FINANCIAL IMPLICATION OF INTERNAL CONTROL SYSTEM IN AN ORGANISATION (A CASE STUDY OF MERCURY MICROFINANCE BANK)
ABSTRACT
The study’s goal is to analyze Microfinance Banks’ compliance with internal control mechanisms in Nigeria’s North Central States. The structured questionnaire, which had 45 items, was used to collect data. For data analysis, descriptive statistics, mean, standard deviation, and the t-test were utilized. Out of the six states in Nigeria’s North Central States, three (Benue, Nasarawa, and Plateau) and Abuja were chosen using simple random sampling.
The study’s population included 152 respondents (management employees) from microfinance banks. Three professionals performed face validation on the instrument. It was also trial tested on 40 respondents to ensure the instrument’s internal consistency.
The instrument’s reliability co-efficient was calculated to be 0.97, 0.98, 0.95, and 0.80 for each cluster, with an overall co-efficient of 0.98. The data analysis revealed that Microfinance Banks in Nigeria’s North Central States highly conformed with physical control measures.
It also demonstrated the significance of internal audit in the discovery and prevention of errors and frauds in microfinance institutions. It was recommended that Microfinance bank management constantly ensure that the bank’s risk management processes be followed in loan approval and disbursement to limit the occurrence of bad debts.
Since Microfinance banks were founded to address their financial requirements, the rural and semi-urban poor should always be the objective of management of Microfinance banks in loan disbursement.
The Central Bank of Nigeria should guarantee that all Microfinance banks operating in Nigeria follow the Central Bank of Nigeria’s guidelines and monitoring regulations.
INTRODUCTION
CHAPTER 1
The Study’s Background
In Nigeria, there is a large mismatch between expected investment demand and domestic resource availability. This is due to inefficient financial institutions, inadequate private capital inflows, insufficient government budgetary provisions, and the inability of market forces (demand and supply) to operate actively.
As a result, the establishment of microfinance banks is regarded since a positive development, as it will bring hope and much-needed financial empowerment to the rural/semi-urban inhabitants for whom they were formed.
President Olusegun Obasanjo introduced the Microfinance Policy, Regulatory, and Supervisory Framework for Nigeria in 2005 to provide legal support for microfinance activities in Nigeria.
According to Fabamwo (2008), 768 microfinance banks are licensed to operate in Nigeria. He further revealed that 607 Community banks that met the capital requirement of N20 million in unaffected shareholder funds were converted to Microfinance banks.
According to Ovia (2007), microfinance is the provision of microcredit and other financial services to those with low incomes. These are the unbanked, who do not have access to financial services through which they could earn wealth. These are the rural inhabitants who lack the appropriate collaterals to approach traditional banking institutions for 1 2 loan facilities, and hence are unable to raise sufficient funds to engage on entrepreneurial projects that could improve their financial situation.
Microfinance customers in Nigeria are primarily the rural and urban poor, who borrow primarily to fund farming activities, petty trade, arts and crafts, and other small-scale companies.
According to the Central Bank of Nigeria (2005), microfinance is the provision of financial services to the poor who are typically underserved by traditional banking institutions.
Microfinance is distinguished from traditional financial products by three characteristics: the modest size of loans and/or savings collected, the absence of asset-based collaterals, and the simplicity of operations. To that end, the Central Bank of Nigeria (CBN) stated that the establishment of Microfinance banks has become critical in order to serve the following purposes:
providing diversified, affordable, and dependable financial services to the poor in a timely and competitive manner, enabling them to undertake and develop long-term, sustainable entrepreneurial activities; mobilizing savings for intermediation; creating employment opportunities, and increasing productivity.
This policy, in particular, requires state governments to dedicate at least one percent of their three annual budgets to the on-lending activities of Microfinance banks in favor of their residents; and to provide payment services, such as salaries, gratuities, and pensions, to various levels of government.
These microfinance banks may fail to accomplish their objectives unless they are adequately managed and administered under a structure that allows them to maintain an effective internal control mechanism capable of preventing fraud.
According to the Banking Supervision Annual Report (2005), microfinance banks are permitted to provide normal but less sophisticated banking services to their clients, with the exception of foreign exchange transactions and international electronic fund transfers; cheque clearing activities; dealing in land for speculative purposes and real estate except for its use as office accommodation; acceptance of public sector deposits.
However, some of the functions performed by microfinance banks include: accepting various types of deposits from individuals, groups, and organizations, keeping valuables such as certificates in their vaults for their customers, maintaining and operating various types of accounts with other banks in the country, credit to their customers, and providing supervisory function in relation to the use of the loan in order to maximize productivity.
Internal control includes both “ex-ante” (before and after operations) risk-control measures (Campion, 2000). According to Arsenault (2008), internal control covers both the prevention of possible problems and the early detection and remedy of actual problems if they occur.
According to the Basle Committee on Banking Supervision (1998), the primary goals of internal control in a financial institution are to verify the efficiency and effectiveness of operations, to ensure the reliability and completeness of financial and management information, and to comply with applicable laws and regulations.
Campion (2000) stated that Microfinance institutions utilize internal control methods to guarantee that personnel respect their organizational policies and procedures when it comes to compliance with applicable laws and regulations.
Internal control mechanisms improve decision-making by ensuring that information is accurate, complete, and timely, allowing the Board and Management to respond to control issues as they arise.
According to the Central Bank of Nigeria (2005), the poor performance of many existing Community banks,
Microfinance and Development financing institutions is attributable to inadequate management, lax internal controls, and a lack of deposit protection programs. This demonstrates that where the internal control system is weak, it will not successfully prevent fraud.
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FINANCIAL IMPLICATION OF INTERNAL CONTROL SYSTEM IN AN ORGANISATION (A CASE STUDY OF MERCURY MICROFINANCE BANK)
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