Chapter One

Introduction

1.0 Introduction.

this chapter will focus background of the study, Problem statement, Purpose of the
study, Research objectives, Research questions, Scope of the Study, Significance of
the study and Organization of the study.
1.1 Background of the study.

Internal control is a comprehensive term that includes all of the procedures, processes,
and control measures established by an organization to increase the probability of
achieving its business goals (Institute of Internal Auditors (Muhammed & Hussaini,
2018).
Internal control can be thought of as a set of policies and processes designed to
manage a firm's decision-making process, in support of ensuring that the organization
is pursuing the objectives established by the organization's management and board of
directors (Muhammed & Hussaini, 2018).
The essence of financial performance is the organization's ability to acquire and
deploy resources over time. Financial performance can be evaluated, among other
things, based on capital adequacy, liquidity, solvency, efficiency, leverage and
profitability. Financial performance is essentially an assessment of the organization's
ability to manage its assets. Directors of companies can make informed decisions by
using data from cash flow statements, and balance sheets, and profit-loss accounts and
changes in capital. It's important to consider both analyses and technical evaluations,
if only to provide adequate funding for the understanding of the company's financial
behaviour. Understanding the financial behaviours of an organization is necessary for
financial management in accounting practices(Hassan, 2022).
Multiple associations operating in the United States have developed frameworks for
internal controls including ISACA (Information Systems Audit and Control
Association), IIA (Institute of Internal Auditors), COSO (Committee of Sponsoring
Organizations), and AICPA (American Institute of Certified Public Accountants).
These internal controls are critical for protecting the assets of a business, ensuring the
reliability and accuracy of information, improving operational effectiveness, and
ensuring that policies and procedures are carried out as directed by management
(Gitau, 2024).
According to the Global Competitiveness Report (2019), Bangladesh was ranked
130th out of 141 countries in relation to bank soundness, situated below India,
Pakistan, and Sri Lanka. One of the most noteworthy elements of this low score is an
ineffective monitoring system. Out of all financial institutions, banks have the most
risk involved. The Bangladesh Bank oversees and regulates all banks and non-
banking financial institutions (NBFIs) and takes responsibility for all regulations in
the control processes of the banking system will fall under the supervision of
Bangladesh Bank. According to Bangladesh Bank, transparency and accountability
are critical to managing risk. In 1992, the Committee of Sponsoring Organizations of
the Treadway Commission (COSO) generated a framework for internal control. The
Bangladesh Bank subsequently drafted detailed guidelines for an internal control
system for all financial institutions for the purposes of safeguarding investors and
promoting the integrity of organizations (Chowdhury, 2021).
As a developing country, Tanzania has improvement opportunities for their internal
control systems through agencies, such as the Central Bank. The Ministry of finance
has been encouraging institutions to adopt effective internal controls, which is become
more significant for each financial institution. Each financial institution's Board of
Directors must approve sound policies and procedures and take care in ensuring an
adequate and effective internal control system to measure and manage all the risks
involved in the business and the markets it serves, including credit, financial, market,
operational, legal, and all other risks that might impact the institution(Ahmed, 2021) .
(Gitau, 2024)observed in Kenya that recent collapses of corporations and associated
cases of accounting fraud are often associated with weak internal control systems of
firms. The article further states that the Capital Markets Authority (CMA) perceive
fraud as a serious issue in the financial sector as it can adversely affect market
confidence. Using data from the CMA's fraud reports, reported cases of fraud
increased by 18 percent, from 390 in 2010 to 460 in 2011.
Since the collapse of the central government in Somalia in 1991 the country has had
continued challenges related to financial performance and the oversight of financial
affairs. With the continued break down of centralized authority, as far back as 1989,
Somalia had a relatively accessible banking and credit system, and was essentially
regulated by the central bank and a handful of commercial banks, the majority being
foreign owned. Even before the collapse of the Barre administration, the banking
industry had very low levels of impact on the daily lives of most Somalis. In 1990, the
Somali Commercial Bank was established with a working capital of 2 billion Somali
Shillings as a part of a deal with the International Monetary Fund to facilitate a
private-oriented economy. The 2 billion Somali Shillings was divided into 2,000
shares at one million Somali Shilling per share. A total of one billion Somali Shilling
was provided by the Government and the Somali Central Bank, one billion Somali
Shillings was set aside for private investors; unfortunately, only 22 shares were
bought. Unfortunately, the bank and the formal financial system of the country
disintegrated in 1991 due to the civil war (FranklinAmoo, 2009). This study will
evaluate the impact of internal control on the financial performance of Commercial
banks in Mogadishu, Somalia(Hassan, 2022).
1.2 problem statement of the study.

Banks, functioning as critical arteries in the global financial system, are inherently
interwoven with the economic well-being of societies, necessitating the establishment
and rigorous maintenance of robust internal control systems to safeguard financial
stability and promote sustainable economic growth.(GamageLow & Keving, 2018).

Internal control systems are indispensable mechanisms within organizations, serving

as the bedrock for achieving financial performance objectives. Internal controls
reduce risk, safeguard resources, guarantee record accuracy, boost productivity, and
make it easier to comply with laws, rules, regulations, and policies.(Bashaija, 2022).

