Abstract

This study had as its prime objective to assess ‘The effect of internal control on budget implementation in cooperative credit unions in the Buea municipality (NTACCUL)’.

The study specifically examines the role of the control environment, risk assessment, control activities, information and communication and monitoring in budget implementation in NTACCUL.

The research was conducted using a quantitative approach, using survey, correlation analysis and descriptive survey as research designs.

Data was collected using questionnaires administered to personnel of Ntarikon cooperative credit union Buea. Data were analyzed using the descriptive and inferential tools where conclusions were drawn from tables and figures.

The sample population of this study was made up of 15 personnel of the microfinance institution and the sample population was selected using a convenience random sample technique.

It was found that; in of control environment, risk assessment, control activities, information and communication and monitoring, only the control environment had a significant effect on budget implantation in NTACCUL.

The following recommendations were made from the study: adequate organizational controls remoulded and strengthened, adequate training of workers in the accounting section, clear organizational targets and budgets

CHAPTER ONE

INTRODUCTION

1.1 Background of the study

Microfinance evolution is closely linked with the reduction of poverty. Although the beginning of cooperative saving and credit activities can be traced as far as 1894 with the foundation in Rhineland of the first cooperative society of savings and credit by Raiffeisen. Microfinance was considered as an alternative to banks meanwhile in most developing countries serve only 5 to 20% of the population (Gallardo et al., 2003).

The history of microfinance in Cameroon dates back to more than one century in its traditional form popularly known as “Njangi or Tontine”. The introduction of modern microfinance in Cameroon started in 1963 by a priest Father Alfred Jansen, in Njinikom in the North West region of Cameroon (Creusot, 2006).

The idea of credit unionism spread so wild over the North west and south west regions of Cameroon and by 1968, 38 credit unions that were already in existence joined together to form the Cameroon Cooperative Credit Union League (CamCCUL) limited  of cooperative credit unions and the largest microfinance institution in Cameroon.

Microfinance institutions in Cameroon carryout all banking and financial services which the commercial banks do, but on a small scale. The vital instruments in this MFIs include; savings, deposit (current and fixed), investment accounts, credit or loans products such as overdrafts, term loans of different terms but majorly short termed, trade loans, salary advances, money transfer both locally and internationally in concurrence with their corresponding banks, payment of civil servant salaries, etc.

The microfinance market in Cameroon recorded an impressive double digit growth in 2011. This was thanks to the ongoing expansionary and aggressive market penetration measures adopted by major players, CamCCUL, CCA and MC2, growing customers and members confidence in the 1st Trust and CCA brand and swift response made by major stakeholders following the collapse of COFINEST to regain customers and members confidence.

In early 2011, the government officially announced the closure of COFINEST with major shareholders arrested for malpractices and mismanagement in the market. This spark fear within depositors who rushed in other microfinance institutions to withdraw their deposits.

However, quick actions taken by major stakeholders such as the government to ensure that creditors start receiving their funds and other assurance from other players such as CamCCUL gradually regain confidence. Regulators tightened up control to watch against crooks and quacks.

After the collapse of COFINEST, regulator authorities became actively involved in the control and supervision of MFIs activities, this was to scrutinize the activities of the MFIs to meet up with the basic prudential norms. Mismanagement, malpractices and lack of professionalism in the MFIs let to the need for internal control as one of the remedies to performance in MFIs.

Internal control had been known to enhance the objectives and discussions within and without the organizational departments which in turn enhanced the value within the organization (Raja, 2002). Management is obliged to increase or maximize shareholders’ wealth while displaying competence in the performance of its duties.

Internal control therefore checks on this performance in accordance with modern day practices due to the amalgamation of diverse forces which led to a quiet revolution of the profession. Companies presently require immense capability from internal control, in light of inadequate capital, to display enhanced competence in identifying and vindicating risks.

The expansion of technology has enabled internal control to monitor and examine facts with intensified rapidness, thereby improving the internal control sector. Making changes to an existing internal control department can be an important undertaking as it differs among microfinance institutions.

The transformation from simply establishing and observing rules and regulations, to accurately delivering additional significance requires numerous organisational changes. According to Rama moorti (2003), various microfinance institutions pay their staff poorly hence making them unresponsive, have weak ethical standards and their governance practices are unproductive emerging into asset mismanagement.

