data sources............................................................................................23

Primary data sources......................................................................................23

Secondary data sources..................................................................................23

3.3.2 Data types................................................................................................24

3.4 Area and population of the study............................................................24

3.5 Sample size and selection techniques......................................................25

3.6 Data collection tools..................................................................................26

3.7 Data quality control..................................................................................26

3.8 Data processing analysis and presentation.............................................28

3.9 Limitations and delimitations..................................................................28

3.10 Ethical Considerations............................................................................29

DATA ANALYSIS, PRESENTATION AND INTERPRETATION

4.2 Response rate.............................................................................................31

4.3 Demographic characteristics of the respondents...................................31

4.3.1 Age distribution of respondents............................................................33

4.2.3 Marital status..........................................................................................34

4.2.4 Education level.......................................................................................36

4.3.5 Occupation of respondents....................................................................38

4.4 Loan management policies employed by P&T Credit Union...............41

4.4.1 The nature of loan management policies employed by P&T Credit

4.5 The effect of loan management on the performance of P&T Credit

4.5.1 The effect of loan management on the financial performance of P&T

4.6 Strategies to improve financial performance.........................................48

DISCUSSION OF FINDINGS, CONCLUSION AND

5.2 Summary of Findings................................................................................51

5.2.1 Loan management policies employed by Micro Finance Institutions.

5.2.2 Effect of loan management on the financial performance of Micro

5.2.3 Strategies for improving financial performance by Micro Finance

5.5 Suggestions for further research.............................................................58

ROE Return On Equity.

ROA Return On Assets.

MFIs Micro Finance Institutions.

FTU Five Talents Uganda.

SACCO Savings And Credit Cooperatives.