By reforming companies for development, internal controls helped management deal

with the constantly shifting goals and needs of customers as well as the ever-changing
economic and competitive contexts.(KHALIF, 2022).

suggested that the control environment establishes a mindset where internal control
systems (ICS) can operate effectively throughout the organization.(Fianko Ofei et al.,
2020).

The likelihood of experiencing loss applies to organizations that have minimal or

ineffective internal controls.(Hanoon et al., 2021). This assertion is bolstered by the
findings from the Tread way Commission's 1987 Report in the United States, which
indicated that the absence of robust internal controls is often the main reason for
financial misreporting by untrustworthy companies.(Hanoon et al., 2021).

In spite internal controls of Mogadishu -Somalia banks not meet the Performance
level needed. That may Couse material mistakes and fraud. That may hurt the
existence of the Commercial banks in Mogadishu – Somalia, at the moment the
financial performance of commercial Banks in Mogadishu- Somalia is reported that
inefficiency.

With this problem commercial Banks in Mogadishu-Somalia lead more challenges as

effects Shareholders and debtor’s moral to dissatisfaction, profit margin and decrease
customer loyal.

However, this study we will examine the effect of internal control on financial
performance of commercial banks in Mogadishu Somalia.
1.3 Purpose of the study of the study.
The purpose of this study is to describe and analyse the effect of internal control on
financial performance of commercial banks in Mogadishu Somalia.
1.4 Research objectives of the study,
To examine the effects of control environment on financial performance of
commercial banks in Mogadishu Somalia.
To determine the effect of control activities on financial performance of commercial
banks in Mogadishu Somalia.
To investigate the effects of monitoring on financial performance of commercial
banks in Mogadishu Somalia.
To identify the effect of Risk assessment on financial performance of commercial
banks in Mogadishu Somalia.
To examine the effect of Information and communication on financial performance of
commercial banks in Mogadishu Somalia.
1.5 Research questions of the study.
1. what is the effect of control environment on financial performance of commercial
banks in Mogadishu Somalia?
2. What is the effect of control activities on financial performance of commercial
banks in Mogadishu Somalia?
3. What is the effect of Monitoring on financial performance of commercial banks in
Mogadishu Somalia?
[Link] is the effect of Risk assessment on financial performance of commercial banks
in Mogadishu Somalia?
5. what the effect of Information and communication on financial performance of
commercial banks in Mogadishu Somalia?
1.6 Scope of the study (content, geographical, time scope).
The study will concentrate on key components of internal control systems such as
control environment, risk assessment, control activities, information and
communication, and monitoring. It will analyse how these elements influence bank
performance indicators including profitability, operational efficiency, asset quality,
and customer satisfaction.
The study will be conducted in Mogadishu Somalia, specifically focusing on
commercial banks operating in the city. Mogadishu has been chosen because it is the
economic canter of the country and has a large market for banks and financial
services.
The study will be conducted over a period of three months, from May to July 2025.
1.7 Significance of the Study
The results of the findings would be used by the employees to in improving their
financial performance through effective implementation of the internal control
systems and processes.
The study will benefit the commercial banks in Mogadishu Somalia by assuring them
the appropriate processes are functioning performance to monitor the risks to which
the company is exposed and that the system of internal control is effective in reducing
those risks to an acceptable level.
The research would benefit the bank’s intuitions management in accounting develop
the operations and the activities of the banks also increase the performance of the
financial the system of internal Control and for provide a systematic way to solve the
problem of fraud and to assess financial crises of the banks.
The study would help researchers and academicians to expand their research into the
effect of internal control on financial performance (both public and private) in
Somalia as a literature review.
1.8 Organization of the Study.
This study is organized into five main chapters, each addressing a specific aspect of
the research to ensure clarity, logical flow, and coherence.
Chapter One: Introduction
This chapter provides a general introduction to the study. It outlines the background
of the study, the problem statement, objectives of the study, research questions, the
significance of the study, scope and limitations, and definition of key terms. It sets the
foundation for the entire research.
Chapter Two: Literature Review
This chapter presents a comprehensive review of existing literature related to internal
control and financial performance, Commercial banks in Mogadishu Somalia It
discusses relevant theories, previous empirical studies, and identifies gaps that the
current study seeks to address.
Chapter Three: Research Methodology
This chapter explains the methods and procedures used to conduct the study. It
includes details on the research design, population and sample size, data collection
instruments, data analysis techniques, and the ethical considerations followed during
the research process.
Chapter Four: Data Analysis and Findings
This chapter provides the analysis and interpretation of the data collected. It presents
the findings of the study based on the research questions and objectives. Tables,
charts, and other visual aids may be used to enhance understanding.
Chapter Five: Summary, Conclusion and Recommendations
The final chapter summarizes the main findings of the study, draws relevant
conclusions, and offers practical recommendations for Commercial Banks in
Mogadishu Somalia, policymakers, and future researchers. It also highlights
limitations of the study and suggests areas for future research.
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