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Analysis of microfinance performance and development of informal institutions in Cameroon

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par Brice Gaétan DJAMAMAN
Amity University (India) - Master of Finance and Control 2012
  

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Analysis of microfinances' performance and development of informal institutions in Cameroon

By Djamaman Brice Gaétan

Amity Campus
Uttar Pradesh
India 201303

ANALYSIS OF MICROFINANCES' PERFORMANCE AND
DEVELOPMENT OF INFORMAL INSTITUTIONS IN
CAMEROON

by

DJAMAMAN BRICE GAETAN

A dissertation submitted in partial fulfillment of the requirements in Masters
of Finance and Control at the Amity Center for E-learning Amity University,

Uttar Pradesh

September 2012

Analysis of microfinances' performance and development of informal institutions in Cameroon

By Djamaman Brice Gaétan

ABSTRACT

Historically, microfinance has been successful in reaching the population excluded from the classical financial system. In the 90's, efforts have been concentrated towards the financial and institutional sustainability of the microfinance institutions (MFIs). Tools to evaluate financial performances have been developed, but the social performances were taken for granted.

This study is intended to investigate the relationship between social and financial performance of MFIs and factors that contribute to the development of informal sector in Cameroon; with a particular interest in the role that microfinance institution may be playing. In addition to gaining a more general understanding of the challenges facing developing informal institutions, the study will identify how the evaluation of microfinances' performance is contributing to overcome the mission drift or arbitrage between social and financial performance of microfinance institutions. This thesis is focused on three specific objectives:

The First is to analyse the influence of social performance on the financial performance, with the aim to study whether there is a good management or arbitration by MFIs. The second objective is to study the impact of the financial performance on the social performance, with the aim to find whether good financial performance enables the firm to allocate some margin to social issues or financially powerful companies are the worse in terms of social performance because of their leaders' greed, who do not share the margin. The last objective is to analyse the reciprocal influence of informal sector and microfinances' performance.

Key words: microfinance, social performance, financial performance, informal sector, Cameroon and mission drift

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Analysis of microfinances'performance and development of informal institutions in Cameroon

By Djamaman Brice Gaétan

ACKNOWLEDGEMENTS

This thesis would not have been realized without the valuable inputs of the Pan African e-Network Project, AMITY University Campus Uttar Pradesh India 201303 and our Focal Team of the National Virtual University. We will like to thank them largely on the knowledge they imparted in us. Gratitude is given to Professor Emmanuel TONYE, Professor Mama FOUPOUAGNIGNI and Mr TAKANG Nixon

We will also like to thank the MOANTAMB's and DJONG's families, for their love, encouragement and the support they gave to us to realize this work, their tolerance made us to understand that winners do not quit and quitters do not win. This is especially to my parents Mr MOANTAMB Nicolas and Mrs NTAMKEN Marie, my aunt Mrs AMBO'O Odette and his husband Mr DJONG Simplice.

We will also like to use this opportunity to thank all those who have contributed directly or indirectly to this thesis. Especially the classmates of Central Africa Virtual University of Cameroon, my friends: BILE'E Etoga Matrhe, NSOUNFON Donald, MVOGO Lucien, NZODIA Ines, ABENGMONI Emmanuel II and KIYEM Gisèle.

To crown it, our profound gratitude goes to God Almighty who gave us the enabling capacity both mentally and physically as well as the opportunity to be alive for the completion of this work.

This work is dedicated to my parents Mr. and Mrs. MOANTAMB

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Analysis of microfinances' performance and development of informal institutions in Cameroon

By Djamaman Brice Gaétan

Table of contents

ABSTRACT 2

ACKNOWLEDGEMENTS 3

LIST OF TABLES 7

LIST OF FIGURES 7

CHAPTER I- INTRODUCTION 8

I.1- Background of the study 9

I.2- Problem statement 10

I.3- Context of the study 11

I.4- Objectives of research 11

I.5- Research outline 12

CHAPTER II- A COMPREHENSIVE REVIEW OF THE EXISTING LITERATURE 13

II.1- Welfarists and Institutionalists approaches 13

II.2- The Self-Sufficiency and Sustainability of MFIs 14

II.3- Impact of Microfinance Institutions 17

II.4- Literature review on the social performance of microfinance institutions 18

II.4.1- Impact studies on microfinance 18

II.4.2- Studies on the social performance of microfinance institutions 19

II.4.3- Clients targeting 20

CHAPTER III- THEORETICAL PERSPECTIVE 23

III.1- The concept of microfinance 23

III.1.1- Definition 23

III.1.2- Overview of microfinance in Cameroon 24

III.1.3- Evolution of equities 28

III.1.4- Profitability of microfinance sector 29

III.2- The concept of informal sector 30

III.2.1- Definition 30

III.2.2- Informal sector in Cameroon 31

III.3- Theoretical links between MFIs and informal sector development 31

III.4- Microfinance schism 33

III.4.1- The welfarists' approach 33

III.4.2- The institutionalists' approach 34

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Analysis of microfinances' performance and development of informal institutions in Cameroon

