Impacts or Methods of Means of Payment on Profitability of Microfinance Institution Case in Afa (Action Finance D’afrique)
Chapter On
Research Objective
To ascertain the impact of methods of means of payment on the overall financial performance of Microfinance Banks in Cameroon.
CHAPTER TWO
LITERATURE REVIEW
Introduction
The section derives its foundation from the research problems and presents literature as presented by other researchers and scholars as is relevant for this study. It specifically presents the theories on which the study is anchored, empirical review and chapter summary.
Theoretical Framework
According to Trochim (2006), theoretical frameworks are necessary in studies because they guide research, and helps in determining the variables and the statistical relationships that permeate the focus of a study. The researcher is directed by theoretical literature to clearly view the variables of the study as well as providing the direction for examining the data, and assists in choosing the appropriate research design. The theories evaluated in the research included the Coase theorem, Schumpeter theory of innovation, and diffusion of Innovation theory.
Schumpeter’s Theory of Innovation
Schumpeter (1954) asserts that, entrepreneurs create an opportunity for new profits with their innovations. New products that enter the market due to innovation decrease the demand of the older ones, lower their cost, and ultimately displace them. The theory contends that whenever entrepreneurs innovate and become prosperous; competitors in the market promptly imitate and adopt the characteristics so as to benefit from the super normal profits thus reducing the profit margin. However, before the supply equates demand a new innovation emerges to begin the business cycle over again. With invention on one hand, innovation and entrepreneurship on the other, he argues that entrepreneurs seek out the activities which generate the values that expand and transform the cyclical flow of income as well. Schumpeterian competition creates imitators who emulates their competitors as well as steers the innovation, thus encouraging investment, and leading to a boom. Porter (1992) supports this theory and argues that improvement is important for a nation’s long-run competitive advantage and economic growth as well. However, critics like Solow (2007) criticized the Schumpeterian theory of innovation as the leading endeavour to capture a complete socioeconomic arrangement in a few grand simplifications.
In the context of retail payments services, innovative payment systems will profit society greatly. As Berger (2003) notes, these systems are beneficial because of their capacity to lower costs and facilitate transactions. The prospective ease of money transfers will increase the purchasing power and expand the market substantially.
Coase Theorem
The analysis of the economics and regulation of the methods of means of payment requires a consistent framework within which the costs and paybacks of different retail payment instruments, and the costs and benefits of regulations imposed on them, can be evaluated. The theorem postulates that private transactors, in the absence of transaction costs and acting in their best self-interest, tend to reach transactions and asset distribution that maximise their combined private welfare. One of the central ideas derived from the Coasian reasoning is that transaction cost includes the direct cost of performing a transaction and costs arising from the asymmetry of knowledge between the transacting parties (Coase, 1960). Critics say that the Coase theorem is instructive; it assumes that costless trading promotes adeptness in the market (Ellickson, 1991).
In the context of the retail payment services, the two classes of costs i.e. the direct costs and the information asymmetry costs, are manifested in various ways. Direct costs of retail payment instruments to transacting parties include the cost of creating the physical payment instruments and information asymmetry costs (Coase, 1960). According to Singh and Zandi (2010), eliminating the frictions and costs in industry would guarantee an efficient payment infrastructure that readily induces trade transactions.
Diffusion of Innovation Theory
Rodgers (1995) brought up the Diffusion of Innovation Theory to document how the society receives, spread as well as adopt new ideas. This theory primarily explains how communication channels as well as the opinion leaders usually shape the data adoption processes. The originator of this theory proposed a raft of issues including the first process and five-stage models of implementing and adopting innovative ventures in organisations. These are compatibility, relative advantage, complexity, and observability as well as trial ability. Moore and Benbasat (1991) utilised this theory in their work to measure the numerous perceptions inherent in the adoption of information technology (IT) tools. One of the perceived strengths of DOI is that it perfectly documents the conditions in which people willingly decide to adopt a new system (Gallivan, 2001). However, critics of this model contend that it was forwarded for a more general course, as it derives its foundation from voluntarily adopted decisions that may not necessarily capture the art (Fichman, 1997).
