ABSTRACT
Payment is one of the most essential services carried out within the banking industry, essentially, they account for a significant portion that pertains the operational costs and revenues. Besides, they are equally related to an augmented market share of banks, especially through credit provision. The goal/objective of this research is to establish the effect of methods of means of payment on the financial performance of Microfinance Bank, a case in AFA (Action Finance D’afrique) in Cameroon. This research was carried out based on various theories, which entails the Schumpeter theory of innovation, Coase theorem and diffusion of Innovation theory. The target population for the present study comprised of staff and customers of AFA (Action Finance D’afrique) in Cameroon for a time of five years from 2011 to 2015. This study maximised on the secondary data of the banks as registered with the AFA (Action Finance D’afrique) in Cameroon. The data included return on assets for microfinance banks and the volume of transactions done through ATMs, Bank Agents and mobile banking over a given period. It also utilised the data on the number of as ATMs and Agents recruited by banks. The natural logs of the independent variables were used in the regression equation. The study revealed that the average ROA for all microfinance banks was 2.6099, the average number of transactions for all microfinance banks was 7, 207,348, the average number of ATMs for all microfinance banks was 50, while the average number of number of agents for all microfinance banks was 204 agents. The findings established that the adoption/use of methods of means of payment has improved the performance in the banking industry through ensuring its productivity and efficiency is greatly improved. Methods of means of payment have brought about a positive effect on the overall operations within the banking industry through making work easier for the management as well as the employees since it has been found to be the most effective and efficient service. Essentially, the adoption of such methods of means of payment has greatly improved the prosperity of the Cameroonian microfinance banks. Indeed, the clients can now carry out most of the transactions outside the working hours, for instance, they can make withdrawals and still attend to their needs; the AFA (Action Finance D’afrique) in Cameroon introduced the electronic retail payment systems guideline, which has intensely assisted the key players within the banking industry by making this type of payment services more effective. The study recommends that microfinance banks need to invest heavily in technology as this will highly affect their 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.
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
Essentially, an operational payment infrastructure is necessary in enhancing market efficiency to strengthen the financial systems and act as a stimulant to consumer confidence while facilitating economic interactions in the market (BIS, 2003). According to Hasan, Schmiedel, and Song (2012), effective payment services bear a substantial effect on the performance of banks generally. Notably, such services favour-lending, investments, and acts as stimulants to the economy. Particularly, the technological advancements that have given birth to the electronic payment services have greatly boosted consumer confidence in the banking system. Infrastructural changes in the payment systems have brought about significance changes within the banking sector such as gaining of the massive traction around it as everyone angles to partake of the benefits inherent in the system (Humphrey, Willesson, Bergendahl, & Lindblom, 2006).
Technological advancements remain the greatest traction behind the evolution in the financial market structures. With increased consumption of technology in the banking sector, new financial instruments in the retail payments continue to make banks more attractive. Major developments have taken over the retail payments, and through the emergence of innovative electronic payments instruments that are gradually replacing the paper based instruments, the banking system progressively changes its image (Scholnick, Massoud, Saunders, Carbo-Valverde, & Rodríguez-Fernández, 2008). Columba (2009) asserts that the distribution network for payment services attract many people to the bank, hence increasing revenue for the bank. Kemppainen (2003) contends that effective payment infrastructure is crucial in assisting banks to institute long-term connections with their clients, as both private and corporate consumers seek to invest in the banks to tap into the tremendous benefits attached to the system.
In recent years, the payment services in Cameroon have witnessed massive transformation as the industry partakes of the new wave in the Information and Communication Technology (ICT) advancements. The banks in Cameroonian have, thus increasingly embraced
ICT to expand their service provision through models such as the e-payments (CBK, 2012). According to CBK (2008), the banking business environment was continuously changing due to the robust ICT platforms. They predicted a possible down streaming to retail market and that banks will continue to design aggressively new products that leverage on ICT to remain competitive.
1.1.1 Methods of means of payment
A payment infrastructure consists of a network of interrelated entities that accelerate data exchange between systems to initiate, sanction, and expedite cash transfer between two parties (Scholnick et al., 2008). An efficient payment system accomplishes these tasks at a relatively low cost to the parties involved. Payment systems come in various forms, as driven by the needs of clients, to facilitate economic transactions. Payment structure can broadly be put into two categories: high value payment systems and the retail payment system (Scott, 2015).