By Djamaman Brice Gaétan

III.5- Social performance 36

III.5.1- Outreach 36

III.5.2- Impact assessment 38

III.6- Financial performance 40

III.6.1- Determinants of a profitable institution 40

III.6.2- Perennial MFIs 42

III.7- The mission drift of MFI: The institutionalists and the welfarists 44

III.7.1- The concept of mission drift 44

III.7.2- The debate between the institutionalists and welfarists 45

CHAPTER IV- RESEARCH METHODOLOGY 47

IV.1- Relationship between social and financial performance 47

IV.1.1- A tentative typology of the firms' performances 47

IV.1.2- The problem statement 48

IV.2- Selection of variables and indicators 49

IV.2.1- Selection of the financial performance indicators 49

IV.2.2- Selection of the social performance indicators 51

IV.2.3- Selection of developmental indicators for the informal sector 52

IV.2.4- Selection of the control variables 54

IV.3- The research hypothesis and research model 54

IV.4- Regression approach 55

IV.5- conclusion 57

CHAPTER V- PRESENTATION AND ANALYSIS OF DATA 58

V.1- Data collection 58

V.2- The data set 58

V.3- Preliminary data analysis 59

V.3.1- Descriptive statistics 59

V.3.2- Correlation analysis 60

V.4- Regression analysis 62

V.4.1- Financial performance regression analysis 62

V.4.2- Social performance regression analysis 68

V.4.3- Informal sector regression 73

CHAPTER VI- CONCLUSION, LIMITATIONS AND RECOMMENDATIONS 79

Analysis of microfinances' performance and development of informal institutions in Cameroon

By Djamaman Brice Gaétan

VI.1- Conclusion 79

VI.2- Limitations and recommendations 81

REFERENCES 83

APPENDICES 85

APPENDIX A: List of variables 85

APPENDIX B: Abbreviations 85

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Analysis of microfinances'performance and development of informal institutions in Cameroon

By Djamaman Brice Gaétan

LIST OF TABLES

Table 1: Distribution of approved MFIs 23

Table2: Aggregate balance sheet of MFIs on 31 December 2010 25

Table3: evolution of microfinance activities in Cameroon from 2002 to 2010 26

Table 4: Summary table: welfarists and institutionalists ...34

Table5: A set of various assumptions on likely relationships between SP and FP 45

Table 6: evolution of fixed deposits and gross loan from 2002 to 2010 51

Table 7: Distribution of microfinances based on their categories 57

Table 8: descriptive statistics 58

Table10: ANOVA analysis of ROA regression 61

Table11: ROA regression coefficients ..61

Table12: ANOVA OF ROE REGRESSION 63

Table13: ROE regression Coefficients 63

Table14: ANOVA OF OSS REGRESSION 65

Table15: OSS regression coefficients 65

Table16: ANOVA of AL regression .66

Table17: AL regression coefficients .67

Table18: ANOVA for CFIR regression 68

Table19: CFIR regression coefficients .69

Table20: ANOVA OF CFGR REGRESSION ..70

Table21: CFGR regression coefficients 72

Table22: ANOVA OF FD REGRESSION 74

Table23: FD regression coefficients when FP influences the informal sector .74

Table24: FD regression coefficients when SP influences the informal sector .74

Table25: GL regression coefficients when FP influences the informal sector .75

Table26: GL regression coefficients when SP influences the informal sector .76

LIST OF FIGURES

Figure1: Number of MFIs per region 26

Figure 2: Evolution of fixed deposits and gross loan from 2002 to 2010 53

Figure 3: Summary of research hypothesis ..55

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Analysis of microfinances' performance and development of informal institutions in Cameroon

By Djamaman Brice Gaétan

CHAPTER I- INTRODUCTION

The proclamation of 2005 as International Year of Microcredit by the United Nations has certainly contributed to make this tool even more popular launched at the end of 1970. Since then, microfinance has developed to enable excluded people to access banking services to financial services. Within a few decades, seeing the results qualitatively and quantitatively promising, microfinance has taken center stage in international cooperation. Non-Governmental Organizations (NGOs), associations, mutual societies, credit unions, private companies have sprung up around the world and are currently serving over 90 million people worldwide.

