EFFECT OF INTERNAL CONTROL SYSTEMS ON THE PERFORMANCE OF SELECTED MICROFINANCE INSTITUTIONS IN THE CENTRAL REGION

ABSTRACT
The purpose of this study is to examine the effect of internal control practices on the performance of microfinance institutions in the Central Region of Ghana. Primary data was gathered using questionnaires on internal controls designed to meet the Committee of the Sponsoring Organizations of the Treadway Commission 1992 report for microfinance institutions.The study adopted a quantitative approach with a descriptive survey method. A primary data were collected using self-administered questionnaires. The study revealed that internal control systems of microfinance institutions are effective and integrated into the daily operations of these microfinance institutions. Another finding was that, microfinance institutions can only achieve their corporate objectives if the internal control systems are effective. Poor internal control systems are due to highcost involved in implementing it and small size of organization to have an internal audit department to ensure effective internal controls. The study recommended that there should be adequate segregation of duties in the control activities, adequate managerial oversight and proper policies and procedures for microfinance institutions to operate effectively to achieve their objectives.


CHAPTER ONE
INTRODUCTION
This chapter gives an overview of the research work. It gives brief background on internal control system and practices in general and limits it to microfinance institutions. Areas that can be seen in this chapter includes problem statement, research objectives and questions, significance of the study and how this research work have been organized.

Background to the Study
Part of the debate over the identification of services that qualify as microfinance has largely been put to rest and today, there is a consensus among microfinance stakeholders worldwide that the field now encompasses all financial services, including credit, savings, and insurance (Consultative Group to Assist the Poor, 2003). Moving away from the field’s roots of providing solely microcredit to poor micro-entrepreneur has been the new development. This new development has been driven by a new emphasis on the use of non-credit services by the poor to build assets and financial security (Consultative Group to Assist the Poor, 2003).

There has been increased scrutiny of financial institutions internal control systems in recent years. Starting with Barings Bank’s collapse in 1995; where Nick Leeson, a trader at the bank’s Singapore office caused the insolvency of the bank. Nick Leeson was able to carry out this fraud because there was not adequate segregation of roles within his division. Jerome Kerviel of SocieteGenerale in 2008 caused his bank a loss of € 4.9 billion due to porous internal control systems. Likewise, KwekuAdoboli an employee at the Swiss Bank caused his bank $2 billion due to unauthorized trading (Fortado, 2015). Recently, the Bank of Ghana in 2015 issued a 90-day moratorium on DKM Diamond Microfinance restraining them from operating as a financial institution. Subsequent investigations by the Bank of Ghana reveal massive internal fraud perpetrated by the directors and employees of the company.As microfinance organisations expand, calls for financial discipline in corporate reporting has emerged with the emphasis on developing micro standards that will aid in good integrated reporting in the area of finance, accounting, social, and environmental issues. The emphasis is not only on corporate reporting, but to developviable internal control systems which ensure that savers moneys are kept well with much professionalism.

Internal controls have received much attention in the world of studies especially emerging markets. Millichamp (2002) defined internal control as a holistic system of controlling the financial and non-financial rules set up by management to safeguard assets, as well as ensure the complete and accuracy of records. This is expected to cut across the entire organisation and ensure communication from bottom-up and vice versa. Schroy (2010) similarly, defined internal control as a process put in place by organisations to structure work, authority flows and people and management information systems in order to help accomplish specific goals or objectives. Internal control systems are applicable to every key risks of the organization and embedded within operations. This will ensure that it is able to respond to changing risks within and outside the organisation (Cunningham, 2004).

Aryeetey (1994) stipulated that only 6% of the Ghanaians population have access to formal financial services such as commercial banks. In a changing financial sector, much effort is required for even microfinance to integrate into rural banks and even commercial banks. Financial irregularities among banks and financial institutions in Sub-Saharan Africa have reengineered central banks and regulatory bodies to tighten supervisions and sanctions in the micro level with the emphasis on structured internal control systems that detect fraud, misappropriation and fraudulent financial reporting.

Bank of Ghana (2007) working paper on microfinance development stated that since the beginning of government involvement in microfinance in the 1950s, the sub-sector has operated without specific policy guidelines and goals.This partially accounts for the slow growth of the sub-sector, and the apparent lack of direction, fragmentation and lack of coordination. There has not been a consistent approach to dealing with the constraints facing the sub-sector. Such constraints include inappropriate institutional arrangements, poor regulatory framework, inadequate capacities, lack of coordination and collaboration, poor institutional linkages, lack of linkages between formal and informal financial institutions, inadequate skills and professionalism, and inadequate capital and poor internal control systems.

Bank of Ghana (2007) argued that traditional commercial banking approaches to microfinance delivery often do not work. According to traditional commercial banking principles, the credit methodology requires documentary evidence, long-standing bank customer relationship and collateral, which most micro and small businesses donot possess. The commercial banking system, which has about twenty-three (23)major banks, reaches only about 5% of households and captures 40% of money supply. Therefore there is room for expanding the microfinance sector in Ghana.

Expanding the microfinance sector in Ghana requires more institutional development, rapid growth, financial development and a reliable financial sector. The internal control framework underlying the activities of major microfinance organisations, banks, securities firms, and non-financial companies, and their auditors are designed by corporate directors of their various boards. Moreover, this internal control framework is consistent with the increased emphasis of banking supervisors on the review of a banking organisation’s risk management and internal control processes. It is important to emphasize that it is the responsibility of a bank’s board of directors and senior management to ensure that adequate internal controls are in place at the microfinance institutions and to foster an environment where individuals understand and meet their responsibilities in this area.

Internal controls and performance of organisations have been studied by few scholars. Gamage, Lock and Fernando (2014) on the state of commercial banks in Sri Lanka observed that an effective internal control system is a viable tool of achieving an organisational financial objectives and hence performance.Performance of microfinance institutions in Ghana is part of the financial sector development aimed at reducing poverty in Ghana. As microfinance institutions achieve their corporate objectives, much of their survivor depends on prudent financial reforms and effective and efficient internal controls designed to detect fraud, errors and money laundering by way of integration, placement and layering.

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Item Type: Ghanaian Project Material  |  Attribute: 85 pages  |  Chapters: 1-5
Format: MS Word  |  Price: GH50  |  Delivery: Within 30Mins.
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