Retail payments are transactions made by several of individual clients. This covers business to business, individual to business and person-to-person payments. It involves a wide range of payment instruments, including point-of-sale payment instruments and those used for remote transactions. It also makes extensive use of private networks, such as automated clearing houses or credit card companies (BIS, 2003).
According Rogers (1995), retail payment intensity is measured using the number of retail transactions to show volume of country level of retail payments business. The number of payment equipments such as ATM (Automated Teller Machine), POS (Point of Sale), and level of usage of both internet and mobile banking determine the level of adoption.
1.1.2 Financial Performance
As a term, financial performance is viewed in general to mean the overall financial health of a firm usually over a period, and is sometimes used in comparing similar firms within the same industry (Gilbert, Meyer, & Vaughan, 2000). Financial performance indices are viewed under the lenses of an acronym known as CAMELS. “CAMELS” denotes the five components of the condition of a bank that are evaluated to in a market assessment. The components include Capital Adequacy, Asset value, Management, Earnings, and
Liquidity as well as the Sensitivity of the bank to the market risks. (Gilbert et al., 2000). The CAMEL assessment ensures a bank stays within a healthy condition that sanctions its positioning in the market (Akram & Hamdan, 2010). Particularly, its ability to help assessors in reviewing the different facets of a firm based on rich data foundations such as fiscal statement, funding mechanisms, macroeconomic statistics, budgetary allocations, and cash flows (Barr et al. 2002). Critics hold that the CAMEL rating of a firm is highly confidential, entrusted only to senior management to help in projecting the corporate strategies (Hirtle & Lopez, 1999).
According to Ahmad, Raza, Amjad, and Akram (2011), financial performance in the majority of financial institutions can be evaluated through a combination of monetary ratios examination, budgetary standardisation or a blend of these methodologies.
Measuring the viability of microfinance banks points at various ratios such as Return on Equity, Return on Asset and Net Interest Margin (Caruntu & Romanescu 2008). Khrawish (2011) explains that Return on Equity signifies the rate of return netted on the assets invested in a bank by its shareholders. Return on Asset measures the aptitude of a bank to create income through the clients’ assets in their hands. Other factors for measuring performance include market share, growth scales, stakeholder satisfaction, competitive positioning, as well as the productivity (Bagorogoza & Waal, 2010).
Sundgren and Schneeweis (2004) hold that accounting measures only seek to capture the historical aspects of a firm’s performance, hence the need to employ more infinite tools and instruments for evaluation. Brilloff (2004) goes further to suggest that these measures have greater likelihood of generating bias since they are codified to managerial manipulation as well as the differences in accounting techniques adopted by firms. Despite the precincts of accounting based processes, they nonetheless offer the best indications for a firm’s overall performance.
1.1.3 Retail Electronic Payments Services and Financial Performance
Income for banks arises largely from non-interest activities and lending. In practice, the retail services rendered by the banks directly impact their non-interest incomes, for instance revenue charged on paying for services. Bolt and Humphrey (2007) note that banks have experienced large revenues from various activities within the banking system. Payment services are necessary aspects of the banking system and they account for a significant portion of the revenues earned by the firms. Revenue earning is backbone of banking business as it significantly helps banks to increase their market share to remain competitive (BIS, 2003). According to BCG report (2009), payments through the banks are ideal for growth of the sector since they form the bedrock of capital for the firms.
New payment technologies that take the form of electronic methods have not only reduced the settlement time but also the financial costs of processing client payments (Humphrey et al., 2006). The shift from the traditional paper based payment systems to electronic methods has substantially reduced the cost of operations for banks. The combination of the sophisticated payment methods and the reduced cost of operations attributed to the shift focus from the traditional payment methods to electronic payments techniques will positively impact the financial performance in the banking system (CEC,
2008).
Retail payment equally impacts lending capacity of the clients because it attracts more deposits from the clients. Consequently, banks can earn interest on both the credit and the debit balances as well, which arise from making payments or withdrawals. A befitting retail payment scheme can attract more clients to borrow from the banks by expediting the refund (Stiroh & Rumble, 2006). Furthermore, interest for the banks may be linked with non-interest revenue due to the potential in cross selling various products to a single customer.
