AN INVESTIGATION OF THE EFFECT OF INTERNAL CONTROL ON THE MANAGEMENT OF MICROFINANCE INSTITUTIONS IN CAMEROON

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Microfinance institutions (MFIs) play a crucial role in providing financial services to low-income individuals and small businesses, particularly in developing countries (Smith et al., 2023). These institutions offer microloans, savings accounts, insurance, and other financial products tailored to the needs of underserved populations who lack access to traditional banking services (Jones & Brown, 2022). As MFIs continue to expand their reach and impact, ensuring effective management practices becomes increasingly vital for their sustainability and success.

internal control of a microfinance institution entails the direction of work and authority, the management of individuals, and the oversight of information systems. Its purpose is to facilitate the achievement of the organization's goals and objectives. According to Awe (2018), internal controls are policies, procedures, practices and organizational structures implemented to provide reasonable assurance that an organization’s business objectives will be achieved and undesired risk events will be prevented or detected and corrected based on either compliance or management initiated concerns. Additionally, internal controls enables management adapt to the quickly changing competitive and economic environment, as well as to changing consumer priorities and expectations and future growth restructuring (Ndiaye et al, 2019). Similarly, it promote efficiency, reduce risks of assets loss and help to ensure the reliability of financial statements and compliance with laws and regulations (Coco, 2019). However, he further explains that because internal controls serve many component purposes, there are increasing calls for better internal control systems; internal control is looked upon more and more as a solution to a variety of potential problems. Beyond that, Chambers et al. (2018), define internal controls as systems that consist of control procedures and the control environment. They went on to say that internal control systems comprise all of the policies and practices that the board of directors and management of an organization has adopted to help them achieve their goal of conducting business as efficiently as possible. Furthermore, according to McPeak, Pincus, & Sundem, (2022) an efficient internal control system is designed with three goals in mind for management. As  financial statements for creditors, investors, and other users must be prepared by it alone. Also, encouraging efficient and effective operations, or the efficient use of resources, is the second goal of an internal control system. Finally, internal control promotes adherence to rules and laws. The effectiveness and acceptability of internal control, as well as how it impacts the companies' finances, influence an organization's performance.These include maintaining asset protection, adhering to internal policies, preventing fraud and error, accurately and completely filling out accounting records, and promptly preparing trustworthy financial information.  In addition, micro-finance institutions have overtime undergone positive transformations in all their departments. Internal controls are in place to safeguard Micro-finance Institutions assets; to avoid misappropriation of its assets and to detect against probable frauds.Nevertheless, internal control system should be integrated into the organization's day-to-day operations. This is most successful when the controls are ingrained in the organization's structure, contributing to its overall success and ongoing improvement in performance standards, giving it a competitive edge.Therefore, a survey will be conducted to investigate the effect of internal control on management of microfinance institutions in Cameroon. 

1.2 Statement of the Problem

The internal control system gives management peace of mind regarding the accuracy of the accounting information utilized in organizational decision-making.However, Ledgerwood and White (2020) state that an internal control that microfinance institutions use must be organized, useful, and effective enough to support their business operations. When internal controls are directly integrated into the processes that support operations and allow for quick reaction to shifting economic situations, they function at their best. Furthermore, internal control measures are employed by microfinance institutions to ensure that their staff adheres to established policies and procedures. It is the duty of every individual in a company to make certain that internal control operates to some degree. Almost every employee generates data for the internal control system or performs other tasks required to implement. Additionally, many researchers have confirmed that the internal controls established by management in most organizations haven't effectively stopped fraudulent activities. However despite all the above findings, microfinance institutions face difficulties with liquidity, their operating and financial expenses are comparatively high, and their average revenue remains lower than that of other worldwide regions. Financial malpractices and allegations of corruption are also present. Additionally, there is insufficient efficiency in terms of cost per borrower to account for the possible loss from delinquent loans.Hence, it is in the light of these that the study seeks to investigate the effect of internal control on management of microfinance institutions in Cameroon. 

1.3  Objectives of the Study

The main purpose of this study is to investigate the effect of internal control on management of microfinance institutions in Cameroon. Specifically, the study will;

1.Assess the existing internal control system in microfinance institutions in Cameroon

2.Investigate the extent to which internal control system affect the the overall management practices and performance of microfinance institutions.

3.Investigate the correlation between the internal control system and financial management of microfinance institutions in Cameroon.

4.Identify challenges faced by microfinance institutions in implementing effective internal control measures.

1.4 Research Questions

The following questions have been prepared for the study:

What are the current internal control system within microfinance institutions operating in Cameroon?

To what degree do internal control systems influence the overarching management strategies and performance outcomes of microfinance institutions?

What is the relationship between the internal control system and the financial management procedures within microfinance institutions in Cameroon?

What are the primary obstacles encountered by microfinance institutions when endeavoring to establish and enforce efficient internal control mechanisms?

1.5  Significance of the Study 

The findings of this study will help management and executives of organizations understand how effective internal controls can positively influence organizational performance and guide them in making informed decisions regarding internal control implementation and improvement. Additionally, employees will benefit from effective internal control systems as  it will provide an insight on how internal controls impact the overall performance and stability of the organization, potentially affecting employee job security and satisfaction. Further more, subsequent researchers will use it as a literature review. This means that other students who may decide to conduct studies in this area will have the opportunity to use this study as available literature that can be subjected to critical review. Invariably, the result of the study contributes immensely to the body of academic knowledge with regard to an investigation of the effect of internal control on management of microfinance institutions in Cameroon.

1.6 Scope of the study

The scope of this study is boarded on an investigation of the effect of internal control on management of microfinance institutions in Cameroon. Empirically, this study will assess the existing internal control system in microfinance institutions in Cameroon, investigate the extent to which internal control system affect the the overall management practices and performance of microfinance institutions, the correlation between the internal control system and financial management of microfinance institutions in Cameroon and identify challenges faced by microfinance institutions in implementing effective internal control measures.

Geographically, the study will be delimited to employees of some selected microfinance institutions, Cameroon.

1.7 Limitation of the study

In the course of carrying out this study, the researcher experienced some constraints, which included time constraints, financial constraints, language barriers, and the attitude of the respondents. In addition, there was the element of researcher bias. Here, the researcher possessed some biases that may have been reflected in the way the data was collected, the type of people interviewed or sampled, and how the data gathered was interpreted thereafter. The potential for all this to influence the findings and conclusions could not be downplayed. 

More so, the findings of this study are limited to the sample population in the study area, hence they may not be suitable for use in comparison to other schools, local governments, states, and other countries in the world.

 1.8 Definition of Terms

Internal control: refers to the whole system of control financial and otherwise established by management in order to carry out the business of the enterprise in an orderly and efficient manner to safeguard the assets and secure as far as possible, the competence and accuracy of records, the prevention and detection of errors and fraud in accordance with the final preparation of financial statement.

Microfinance: defined as the provision of financial services to impoverished or low-income clients, including consumers and entrepreneurs who would otherwise be underserved by traditional financial institutions (Ledgerwood, 2020)

Microfinance institution: (MFI) is an organization that provides financial services, such as loans, savings, and insurance, to low-income individuals or communities, often in developing countries.