In the context of the methods of means of payment, the theory seeks to upsurge the availability of payment means, ease transactions, and augment efficiency in payments processing. According to Columba (2009), empirical studies show a reduction in the cost of transaction owing to massive distribution of electronic money transfer systems such as ATMs and POS.
Determinants of Financial Performance
The causes of profitability within the banking system are either the internal or the external factors. According to Zimmerman (1996), the internal factors of profitability in the banking system are influenced by the management policy and the decisions made internally. The external determinants on the other hand consist of those events exterior the bank’s establishment which are not influenced by internal decisions (Datta, 2012).
According to Karlyn (1984), capital adequacy relates to capital-deposit and the primary risk is vested on depository withdrawals. Arguably, this ratio denotes the book value of capital investment attached to bank. Notably, the 1993 Basel treaty enshrined capital ratio to risk adjustment mechanisms. The accord holds that capital must exceed or be equal to about four percent of the risk weighted on assets.
Grier (2007) asserts that credit risk is amongst the determinants of the welfare of the microfinance bank. As the market feature, credit risk depends on the quality of the assets and has the direct impact on the operations of microfinance bank. Despite Loan portfolios being the most significant asset for the banks, the greatest risks faced by the banks are of non-performing loans (NPL). According to Frost (2004) the asset worth indicators highlight the use of the non-performing loans ratios as well as bad loans provisions made.
CHAPTER THREE
RESEARCH METHODOLOGY
Introduction
The present chapter details the collection of data, processing of data as well as its analysis methods. The chapter also discusses the instruments to data collection instruments as well as the procedures and the study sample and target population. According to Zikmund, Babin, Carr, and Griffin (2010)’s affirmations, research methodology must have the capacity to explain the technical procedures to enhance concept and understanding of the project. The paper achieves its objectives by addressing the sample designs, data collected and analysed in the process. Duttweiler (2009) notes that research methodology passes out as a general principle that offer itself as a guide for the research.
Research Design
According to Dawson (2002), the tenacity of this chapter is relevant since it is the central to describing and justifying the chosen methodology as well as the methods of research. Polit and Beck (2003) designate research design as a necessary tool owing to its ability to document the overall plan for tracking down answers to the concerns being examined. The ability of the research design to handle certain difficulties encountered in the research process makes it a necessary aspect of any study. Lavrakas (2008) labels the descriptive survey scheme as the methodical research technique for data collection. It utilises instruments such as open-ended or closed-ended questions, interviews, and observations. Descriptive design was used to measure, analyse, compare and interpret data to understand the impacts of methods of means of payment on microfinance banks in Cameroon.
Target Population
Kothari (2004) designates a population in terms of all the items used in a study as its constituents or ingredients. However, Polit and Beck (2003) asserts that the population consists of the aggregate of the individuals or entities to which the research is made. The target population for the present study comprised of the all the forty-three microfinance banks for a certain time of about five years between two thousand and eleven and two thousand and fifteen.
CHAPTER FOUR
DATA ANALYSIS, RESULTS AND DISCUSSION
Introduction
This chapter, data analysis, results, and discussion, presents data analysis and interpretation. The objective of the research was to determine the impact of methods of means of payment on the financial performance of Microfinance Banks in Cameroon. The data was collected from all the banks. The data sources included financial statements, annual statements for a period of 5 years (2011-2015) as well as other publications. The data collected was for 42 banks with the exclusion of charter house bank. The data for 2015 additionally ommitted imperial and Chase bank. Data was collected based on the variables of the study, that is Financial performance depicted by Return on Assets; total number of transactions in an year; number of ATMS in an year as well as number of agents implemented in an year.
