AN ASSESSMENT OF ITS RELEVANCE ON THE MANAGEMENT OF MICROFINANCE INSTITUTIONS IN GHANA

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Through microfinance, low-income households and their businesses can obtain traditional financial resources like loans and credit lines (often referred to as "microcredit"), the kinds of instruments that households and start-up firms would require in a market environment. While the idea of small-scale money management has been around for a while, the microfinance sector has only grown significantly over the past three decades, giving hundreds of millions of individuals who might not otherwise have access to it, access to both financial and non-financial services.Similarly, microfinance institutions (MFIs) play a pivotal role in offering financial services to low-income individuals and small businesses, particularly in developing countries (Smith et al., 2023). These establishments provide 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 extend their reach and influence, ensuring effective management practices becomes increasingly crucial for their sustainability and prosperity.

The internal control of a microfinance institution involves overseeing work direction, authority, personnel management, and information systems supervision. Its aim is to facilitate the attainment of the organization's goals and objectives. According to Awe (2018), internal controls encompass policies, procedures, practices, and organizational structures implemented to offer reasonable assurance that an organization's business objectives will be achieved and undesirable risk events will be prevented or detected and corrected based on compliance or management-initiated concerns. Additionally, internal controls enable management to adapt to rapidly changing competitive and economic environments, as well as shifting consumer priorities, expectations, and future growth restructuring (Ndiaye et al., 2019). Similarly, they promote efficiency, reduce the risk of asset loss, and help ensure the reliability of financial statements and compliance with laws and regulations (Coco, 2019). However, because internal controls serve various purposes, there is a growing demand for better internal control systems, as they are increasingly seen as a solution to various potential problems.

Furthermore, Chambers et al. (2018) define internal controls as systems comprising control procedures and the control environment. They assert that internal control systems encompass all the policies and practices adopted by the board of directors and management of an organization to facilitate conducting business as efficiently as possible. Moreover, according to McPeak, Pincus, & Sundem (2022), an efficient internal control system is designed with three management goals in mind. Firstly, it must prepare financial statements for creditors, investors, and other users. Secondly, it should encourage efficient and effective operations, or the efficient use of resources. Finally, internal control promotes adherence to rules and laws. The effectiveness and acceptability of internal control, as well as its impact on the company's 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.

Additionally, microfinance institutions have undergone positive transformations across all their departments over time. Internal controls are in place to safeguard the assets of microfinance institutions, prevent misappropriation of assets, and detect potential frauds. Nevertheless, the internal control system should be integrated into the organization's day-to-day operations. This integration is most successful when 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 assess the relevance of internal control on the management of microfinance institutions in Ghana.

1.2 Statement of the Problem

The internal control system provides management with confidence regarding the accuracy of accounting information used in organizational decision-making. However, Ledgerwood and White (2020) argue that internal controls utilized by microfinance institutions must be well-organized, practical, and sufficiently effective to support their business operations. Optimal performance of internal controls is achieved when they are seamlessly integrated into operational processes, enabling swift responses to changing economic conditions. Moreover, microfinance institutions employ internal control measures to ensure staff compliance with established policies and procedures. It is incumbent upon every individual within a company to ensure some level of operation of internal controls, as nearly every employee contributes data to the system or performs tasks necessary for its implementation. Despite numerous studies indicating that management-established internal controls often fail to effectively prevent fraudulent activities, microfinance institutions encounter challenges with liquidity, face relatively high operating and financial expenses, and experience lower average revenue compared to other global regions. Instances of financial misconduct and corruption allegations persist, alongside insufficient efficiency in terms of cost per borrower to mitigate potential losses from delinquent loans. Hence, it is in the light of these that the study seeks to assess the relevance of internal control on the management of microfinance institutions in Ghana

1.3  Objectives of the Study

The main purpose of this study is to assess the relevance of internal control on the management of microfinance institutions in Ghana. Specifically, the study will;

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

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 Ghana.

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 Ghana?

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 Ghana?

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 the relevance of internal control on the management of microfinance institutions in Ghana.

1.6 Scope of the study

The scope of this study is boarded on the relevance of internal control on the management of microfinance institutions in Ghana. Empirically, this study will assess the existing internal control system in microfinance institutions in Ghana, 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 Ghana 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.