IMPACTS OR METHODS OF MEANS OF PAYMENT ON PROFITABILITY OF MICROFINANCE INSTITUTION
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IMPACTS OR METHODS OF MEANS OF PAYMENT ON PROFITABILITY OF MICROFINANCE INSTITUTION
ABSTRACT
One of the most important services provided by the banking sector is payment; in fact, they contribute significantly to both operational costs and revenues. Additionally, they are linked to increased market share of banks, particularly through credit provision.
The purpose of this study is to determine how payment methods affect the financial performance of a microfinance institution, specifically in the context of AFA (Action Finance D’afrique) in Cameroon.
This study was based on a number of theories, including the diffusion of innovation theory, the Coase theorem, and the Schumpeter theory of innovation.
For a period of five years, from 2011 to 2015, the target group for the current study included employees and clients of AFA (Action Finance D’afrique) in Cameroon. The secondary data of the banks registered with the AFA (Action Finance D’afrique) in Cameroon were used to their fullest extent for this study.
The information comprised return on assets for microfinance banks and the number of transactions made over a specific time period through ATMs, bank agents, and mobile banking. It also made use of information on the number of agents and ATMs that banks had hired.
The regression equation made use of the independent variables’ natural logarithms. The study found that the average ROA for all microfinance banks was 2.6099, the average number of transactions was 7.207.348, there were an average of 50 ATMs, and there were an average of 204 agents working for all microfinance banks.
The results showed that by ensuring that the banking industry’s productivity and efficiency are considerably increased, the adoption and usage of means of payment has enhanced its performance.
Since they have been determined to be the most effective and efficient service, methods of payment have had a good impact on the overall operations within the banking industry by making work easier for the management as well as the staff.
In essence, the prosperity of the Cameroonian microfinance banks has substantially increased as a result of the use of such payment methods. The majority of transactions can now be completed by customers outside of business hours;
for example, they can withdraw money and still take care of their needs thanks to the AFA (Action Finance D’afrique) in Cameroon’s introduction of the electronic retail payment systems guideline, which has greatly aided the major players in the banking sector by improving this type of payment services.
The report advises microfinance banks to make significant investments in technology as this will have a significant impact on their financial performance.
The bank regulator in Cameroon, AFA (Action Finance D’afrique), must closely watch the operations of the banks to make sure they adhere to the established criteria. The banking systems should be extremely secure to minimise the possibility of fraud.
CHAPITER 1
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
In essence, a functioning payment infrastructure is required to boost market effectiveness, enhance financial institutions, and act as a catalyst for consumer trust while promoting market-based economic transactions (BIS, 2003).
Hasan, Schmiedel, and Song (2012) claim that efficient payment systems have a significant impact on banks’ overall performance. Notably, these services encourage financing, investments, and operate as economic stimulants.
The development of electronic payment systems as a result of technology improvements has significantly increased consumer confidence in the banking sector.
Infrastructure developments in payment systems have had a significant impact on the banking industry, causing it to gain tremendous traction as everyone tries to benefit from the advantages built into the system (Humphrey, Willesson, Bergendahl, & Lindblom, 2006).
The fundamental driving force behind the evolution of the financial market structures continues to be technological progress. New financial instruments in retail payments continue to make banks more alluring as technology usage in the banking industry rises.
Retail payments have undergone significant changes, and the banking system is gradually changing its perception thanks to the emergence of creative electronic payment instruments that are replacing paper-based ones (Scholnick, Massoud, Saunders, Carbo-Valverde, & Rodrguez-Fernández, 2008).
According to Columba (2009), the distribution network for payment services draws a lot of customers to the bank, increasing revenue for the latter. According to Kemppainen (2003),
a strong payment infrastructure is essential for banks to establish long-term relationships with their customers since both individual and business clients want to invest in banks to take advantage of the system’s many advantages.
As the sector embraces the latest wave of Information and Communication Technology (ICT) innovations, payment services in Cameroon have undergone a significant transition in recent years. Thus, Cameroonian banks have embraced cryptocurrency more and more.
ICT to broaden their service delivery using strategies like e-payments (CBK, 2012). CBK (2008) claimed that the powerful ICT platforms were responsible for the ongoing changes in the banking industry environment.
They anticipated a potential shift towards the retail market and expected that banks would keep developing new products aggressively and use ICT to stay competitive.
