THE EFFECT OF INTERNAL CONTROL ON THE PEFORMANCE OF MFIs IN BUEA MUNICIPALITY

ABSTRACT

The study was titled the effect of Internal Control on the performance of Micro Finance
Institutions in Buea. The study seeks to examine the effect of Internal Control on the
performance of Micro Finance Institutions in Buea.

The hypothesis of the study was to find out if
Internal Control significantly affects the performance of Micro Finance Institutions in Buea. The
research was a quantitative research and the method of use was primary method, the descriptive
survey was use.

The study was conducted in Buea municipality and the sample size was 20
questionnaires which were issued and all the 20 were returned. The study made use of closed
ended questions.

The data was analyzed using the descriptive analysis and the multivariate of
multiple regression analysis. The descriptive was to show the results of the dependent and
independent variables separately and the regression analysis was conducted to show the effect of
Internal Control on the performance of Micro Finance Institutions in Buea.

The analytical tool
that was use to analysis the data collected from primary source was SPSS version 25 (statistical
package for social sciences). The findings rejected the null hypothesis and the results conducted
that Internal Control significantly affects the performance of Micro Finance Institutions in Bue

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. Micro-finance
Institutions use internal control mechanisms to make sure the staffs respect its policies and
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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 ofthe 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
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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
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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 ease the operation of the credit union.
1.2 STATEMENT OF THE PROBLEM