The Gramenn Bank and Muhamed Yunus had the Nobel Prize in 2006. They have enabled the poor population of Bangladesh which is up to six millions persons, with 96% of women to have access microcredit. The microcredit belongs to the range of varied products offered by microfinance institutions (MFIs). Microfinance means the finance of small size. She represents a financial intermediation in favour of poor people who have low income and are generally marginalized by classical banking system. That is why, most African countries have developed in their PRSP (Poverty Reduction Strategy Paper) some actions concerning microfinance, with the aim to improving financial services offered, in particular credit to poor people and contribute in stimulating economic growth. However, these MFIs sometime face social mission (social performance, which consist in touching a large number of those who are excluded to the classical banking system) and financial viability or financial performance, which means that cost of supply service must be taken into consideration (Doligez , Lapenu, 2006).

In fact, the real contribution of services offered to microfinance institutions with the aim of reaching social objectives such as the fight against poverty, the local development or the reduction of inequalities, still at the center of various debates (Hulme & Mosley, 1996; Morduch, 2000; Pitt & Khanker, 1999). Generally, in developing countries and particularly in Cameroon the fight against poverty can be effective through the financing of micro and small businesses. The creation of Small and Medium Size Enterprises generates employment but these enterprises are short live and consequently cause those who gained job positions to lose them and even go poorer than they were. It should be noted that microfinance is not a panacea but it is a main tool that fosters development in developing countries. It is known worldwide that the poor cannot borrow from banks. The latter does not lend to them because they do not have what is required to be granted a loan or to be provided with bank services. The lack of financial power is a contributing factor to most of the societal problems. These problems emanate from poverty and it

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Analysis of microfinances' performance and development of informal institutions in Cameroon

By Djamaman Brice Gaétan

is known that with poverty one is bound to suffer so many consequences ranging from lack of good health care system, education, nutrition, Microfinance has proved this bank concept to be wrong. They target the poor who are considered risky but the repayment rate turns to be positive as compared to the regular commercial banks (Zeller and Sharma, 1998).

Researchers regard microfinance from different dimensions. Microfinance gives people new opportunities by helping them to get and secure finances so as to equalize the chances and make them responsible of their own future. It broadens the horizons and thus plays both economic and social roles by improving the living conditions of the people (Microfinance Radio Netherlands, 2010). These improvements are to alleviate poverty, and according to this project, it will be seen from the point of the development of informal institutions. The accomplishment of 2035 Cameroon emergence to alleviate poverty at this date is far-fetched despite the enormous works that microfinance institutions are doing to contribute in this domain. The main challenge faced by the poor is to gain financial power to enable them boost their income generating activities (Yunus, 2003).

I.1- Background of the study

Since independence, the government of Cameroon has embarked on several attempts aimed at promoting agricultural development in the country. In the first few years after independence in 1961; the government embarked on the policy of «Green Revolution», which aimed at encouraging the development of agriculture in the country (Simarski, 1992). Other efforts included the setting up of agencies like the National Fund for Rural Development (FONADER) and other rural agricultural extension programs. In spite of all these attempts, much is still needed to boost this sector, which is considered very vital in the economic life wire of the state. A recent development in this sector has been the increase involvement of NGOs and the microfinance institutions in the process of enhancing the development of informal sector.

Moreover, recent years have seen a growing push for transparency in microfinance. An important aspect of this trend has been the increasing use of financial and institutional indicators to measure the performance of microfinance institutions.

Historically, microfinance has been successful in reaching the population excluded from the classical financial system. In the 90?s, efforts have been concentrated towards financial and institutional sustainability of the microfinance institutions. Tools to evaluate financial performances have been developed, but the social performances were taken for granted.

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Analysis of microfinances' performance and development of informal institutions in Cameroon

By Djamaman Brice Gaétan

However, nowadays, donors and social investors ask the MFIs to justify the fundings: Who are the clients targeted? How can we combine social and financial objectives? How do we avoid mission drift? Some MFIs themselves have the intuition that reinforcing social performances can lead, on the mid run, to strengthen financial sustainability. Some initiatives have flourished, trying to identify few indicators that could be used to assess the social process followed by the MFIs.

In Cameroon, studies conducted on MFIs efficiency are rare. Monkam et al (2001), shown through the financial ratios that, IMFs are viable even the cost of money is expensive. However, Monkam?s study is focus on financial aspect to the detriment of social objectives. Likewise, Djeuda & Heidhues (2005) have done the growth stimulations of Cameroonian Mutual Growth by using Cobb - Douglas production function in the cost behaviour analysis. But their study is just based on structure growth, without seeking to know if credit grant toward the poor is effective. Therefore, we are based on this lack of research on social performance on MFIs to structure our argumentation. It is important to look at it because even though the government promotes informal sector through different institutions, microfinance institutions are not leaving any stone unturned to make sure that the acute poverty striking the poor population is redressed.

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