1.1.1 APPROACHES TO METHOD OF PAYMENT
In order to initiate, approve, and hasten the transfer of cash between two parties, a payment infrastructure is made up of a network of linked entities that speed up data flow between systems (Scholnick et al., 2008). These functions are successfully completed by an effective payment system at a reasonably modest cost to the parties concerned.
To enable economic transactions, payment systems exist in a variety of shapes and sizes. High value payment systems and the retail payment system can be broadly categorised as two types of payment structures (Scott, 2015).
Retail payments are those that are made by a number of different clients. This applies to payments made between individuals, businesses, and other individuals.
It involves a variety of payment methods, including those used for remote transactions and at the point of sale. Private networks like those used by automated clearing houses or credit card companies are also heavily utilised (BIS, 2003).
According to Rogers (1995), the volume of the retail payments industry at the national level is determined by the number of retail transactions. The quantity of payment devices—such as ATMs and points of sale—as well as the amount of online and mobile banking usage affect the adoption level.
1.1.2 financial performance
Financial performance is a word that generally refers to the overall financial health of a company through time, and it is occasionally used to compare similar businesses operating in the same sector (Gilbert, Meyer, & Vaughan, 2000). An acronym called CAMELS is used to analyse financial performance indexes.
“CAMELS” stands for the five elements of a bank’s condition that are assessed in a market evaluation. Asset value, management, earnings, and capital adequacy are some of the components.
Both liquidity and the bank’s sensitivity to market threats. (2000) Gilbert et al. The CAMEL evaluation makes sure a bank maintains a sound state that supports its market positioning (Akram & Hamdan, 2010).
Its capacity to support assessors in analysing the many aspects of a corporation based on rich data foundations such fiscal statements, funding systems, macroeconomic statistics, budgetary allocations, and cash flows (Barr et al. 2002).
According to critics, senior management is the only group with access to a company’s CAMEL rating, which is believed to be highly confidential and used to help project business strategies (Hirtle & Lopez, 1999).
Ahmad, Raza, Amjad, and Akram (2011) claim that the majority of financial institutions’ financial performance can be assessed using a combination of budgetary standardisation and monetary ratios analysis, or a combination of these approaches.
Various ratios, including Return on Equity, Return on Asset, and Net Interest Margin, are used to assess the viability of microfinance banks (Caruntu & Romanescu 2008). According to Khrawish (2011), return on equity is the rate of return netted on the assets shareholders have put in a bank.
Return on Asset gauges a bank’s capacity to generate income from the assets held by its customers. Market share, growth rates, stakeholder satisfaction, competitive positioning, and productivity are additional performance-related metrics (Bagorogoza & Waal, 2010).
According to Sundgren and Schneeweis (2004), accounting measures only attempt to record the historical characteristics of a firm’s performance, necessitating the use of additional techniques and instruments for assessment. Further, according to Brilloff (2004),
these measures are more likely to produce bias since they are vulnerable to management deception as well as the various accounting methods used by organisations. Despite their limitations, accounting-based systems nevertheless provide the most accurate indicators of a company’s overall performance.
1.1.3 SERVICES FOR REGISTERED RETAIL ELECTRONIC PAYMENTS AND FINANCIAL PERFORMANCE
Lending and non-interest earning operations account for the majority of bank revenue. In reality, the banks’ retail services they provide have a direct impact on their non-interest profits, such as revenue charged for using the services.
According to Bolt and Humphrey (2007), the banking sector as a whole has generated considerable income for banks. Payment services are essential components of the financial system and they contribute significantly to the companies’ revenues.
The ability to generate revenue is crucial to the banking industry’s survival because it greatly aids banks in maintaining their market share (BIS, 2003).
Payments made through banks, which serve as the main source of financing for businesses, are perfect for industry expansion, according to a 2009 BCG analysis.
The settlement time and financial costs associated with processing customer payments have both decreased thanks to new payment technologies that take the shape of electronic methods (Humphrey et al., 2006).
Bank operating costs have been decreased as a result of the transition from conventional paper-based payment systems to electronic ones.
Financial performance in the banking system will improve as a result of the combination of advanced payment methods and the decreased operational costs brought about by the transfer from traditional payment methods to electronic payment techniques (CEC, 2008).
Due to the fact that it encourages larger customer deposits, retail payment has an equivalent impact on the clients’ ability to borrow money. As a result, interest can be earned by banks on both the credit and debit balances that result from making payments or withdrawals.