There is worry in the entire world whether the internal control function has the capability to grant so far, divergent benefits to an organisation in achieving its objectives. This hidden deviated into a provocation and resulted into actualisation of the meaning of internal control by the Institute of Internal Auditors (IIA) which says that ‘internal control is a process of assuring of an organizations objectives in operational effectiveness and efficiency, reliable financial reporting and compliance with laws, regulations and policies’.

According to Basel Committee (2002) microfinance institutions have come to an understanding that internal control is significant in enhancing supervision of resources which convey an enhanced fiscal performance.

There are three main objectives in the performance of MFIs; they include operational efficiency and effectiveness, reliability of financial reporting and compliance with relevant laws and regulations. When companies suddenly collapse, the resounding question is “what went wrong”. The cause is usually a break down in the internal control system.

There are various theories that try to explain internal control’s importance to an organisation. The agency theory which is the overarching theory makes the assumption that separation of ownership and management leads to transparency in internal control function.The contingency theory which states that internal control is most effective when it is matched with the financial risks essential to the nature of the organization. The stakeholder theory which identifies stakeholders and defines performance outcomes as the defined satisfaction measure.

Internal control is a valuable instrument for management in progressing development geared towards improving financial performance (Beyanga, 2011). According to KPMG (2015) internal control may result to improved financial performance through strict adherence to its control aspects. Internal control standards will lead to improved financial performance as a result of auditors carrying out the functions within the criteria approved, being professional and objective for improved risk management (Fadzilet al, 2005). Through independence of internal controllers, financial performance can be improved since the controllers are independent from the activities which they evaluate and must likewise be independent from the routine internal control processes and perform their activities objectively and impartially without conflict of interest.

The internal motivation, competence in performing duties professionally as well as systematic professional development of each internal auditor are essential factors for the right functioning of the general internal audit department of any firm thus leading  to improved performance (Beyanga, 2011).

The objectives related to internal control are associated with management methods, management plans and those procedures that meet the goals, mission and objectives coupled with overall performance. Hence internal control, which acts as a supervisory body can save the institute from negligence and irregularities hence pushing the business to attain high levels of outputs and profits (Institute of Internal Auditors, 2016).

All the above show the importance of internal control on the performance of enterprises. Several studies were conducted in order to analyze the relationship between performance and internal control (Mawandam 2008; Shabri, 2013, Noel, 2003 and Siayo, 2010). Their findings have proven that internal control and performance have a positive relationship in most MFIs.

1.2 Statement of the Problem

The internal control function measures the usefulness of microfinance firms in accomplishing approved objectives and in implementing recommendations made by internal control for improvement of their risk management, control and governance processes (VanGansberghe, 2005).

The internal control function offers an unfailing, impartial and objective service to the directors of the board, management and the audit committee whereas the stakeholders are more concerned on ROI, growth, sustainability, leadership and the reporting that can rely on the financial performance.

The studies have been done regarding the influence of internal control on financial performance. Hutchinson and Zain (2009) while exploring the association between quality of internal control performance of the firm and return on equity (ROE) in Malaysia showed the association between quality of internal control and the performance of firms. Opportunities that result to high growth are further increased by the independence of the audit committee.

Also Salih (1983) while evaluating the internal controls at Ethiopian Airline’s Nairobi branch mentioned that the lack of separation of custodian and accounting functions was a weakness within the branch that affected service delivery to customers and increased costs.

Most of the reviewed studies have glaring methodological weaknesses. It is evident that majority of the studies relied on qualitative approaches and lacked strong statistical test on the relationships among studied variables. Further, some of the studies such as Ngahu (2015) did not specify and justify their research designs and the sampling procedures used.

The financial pressure to improve the performance of financial institutions is challenging. This has made to employ new technologies or develop new product services in an attempt to maintain a competitive edge. This therefore implies that the internal control environment may not always evolve in kind.

The absence or failure to maintain an internal control environment which commensurate with the size and activities of an institution can lead to shortages of liquidity, management of resources, fraud, loan delinquency and of customer.

This leads to this study’s primary contention by answering the research question; what role does internal control have on the performance of MFIs in Cameroon? The main question is therefore divided into the following specific research questions considering internal control components.

1.3 Research Questions

1. Does the performance of microfinance institutions be affected by a good control environment?
2. Does control activity influence the performance of microfinance institutions?
3. Do information and communication affect the performance of microfinance institutions?
4. What is the effect of risk management on the performance of microfinance institutions?
5. Does monitoring affect the performance of microfinance institutions?

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