AN ASSESSMENT OF THE IMPACT OF CREDIT MANAGEMENT ON ORGANIZATIONAL FINANCIAL PERFORMANCE IN CAMEROON

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Managing credit is crucial for mitigating the risks inherent in credit sales. The objective of credit management is to address both financial and political risks associated with extending credit. The credit management policy encompasses frameworks, directives, and principles serving as a guide for credit department personnel in disbursing loans and overseeing overall credit collection. Edwards (2018) posits that credit is synonymous with trust, which must be grounded in knowledge to hold significance. Thus, credit management involves the acquisition, analysis, and informed decision-making based on such knowledge. Similarly, it refers to the process of controlling and monitoring the credit extended to customers or clients. According to Sallufah (2021) it involves assessing the creditworthiness of potential borrowers, setting credit limits, establishing terms of payment, and ensuring timely collection of payments.

Moreover, reducing the vulnerabilities linked with non-performing loans necessitates companies to gain a deeper understanding of clients' economic capabilities, credit history, and repayment patterns. Expanding into new markets and attracting more clients hinges on the ability to swiftly and accurately make well-informed credit decisions and establish appropriate credit limits. It's evident that the primary function of financial institutions is to offer loan facilities to deserving clients within their jurisdiction. However, these organizations operate with profit motives, primarily through loan disbursement and investment in other assets. Consequently, providing loans and advances to individuals and businesses is integral to financial institutions' core operations, as it aligns with their business objectives. Crafting an optimal credit policy presents a challenge due to the complex amalgamation of various policy variables. 

Institutions may experiment with adjusting certain variables over time to gauge their impact. Economic conditions significantly influence a firm's lending practices, and as such, the guidelines for credit management may evolve alongside economic changes. The success of extending credit relies on the methodology employed to assess and approve credit, emphasizing thorough evaluation of lending risks and borrower characteristics.

Financial organization plays a crucial role in providing financial services to impoverished individuals who lack access to traditional banking services.  However, Microcredit provision falls under financial activities regulated by applicable laws. Despite economic challenges, the Cameroonian financial sector maintained stability and bolstered its capital adequacy in 2015, attributed to robust financial legislation and compliance measures.  Furthermore, Haneef et al. (2018) argues that financial institutions face a multitude of risks, such as diminishing capital adequacy ratios, heightened insolvency levels, and increased non-performing loans, as they pursue their business goals. These risks are exacerbated in the competitive landscape of microfinance institutions, where acquiring clients is essential for sustaining profitability and enhancing financial viability.

The failure of many finance institutions (FIs) to effectively manage these risks not only impacts profitability by converting earnings into bad debts but also leads to elevated interest rates and economic slowdown, ultimately impeding the achievement of strategic business objectives (Haneef et al., 2018).

Mwangi (2019) argues that financial institutions employ credit risk management strategies to oversee lending activities. This involves implementing robust credit mechanisms and procedures, encompassing credit assessment, staff training, and establishing credit standards and terms to mitigate potential losses and enhance financial performance. Despite efforts to address inadequate credit risk management practices, financial organization continue to struggle with challenges stemming from escalating non-performing loans, weak capital adequacy ratios, and heightened insolvency risks. Therefore, a survey will be conducted to assess the impact of credit management on organizational financial performance in Cameroon 

1.2 Statement of the Problem

Despite the considerable efforts made by financial institutions in Cameroon, the presence of nonperforming loans continues to pose a credit risk to their loan portfolios. Moreover, there is occasional confusion among the credit experts within these banks, as their roles sometimes overlap, making it difficult to pinpoint which type of risk to prioritize. This confusion is compounded by the existence of various other risks such as interest rate fluctuations, market volatility, liquidity challenges, currency fluctuations, and operational uncertainties. Furthermore, the asymmetry of information between borrowers and lenders has led credit experts to lean towards financing projects with questionable viability rather than those with higher prospects of success. Hence, it is in the light of these that the study seeks to assess the impact of credit management on organizational financial performance in Cameroon 

1.3  Objectives of the Study

The main purpose of this study is to assess the impact of credit management on organizational financial performance in Cameroon . Specifically, the study will;

1.Examine the current credit management practices employed by organizations in Cameroon.

2.Investigate the relationship between credit management practices and organizational financial performance.

3.Investigate factors influencing credit management effectiveness in organizations.

4.Assess the impact of credit management on organizational financial performance in Cameroon

1.4 Research Questions

The following questions have been prepared for the study:

What are the prevailing credit management practices adopted by organizations in Cameroon?

How does credit management practice correlate with organizational financial performance?

What factors play a significant role in determining the effectiveness of credit management within organizations?

How does credit management impact the financial performance of organizations in Cameroon?

1.5  Research Hypothesis

H0: There is no significant impact of credit management on organizational financial performance in Cameroon .

Ha: There is a significant impact of credit management on organizational financial performance in Cameroon .

1.6  Significance of the Study 

The results will aid loan experts in understanding the effects of credit risk management better, enabling them to enhance the efficacy of their strategies to reduce the incidence of non-performing loans that undermine profitability. However, this study holds significant value in comprehending the impact of robust credit risk management and guiding officials in crafting more effective policies to manage credit default risk. As for customers, this research will provide insight into the diverse tools utilized by banks to evaluate loan applications and empower them to make informed decisions. Further more, subsequent researchers will use it as a literature review. This means that other students who may decide to conduct studies in this area will have the opportunity to use this study as available literature that can be subjected to critical review. Invariably, the result of the study contributes immensely to the body of academic knowledge with regard to the the impact of credit management on organizational financial performance in Cameroon 

1.7 Scope of the study

The scope of this study is boarded on the impact of credit management on organizational financial performance in Cameroon. Empirically, this study will examine the current credit management practices employed by organizations in Cameroon, investigate the relationship between credit management practices and organizational financial performance, investigate factors influencing credit management effectiveness in organizations and assess the impact of credit management on organizational financial performance in Cameroon.

Geographically, the study will be delimited to employees of some financial institutions in Douala, Cameroon.

1.8 Limitation of the study

In the course of carrying out this study, the researcher experienced some constraints, which included time constraints, financial constraints, language barriers, and the attitude of the respondents. In addition, there was the element of researcher bias. Here, the researcher possessed some biases that may have been reflected in the way the data was collected, the type of people interviewed or sampled, and how the data gathered was interpreted thereafter. The potential for all this to influence the findings and conclusions could not be downplayed. 

More so, the findings of this study are limited to the sample population in the study area, hence they may not be suitable for use in comparison to other schools, local governments, states, and other countries in the world.

 1.9 Definition of Terms

Credit Management: this is the process of controlling and monitoring the credit extended to customers or clients. It involves assessing the creditworthiness of potential borrowers, setting credit limits, establishing terms of payment, and ensuring timely collection of payments.

Organization: refers to various entities such as businesses, non-profit organizations, governmental bodies, or even informal groups.

Financial performance: involves analyzing various financial metrics such as revenue, profitability, liquidity, solvency, efficiency, and growth over a specific period.