1.1.4 Microfinance Banks in Cameroon
Various Acts such as the Companies Act as well as the AFA (Action Finance D’afrique) in Cameroon Act,
Banking Act as well as other prudential guidelines govern the banking system in Cameroon. Liberalisation for the Cameroonian banking sector took place in 1995, which witnessed the lifting of exchange controls. The Central Bank formulates and implements the monetary policy. As the regulatory authority, the Central Bank also fosters liquidity, solvency and ensures the efficacy of the monetary system in the country. In Cameroonian, there are 86 forex bureaus, 43 microfinance banks, 14 currency remittance providers, 12 microfinance banks, 3 credit reference agencies and 1 mortgage finance establishment. Review of the annual report shows that the Banking Sector in Cameroon performance improved for the fiscal year 2015 as compared to 2014. Asset increment stood at 3.6 from 3.0 trillion Cameroon shillings while the Gross Profit rose to 76.7 from 71.0 billion Cameroon shillings (CBK, 2015).
The modernisation of the National Payment Framework in Cameroon began in 1998 with the full automation of the Yaounde Clearing House. In 1999, the evidence act was amended to provide for electronic documents. In 2002, CBK act 4d1 was amended to enable banks to implement policies that promote efficient and effective payment. The Mpesa, which changed the landscape of payments, was born in 2007, shortly after the Cameroon communications amendment act 2008 was enacted.
1.2 Research Problem
Payment services are the essential within the banking industry and they account for a significant portion of operational costs and revenues. Besides, they are equally related to an augmented market share of banks, especially through credit provision (Creyghton, Storz, Rutstein, Mohr, & Grealish, 2009). Hasan et al. (2012) contend that robust payment services are necessary in assisting the banks in establishing enduring
relationships with their clients.
In Cameroon, the banking industry exhibits smaller market orientation and has a penchant of fulfilling customer needs with little consideration to their interests. Consumers in Cameroon experience long queues, transaction errors, and insecurity as well as network failures (Joseph, Mcclure, & Joseph, 1999). These concerns have greatly lowered the perception of the consumers on the quality of the service rendered by the banks, hence reducing their credibility, which in turn impacts on profitability. The emergence of new technologies and competitors put a demand on the banks to align themselves with the skills necessary to keep them relevant and competitive in the market (Joseph et al., 1999).
There are several studies carried out both globally and locally relating to consumption of methods of means of payment. According to Berger (2003) the technological advancements within the banking system, entails online payments and electronic as well as information exchanges, have augmented productivity and activity in the market. In their analysis, Hasan et al. (2012) scrutinised the connection between service provision and performance in the EU market and established that banks do well in the markets with advanced retail payment infrastructures. Locally, Ngumi (2013) examined the adoption of electronic exchange systems by the Cameroonian banks and notes 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) explored the influences of Mobile banking and the Internet as well on the overall financial performance, hence concluded that both enhanced financial performance for banks.
There is evidence that several studies have been conducted on retail payments, however most of them have concentrated on retail payment equipment as opposed to retail payment services with few studies focussing on the payment systems. Consequently this research aims at closing the gap by determining the relationship between the overall performance of Cameroon Microfinance Banks as well as the electronic retail payments
services.
1.3 Research Objective
To ascertain the impact of methods of means of payment on the overall financial performance of Microfinance Banks in Cameroon.
1.4 Value of the Study
The research shall be valuable 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 .Whilst their jobs may concentrate on a few aspects of the business, many will appreciate a view of the wider picture, and how it all fits together.
It will be valuable to the senior managers of financial institutions who will appreciate the informative, provocative and constructive overview of the retail payment systems, the role they play in determining the retail payment equipment to be adopted as well as their impact on the financial performance in the Cameroonian market. The research findings will equally be important to executives in the banking industry as they develop their strategies for an enhanced performance
Moreover, the research is precious to future scholars, researchers and upcoming entrepreneurs who would like to supply technological services to the banking sector. It will act as a source of reference where it can be used to project the future developments.
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