ABSTRACT

This study investigated the relationship between internal control systems and performance of microfinance institutions in Bamenda Municipality, North Western Cameroon. The study was guided by specific objectives, that is, to examine the effect of control environment on performance of microfinance institutions; to examine the effect of risk assessment on performance of microfinance institutions; investigate the effect of monitoring activities on performance of microfinance institutions; and, to assess the effect of communication on performance of microfinance institutions in Bamenda Municipality. The study employed a cross sectional survey design to explore information from different stakeholders in selected microfinance institutions at a given point in time. A sample size of 200 respondents was considered for the study, selected by simple random sampling and purposive sampling techniques.

Data were collected through primary sources using structured questionnaires and interviews. Statistical Package for social Scientists, SPSS, Ver. 23 was used to analyse the data, and findings were presented in tables and charts. Pearson correlation and multiple regression analysis were also used to establish relationships between independent and dependent variables. A multiple linear regression determined extent independent variables predicted dependent variable. Information was explained with assistance of p-values for hypothesis testing. The hypotheses were accepted when their p-value is less than 0.05 and considered to be with significant relationships.

Findings revealed that risk assessment significantly affect performance of microfinance institutions in Bamenda Municipality. However, control environment, monitoring activities and communication had an insignificant effect of performance of microfinance institutions. Only risk assessment significantly influences performance of these institutions. Generally, internal control system as a function affected performance of microfinance by 15 percent. In due regard, the study recommends that risk assessment be reinforced so as to continuously increase performance in microfinance institutions in Bamenda Municipality. More so, other factors that have a strong bearing on the performance of MFIs need to be explored by future researchers.

Key terms: Risk assessment, Monitoring, Controlling, Internal Control

CHAPTER ONE

INTRODUCTION

1.1  Background to 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  MFIs 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).

The United States of America and elsewhere in Europe have encouraged nations and corporate organizations to place more emphasis on their internal control systems, internal auditing functions and risk management G., & Crowther, D. (2017).The credit crunch that has hit the world’s most developed economies recently is a clear indication of the failure of the system to hold in check some of the excesses in our haste to satisfy our profit making agenda and to outdo one another in competition. These financial crises which affected the mainly the developed countries results are being felt by the developing countries of which Cameroon is no exception.  Internal controls are simply good business practice Alchian N. Demsetz S. (2022). For some time now, risk management in general and internal control more specifically; have been considered as fundamental elements of organizational governance.  As a consequence, risk management is beginning to be perceived as a new means of strategic business management, linking business strategy to daily risks and then optimizing those risks in order to realize value.

The main aim of microfinance in Africa was and is to address poverty. From 1980 to 2000, Non-Governmental Organizations (NGO) and multinational agencies were behind many MFI’s as they were co-financing agencies. The co-financing agencies were concerned with alleviation of poverty and creation of employment as well as increasing income for the poor. They were also concerned with improving social capabilities availability and access to resources and participation in decision making. Microfinance institutions (MFIs) in Cameroon provide loans, savings, insurance, and money transfers to micro-entrepreneurs to support productive activities, build assets, stabilize consumption, and protect against risks.

The Cameroonian banking industry has evolved from a highly regulated sector into a largely market driven one. The regulatory and institutional framework has improved considerably yet Microfinances in Cameroon are facing some challenges as the world deals with one of the deepest financial crisis in the history of the planet. Otero et al. (2016)  Internal controls and risk managements, the purpose to ensure effectiveness and efficiency of operational activities, reliability of financial information, compliance with applicable rules and regulations and sustainable business growth have been incorporated into the mundane activities of micro finance in Cameroon. Most microfinances go through difficulties in recovering facilities granted to customers after expiry. The issue of default of bank facilities is gradually eroding most gains and crippling business opportunities. Internal controls and risk managements the purpose of which is to ensure effectiveness and efficiency of operational activities, reliability of financial information, compliance with applicable rules and regulations and sustainable business growth have been incorporated into the mundane activities of micro finance in Cameroon.

The Central African Banking Commission (COBAC) is playing the regulatory role to come out with measures to help regulate the functioning of the financial institutions to improve on the effectiveness of their internal control systems and risk management.  In Cameroon for example various legislations have been passed to reduce the risk of misstatements, fraud and mismanagement of both corporate and government resources. The government in 2003 passed the financial Administration act (Act 654), the Public Procurement Act (Act 663), and the Internal Audit Agency Act (Act 658), the government also set up certain bodies in addition to existing ones.  The Office of accountability at the Presidency was set up in addition to the Serious Fraud Office and as part of improving their internal control systems, internal auditing function, and reducing risk, most banks in the country have put in place mechanisms to ensure internal control and compliance in credit delivery.  These include setting up an internal audit unit, a monitoring unit and issuing the Accounting, Treasury and Financial Reporting Rules. It is therefore in this light that this project work is being carried out to assess the effectiveness internal audit and internal control systems in the micro finance sector.

1.2  Statement of the Problem

Globalization and the advancement in technology has become the hallmark for businesses today and the banking sector is no exception. Banks have been expanding their operations and activities beyond the domestic borders as a result of globalization and improved technology. The expansion of business, globalization and the advanced technology also exposes business to increased risk, fraud, altercations and other irregularities. This has made internal controls an imperative system to maintain by every business and for that matter the banking sector. Globalization of businesses, technological advancements, increasing risk of business failures, the fraud and altercations that emerged in the financial sector in Africa call for the proper maintenance of an effective internal control systems. 

 Recently, several accounting scandals have occurred, which were partly caused by a failing system of internal control. Well known notorious examples of extensive fraud are Enron, Ahold, Parmalat, and Worldcom. Where internal control weaknesses exist, an important question that arise is whether these weaknesses can be traced to personal determinants of those within the company who are involved and who are linked with these internal control problems, more specific, audit department employees, members of the audit committee and members of the senior management. The management of the organization should meet regularly to review the affairs of the firm and direct strategic path of the firm and also ensure continued goal congruence. Reid et al. (2020). Internal controls check the governance of MFI’s to achieve profitability growth and development. Microfinance Institutions are prone to risks that are life threatening to the existence and sustainability. Operational and strategic risks are of non-financial character and result mainly from human error, frauds, system failure, through regulatory environment (COBAC 2014) however when they materialize they lead to financial losses for the organization. A number of MFI’s face collapse or near collapse if they are unable to set up internal controls COBAC (2014).

Even if Microfinance institutions play great role on economic transformation, they have their own big challenges and problems. The main complaints rise by microfinance institutions are insufficient credit facilities, corruption, uncollectable loans, lack of well-educated man power, inefficiency of information system and etc. This all are in general manifestation of the unclear administrative practice that is the lack of proper internal control system. When you look at countries in Africa, financial internal control on micro finance institution, some researches on micro finance institution showed that there is a weak internal control system in their operation Yigirem K, (2016). Therefore this weakness in ICS can cause for serious smash up on the sector as well as overall economic activities of the country for that reason this paper focused on to assess the shortcoming and contribute remedies to improve internal control system of  selected MFIs in Cameroon found in Bamenda urban area of the North West Region Cameroon.