Internal Control in Microfinance Institutions
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ScribdTranslationsInternal Control in Microfinance Institutions
Translated by
ScribdTranslationsIUC / ICIA Academic Year 2018/2019
BANK / FICO Level: Bachelor's
CHAPTER 4
IMPORTANCE OF INTERNAL CONTROL IN MFIs
A Micro-Finance Institution (IMF) receives deposits from its clients, sets up
loans, tracks their repayments, handles cash. All these actions are done in
the framework of predefined procedures. Negligence, omissions, dishonesty that are
Possibilities, as in all human actions, can create serious situations such as
the granting of loans to people who would not be entitled to them, the misallocation
savings deposits, frauds...
To limit these risks, the MFIs implement a control system which
constitutes an essential component of the management of an institution and a foundation
incontournable pour un fonctionnement sûr etprudent de l’[Link] la zone Afrique
Central, according to the CEMAC / COBAC regulations concerning the conditions of activity of
microfinance institutions are required to equip themselves with
minimal control structure consisting of an internal audit function, one or two
auditors. Mutual microfinance institutions must also be
equipped with a control organ.
I. Conceptual analysis of internal control
I.1. Definition
Internal control is a process designed to minimize risks through verification.
of the effectiveness of operations, the reliability and completeness of information, and compliance
operations to laws and regulations in force.
All these elements contribute significantly to performance and transparency.
The institution. They are integrated into the daily management procedures of the institution.
I.2. Key success factors for effective internal control
Generally, the characteristics to fulfill for good internal control are
following:
Establish a risk mapping, updated regularly;
Ensure the separation of tasks;
Formalize, standardize, and disseminate the procedures for all operations;
Clearly define the roles of each employee and the interactions between them;
Promote a culture of verification.
Teacher: Dr. TIONA WAMBA Page 1 of 3
IUC / ICIA Academic Year 2018/2019
BANK / FICO Level: Bachelor's
In a microfinance institution, an internal control system allows:
Check that the operations, organization, and internal procedures are in compliance with the
regulations in force;
Check compliance with the set limits regarding risk-taking, particularly in
the credits granted to members and certain clients;
Ensure the quality of accounting and financial information.
II. Internal control in the face of risk in microfinance institutions
II.1. Identify and evaluate the risk
The IMF must first identify the risks and prioritize them.
risk mapping will be verified and then approved by the Board of Directors. It
specify the level of risk that the IMF can tolerate and the negative impact that each risk can have
to have if it is not controlled. It also specifies the key indicators and ratios that must be
monitored and analyzed regularly to track exposure to risks. A range of
acceptable values are set for each indicator.
The most commonly practiced types of fraud by employees of microfinance institutions are
fake loans, bribes or the collection of fictitious commissions from clients, and the
diversion of client funds (recording a refund or a deposit on the
another person's account). Computer frauds, involving the manipulation of the
database or computer system by an employee can also prove to be
expensive. For example, we will cite the entry of false entries in the accounting system
aimed at concealing the loss of funds (Campion, 1999).
II.2. Develop and implement the various controls
Two types of internal control are distinguished: ex ante controls, which are integrated
to routine operations, and the ex post controls, which test the regularity of the transactions
times they took place.
II.2.1. Ex ante internal controls
The most common pre-analytical controls are the following internal controls:
The control environment: Here, the board of directors and the management
general emphasize the importance of internal control, so that everyone knows
What punishment applies in the case of wrongdoing, and fraudsters must be punished;
Teacher: Dr. TIONA WAMBA Page 2 of 3
IUC / ICIA Academic Year 2018/2019
BANK / FICO Level: Bachelor's Degree
The separation of tasks: assigning the responsibility of tasks to different people.
which could lead to errors or encourage fraud if they were
carried out by a single employee. For example, in the purchasing procedure, one person
authorizes a purchase, another holds the checkbook and writes the check, a third can
the signer;
The limits: procedures set maximum levels of liquidity, for example.
can be held in the agencies; different levels of approval depending on the
amount of credit to be granted or of the expense to be incurred;
Operations documentation: every operation must be documented and this
Documentation kept up to date and maintained by the IMF in accordance with the law;
Double verification: having an operation approved by two or more individuals.
people. This is the case of the credit committee composed of several members taking a
collegial decision, the required presence of two people to open the safe, of
the obligation for the agency head to visit in addition to the credit agent for any new
client;
A personnel rotation system: may be considered for certain positions.
II.2.2. The internal controls ex post
The post-intervention checks occur when the operation has taken place and come to verify.
that it was conducted in accordance with the procedures: for example, the reconciliation of
GIS data with cash management, management control, performance control. The work of
The internal auditor is also part of the post controls. This is why we say that the
Internal control (before and after) encompasses internal audit (after).
These different internal controls are further supplemented by controls operated by
external entities: external auditors, rating agencies, supervisor.
Knowledge check
What difference should be established between a risk management department and control?
Internal and internal audit? How should these three departments work together?
together?
-Quels sont les risques opérationnels auxquels fait face votre EMF ? (7 minimum)
and the five main financial risks?
Do you think that the ex ante and ex post controls put in place by your IMF
Are they sufficient?