CHAPTER FIVE
SUMMARY, CONCLUSION, AND RECOMMENDATIONS
Introduction
This chapter puts into fore the summary of the data findings on the impact of methods of means of payment on the Microfinance Banks’ financial performance in Cameroon, and the conclusions and recommendations are obtained from the findings as well. Therefore, the chapter is organised into summary of findings, conclusions, recommendations, limitations and, finally, part/area for further research.
Summary of Findings
The research found out that a steady rise in ROA values from 2011 indicates that the bank’s financial performance has been very good over the last 5 years in Cameroonian. A number of transactions done via electronic retail payment systems were found to have a significant impact on the microfinance banks’ financial performance. A noteworthy positive relationship between electronic retail payment systems and microfinance banks’ financial performance was also established by the study.
The research also disclosed a vital positive connection between financial performance and the number of ATMs. ATMs were found to have enhanced bank profitability and incomes, as they offer services at minimal charges at the various outlets, thus making it accessible as a platform for banking institutions to provide their services.
The study as well established a remarkable positive association between number of agents and financial performance. Moreover, the study discovered that agents give faster transaction rates as the effects of time delay and distance are removed. Therefore, there exists more productivity per period. Furthermore, with the various agents offering services to the customer population as one system, there exist a simulated division of labour among banks together with their associated positive impacts on performance among the several outlets.
The study additionally found that there is interrelationship in the various electronic retail payment systems in the banking industry such a change in one electronic retail payment service affect the other. From the study, it was evident that financial performance increased with increase in number of number of transactions in a year; Number of ATMs in a year as well as number of agents networks implemented in a year.
Conclusion
The following deductions have made from the summary of the key findings:
The use of methods of means of payment has improved Cameroonian banking industry; it has made it more effective and productive. In addition, methods of means of payment have a positive relationship largely on the performance banking institutions, as it make performance of workers more efficient and effective; the adoption of methods of means of payment has boosted the fortune microfinance banks in Cameroon. For instance, customers can use m-banking options to access their accounts outside the normal working hours to make deposits and withdrawals in order to attend to their needs; the electronic retail payment systems guidelines that the CBK introduced help strongly in effective methods of means of payment. With no regulation on a specific banking hall, customers can make withdrawals anywhere, at any time while using any bank ATM machine, clients cannot surpass a certain amount while making withdrawals to allow other customers have access to funds and cash, and can as well use the electronic means to transfer money from one place to another.
The ability to offer banking services in the 24 hours in a day via the use of electronic retail payment systems has enhanced the bank client relationship; they render effective services. From the study’s literature, there was a positive anticipation of the relationship between methods of means of payment adoption and the financial performance of the banks. The results of this study is consistent with the literature of the study as it was found out that 74.9% changes in the bank’s financial performance was as a result of implementation of methods of means of payment in the form of ATMs and Agents, , as well as the number of transactions effected through the services.
The introduction of methods of means of payment has revolutionized and redefined the means through which bank operations are carried out. Methods of means of payment are deemed as the chief reason for the banks’ success as well as their fundamental proficiencies. In conclusion, the methods of means of payment has improved the performance of the banking industry by making banking transaction easier – it has brought services closer to its customers. Therefore, it is indispensable to argue that the various banking parameters of performance and profitability have meaningfully improved in the high technology induction age. From the foregoing analysis, the winners emerging would be fully technology-oriented banks.
Recommendations
Based on the finding there is need for various players in the banking sectors to adopt methods of means of payment as this will enable them have a wide coverage, flexibility, and greater accessibility compared to conventional banking. Microfinance banks, therefore, need to invest heavily in technology, as this will highly have a bearing on the microfinance banks’ financial performance. The AFA (Action Finance D’afrique) in Cameroon, which is the regulator of the banks, also needs to monitor keenly the banks operations to ensure they are as par the set standards. The banks systems should be very secure to reduce chances of fraud occurring.