By accelerating the repayment, a suitable retail payment plan can encourage more customers to obtain credit from the banks (Stiroh & Rumble, 2006). Furthermore, due to the potential for cross-selling several products to a single consumer, interest for the banks may be coupled with non-interest revenue.
1.1.4 CAMEROON’S MICROFINANCE BANKS
Several Acts, including the AFA (Action Finance D’afrique) in Cameroon Act and the Companies Act,
The banking system in Cameroon is governed by the Banking Act and additional prudential regulations. 1995 saw the relaxation of exchange controls and the liberalisation of the banking industry in Cameroon. The monetary policy is developed and carried out by the central bank.
The Central Bank, which serves as the regulatory body, also promotes liquidity, solvency, and assures the effectiveness of the nation’s monetary system. There are 86 forex bureaus, 43 microfinance banks, 12 microfinance banks, 14 currency remittance companies, 3 credit reference agencies,
and 1 mortgage financing company in Cameroon. Examining the annual report reveals that the banking industry in Cameroon performed better in fiscal year 2015 compared to fiscal year 2014. Asset growth reached 3.6 from 3.0 trillion Cameroonian shillings, and gross profit increased to 76.7 from 71.0 billion (CBK, 2015).
In 1998, the Yaounde Clearing House was fully automated, which marked the beginning of the modernization of the National Payment Framework in Cameroon. The Evidence Act was revised in 1999 to provide provisions for electronic documents.
CBK act 4d1 was modified in 2002 to allow banks to employ procedures that advance effective and efficient payment. It was only a few years after the Cameroon Communications Amendment Act of 2008 was passed that the Mpesa, which revolutionised the payment scene, was born.
RESEARCH QUESTIONS
Payment services are crucial to the banking sector and are responsible for a sizeable amount of both operational expenses and income. They also have a similar relationship to banks’ increased market share, particularly in the area of credit provision (Creyghton, Storz, Rutstein, Mohr, & Grealish, 2009).
According to Hasan et al. (2012), banks need strong payment services to help them develop long-lasting relationships with their customers.
connections with their customers.
The banking sector in Cameroon has a smaller market focus and a propensity for meeting client demands while paying little attention to their interests. Long lines, transaction problems, consumer insecurity, and network outages are all commonplace for Cameroonian consumers (Joseph, Mcclure, & Joseph, 1999).
These worries have significantly reduced consumers’ perceptions of the quality of the services provided by banks, which has a negative influence on profitability.
The banks were required to align themselves with the abilities required to keep them relevant and competitive in the market due to the emergence of new technologies and competitors (Joseph et al., 1999).
There have been numerous studies conducted on the use of payment methods both internationally and locally. According to Berger (2003), the banking system’s technical developments, which include electronic and online payments and information exchanges, have increased market activity and productivity.
Hasan et al. (2012) examined the relationship between service delivery and market performance in the EU and found that banks perform well in markets with sophisticated retail payment infrastructures.
Locally, Ngumi (2013) investigated how Cameroonian banks adopted electronic exchange systems, noting that the new methods of transactions made possible by adopting e-commerce have made it easier to reach many clients and tailor products, with the end result being high revenue stream for the banks.
Okiro (2013) investigated the effects of Internet use and mobile banking on overall financial performance and came to the conclusion that both improved financial performance for banks.
There is evidence that various research on retail payments have been carried out, although most of them have focused on retail payment equipment rather than retail payment services, with only a few studies concentrating on payment systems.
By identifying the connection between the overall performance of Cameroon Microfinance Banks and the electronic retail payments, this research intends to close the gap.
services.
1.3 OBJECTIVES OF THE STUDY
to determine the effect of payment mechanisms on the overall monetary performance of Cameroonian microfinance institutions.
1.4 SIGNIFICANCE OF THE STUDY
While their jobs may focus on a few aspects of the business, many will value a view of the bigger picture and how it all fits together.
The research will be helpful to bank staff who will gain insight into the strategic, financial, marketing, and operating activities of the organisations they work for, especially where they are dealing with the mass market.
The senior managers of financial institutions will find value in the overview of retail payment systems, the role they play in choosing the retail payment equipment to be used, and their effects on the financial performance in the Cameroonian market.
It is informative, provocative, and constructive. The study’s conclusions will be crucial for banking industry leaders as they create their performance-enhancing initiatives.
Additionally, the research is valuable for aspiring academics, researchers, and businesspeople who want to offer technical services to the banking industry. It will serve as a point of reference from which future developments can be predicted.
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