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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