Profitability is also crucial to shareholders and the market is as well paying attention on the profitability of establishments. In this approach, any responsible and ethical effort to enhance profitability of a company will receive heartfelt appreciation from the shareholders. In retrospect, microfinance banks, therefore, ought to continue adopting new technologies to help in improving their margins, hence their profitability in order to attract more investors.
Limitations of the Study
The research used secondary data, which can be common as well as imprecise, and may not actually assist businesses in making decisions on current issues due to its historic nature. The researcher ensured that the data source had to be checked properly and multiple sources used to ensure consistency.
The study encountered the challenge of privacy with regard to disclosure of information on banks as only a few disclosures are given in financial statements to comply with statutory requirements. The management is hesitant when it comes to exposing information which it considered as a top secret to the public. The researcher surmounted the challenge using alternative bodies that is the regulator and Cameroon Bureau of Statistics to obtain the required data.
Lastly, results obtained from the study are not final in themselves as the study centred on three determinants of financial performance. In addition, data availability envisages the study elements and not any probabilistic or statistical standard. For that reason, care ought to be applied in generalizing the outcomes of the research.
Suggestions for Further Research
Future studies ought to look at the determinants of methods of means of payment on the service quality, as the banking industry should be well acquainted with these determinants and variables to enhance their competitive advantage through use of methods of means of payment that will eventually improve the banks performance.
Further studies can be done on the Impact of Cameroon Interbank Switch (Pesalink) on the performance of microfinance banks in Cameroon. The industry not only perceives that implementation of the Switch will reduce infrastructure costs for the individual banks as it will allow interoperability but also enable the banks regain the market share that was lost to the Mobile Network Operators.
Studies can also be done on the effects of methods of means of payment to risk profile of banks. With increased incidences of online frauds, banks continue to incur huge losses.
REFERENCES
- Agboola, A. (2006). Information and communication technology (ICT) in banking operations in Nigeria: An evaluation of recent experiences. African Journal of Public Administration and Management 18 (2).
- Ahmad, H. K., Raza, A., Amjad, W., & Akram, M. (2001). The role of knowledge measurement in creating and sustaining high performance organizations. Interdisciplinary Journal of Contemporary Research in Business, 78(2), 732-744.
- Al-Smadi, M. O., & Al-Wabel, S. (2011). The Impact of E- Banking on The Performance of Jordanian Banks. Journal of Internet banking and commerce vol. 16 (2)
- Arnaboldi, F.,&Claeys, S.(2008). Financial Innovation in Internet Banking: A Comparative Analysis. Journal of Technology, 10, 233-234
- Bagorogoza, J., & Waal, A. D. (2010). The role of knowledge measurement in creating and sustaining high performance organizations: The case of financial institutions in Uganda. World Journal of Entrepreneurship Management and Sustainable Development, 6(4), 307-323.
- Barr, R. S., Killgo, K. A., Siems, T. F., & Zimmel, S. (2002). Evaluating the productive efficiency and performance of US microfinance banks. Managerial Finance, 28(8), 3-25.
- Berger, A. N. (2003). The economic effects of technological progress: Evidence from the banking industry. Journal of Money Credit and Banking, 35(2), 141-76.
- Bichanga, W.O., & Wario, Y.A. (2014) Effects of E-Banking on Growth of Customer Base in Cameroonian Banks. International Journal of Research in Management &
- Business Studies, 1(1), 4-10.
- BIS. (2003). Policy issues for central banks in retail payments: Report of the Working Group on Retail Payment Systems, Committee on Payment and Settlement Systems, Bank for International Settlements, Basel.
- Bolt, W.,& Humphrey, D. (2007). Payment Network Scale Economies, SEPA, and Cash
- Replacement. Review of Network Economics, 6(4).
- Brilloff, M. (2004). Accounting measures (4th ed.). New York: Southwestern Publisher.
- Capgemini and European Commission. (2008). SEPA: Potential benefits at stake –
