THE EFFECT OF INTERNAL CONTROL ON THE PEFORMANCE OF MICRO FINANCE INSTITUTIONS

ABSTRACT

The study sought to examine the effect of internal control on the performance of MFIs in
Buea Municipality case study NTACCUL. Internal controls were looked at from the
perspective of risk assessment, control environment, control activities, and information and
communication whereas performance was focused on Liquidity. The specific objectives
included; to determine the extent to which risk assessment affects performance of MFIs; to
assess the effect of control environment on the performance of MFIs and to examine the
effect of control activities on the performance of MFIs.

The independent variable was internal
control (Risk Assessment, Control Environment and Control Activities) and the dependent
variable was performance (Liquidity). The sampling technique use is the probability sampling
which is random and stratified sampling which sample out 20 respondents from the period of
April 2022 till June 2022. Questionnaires were used to collect primary data and data collected
analyzed using correlation and presented through tables. The data was analyzed using
descriptive statistics and inferential statistics.

The hypothesis was tested through a correlation
test, and it revealed that there is a positive relationship between internal control dimensions
(Risk Assessment, Control Environment and Control Activities) and performance (liquidity)
of Micro-finance Institutions at Pearson correlation coefficient r=0.447(**). p=0.007. This
implies that internal control affects performance of Micro-finance Institutions by 44.7% and
55.3% by other factors. The study recommends that the institutions should tighten controls to
tend towards a 100% debt collection. The study further points out that keen attention should
be paid to adopt more efficient management information systems.
Keywords: Internal Control, Risk Assessment, Control Environment, Control Activities and
Performance

CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
Internal control is a process, effected by an entity‟s board of directors, management and other
personnel, designed to provide reasonable assurance regarding the achievement of a firm‟s
objectives in the effectiveness and efficiency of operations, reliability of financial and
management reporting, compliance with applicable laws, regulations and protect the
organization‟s reputation (Kaplan, 2008).

There are many controls that an MFI can institute to
protect it resources against loss to improve performance. A collection of internal controls put
in place by the MFI is what forms internal control system (ICS). An internal control cuts
across a number of disciplines including financial accounting and auditing. It can be traced
back to ancient times. In Hellenistic Egypt there was dual administration where one side was
involved in collection of taxes while the other supervising them. Sacking of Troy was one of
the examples of weaknesses of internal controls. Internal controls became apparent at the
beginning of 21stcentury following major corporate scandals (PABC, 2006).
Internal control consists of five related components which are derived from the manner in
which management runs its business. These components are control environment; risk
assessment; control activities; information and communication systems and monitoring.
These components of internal control apply to all business entities though Microfinance
Institutions may apply them differently to large corporations. Micro-finance Institutions‟
internal control systems could be less formal and unstructured but at the same time be very
effective.
According to Ledgerwood and White (2006), an internal control adopted by Microfinance
Institutions need to be orderly, practical and efficient enough to help them conduct business.

Internal controls are most effective when they are directly incorporated in the process that
support operations and enable quick response to changing economic conditions. Microfinance Institutions use internal control mechanisms to make sure the staffs respect its
policies and procedures. Everyone in an organization has the responsibility to ensure internal
control succeeds to some extent. Virtually all employees produce information used in the
internal control system or take other actions needed to effect the control.
Many efforts have been made to streamline corporate governance which in turn guarantees
accountability and security of resources.

Notable regulations are Sarbanes-Oxley Act of
2002(SOX), Committee of sponsoring organization of the Tread Way Commission (COSO,
2004), Internal Control Integrated Framework (ICIF March 2013) among others. The
widespread accounting scandals that have been witnessed in both public and private sectors
have informed this study. Cases of Enron and WorldCom in the U.S.A., Parmalat in Europe
and ChuoAoyama in Asia. In Zimbabwe between December 31 2003 and December 31 2004
out of 40 registered financial institutions 29 collapsed representing 27.5 % decline in
registered financial institutions. In Nigeria the managing director and the chief finance officer
of Cadbury Nigeria plc were dismissed in 2006 for exaggerating profits of the company for
several financial years before the company‟s foreign partner acquired controlling interest.
In Kenya the giant Uchumi supermarket went under in June 2006 due to insolvency and it
securities stopped trading at Nairobi stock exchange (N.S.E). It is until the Government of
Kenya injected some amount to bail it out of the liquidity trap. The most apparent incident is
the fall of two commercial banks in a span of less than five months. Fall of Dubai bank in
14thAugust, 2015 followed by Imperial bank in 13thOctober, 2015. The reason cited in the
case of Dubai bank was serious liquidity and capital deficiencies that may render inability to
meet financial obligations as and when they fall due. In the case of Imperial bank, the CBK
reported unsafe or unsound business conditions where the appointed Kenya Deposit

Insurance Corporation (KDIC) will manage it for 12 months while investigating
inappropriate banking practices. Serious ramifications followed when customers could not
get back their deposits, numerous jobs were lost and many creditors could not be easily paid.
This happened despite both banks being under supervision of the CBK.
Microfinance institutions in Cameroon consist of Banks, microfinance agencies, non –
governmental organizations (NGOs), and rural farmers‟ scheme and savings societies that
provide savings and/or credits facilities to micro and small scale business people who have
experience difficulties in obtaining such services from the formal financial institutions. Their
range of activities include deposit taking, savings schemes, small scale enterprises,
agriculture, real estate, group lending, retail financial services, giving advice on financial
matters and training in business management. For developing countries small scale business
would generally mean enterprises with less than 50 workers and medium size business would
mean those with 50 –99 workers.

In Cameroon a small scale business is an enterprise
employing at least 6 but with a maximum of 20 employees, with the value of assets and
working capital of less than or equal to 100 million FCFA. A medium size business is
considered a firm which employs between 21 –100 workers with an annual turnover income
between 100 million to one billion FCFA. This study will be looking at the effect of Internal
control on the performance of Micro Finance Institutions in Buea Municipality with case
study; Ntarinkon Cooperative Credit Union (NTACCUL).
Ntarinkon cooperative credit union is a savings and credit cooperative founded in 1972.The
founding members of this credit union were farmers who usually sell their products to the
marketing cooperatives. Its common bond was later extended to all the villagers and even
civil servants.
Over a period of about 47 years, the credit union has had some remarkable growth such as
amalgamation and evolution of membership, shares, savings, and reserves and increase in the

number of branches. Amalgamation came to place in 1999 where the three quarter branches
joint together to form one strong and viable credit union now located at Ntarinkon after
Ntarinkon market. The evolutionary chart of the credit union shows a tremendous increase in
branches such as the creation of the Bamenda, Yaoundé, Bertoua, Douala, Buea, Kumba, and
even Bafoussam.
Membership, shares savings, and deposits have equally witnessed a remarkable growth since
1972 to present date. The credit union now possess a membership of about 47000
shareholders and a share capital of about 213,199,898 CFA francs. The members are of both
sexes and even groups are included. The annex office in Bamenda helps to support the head
office in its operations and thereby reducing traveling expenses to and from the village for
transactions. With this development, money transfer has been made possible. The annex
offices table its own financial report to the main office for a consolidated financial report to
be prepared. In addition, the credit union now owns a building in Bamenda town located near
total bonjour. Another important event in the life of the credit union is the computerization of
system. NTACCUL now operates a computerized system which eases the operation of the
credit union.

1.2 Statement of the Problem