A REPORT ON

“HOW IMPORTANT IS INTERNAL CONTROL IN

MICROFINANCE”

BY: - MEHULI AICH ROY

TO:-
AROHAN FINANCIAL SERVICES LTD.
'Prafulla', 195/1 Rajdanga Chakrabortipara, Kasba
Kolkata – 700 107.
 INTRODUCTION

Microfinance is the provision of financial services to low-income clients, poor households both
in urban & rural areas who are generally not bankable.
It can be defined as the supply of loans, savings and other basic financial services to the
poor.

WHAT IS INTERNAL CONTROL?

Internal control comprises the institution’s mechanisms to monitor risks before and
after operations.

INTERNAL CONTROL PROCESS IN MICROFINANCE:

• To verify the effectiveness and efficiency of the operations.
• To assure reliability & completeness of Financial and Management
Information.
• To comply with applicable laws & regulations.

INTERNAL CONTROL IS A PART OF RISK MANAGEMENT WHILE

INTERNAL AUDIT IS A PART OF INTERNAL CONTROL.

INTERNAL AUDIT:
Internal audit is a systematic “ex-post” appraisal of an institution’s operations and
financial reports.

KEY AUDIT AREAS IN MICROFINANCE:

• Cash
• Loans
• Provisions
• Savings
• Computer system
• Fixed assets
• Documentation
• Write-off
• Financial statement
• Recoveries
• GRT
• Registers
WHY INTERNAL CONTROL IS IMPOETANT IN MICROFINANCE?

Bank failures and widespread losses over the past two decades have elevated the
importance of effective risk management and internal control within the formal
financial sector worldwide.
Straddling the formal and informal financial sectors, the microfinance
industry also recognizes the importance of effective internal control. As more
growth & overspread operations Internal Control has become an integral part in the
microfinance process.

CHARACTERISTICS OF MFIs THAT MAKES THEM VULNARABLE:-

1. Natural disaster.
2. Corruption.
3. De-motivated Employees.
4. Decentralise nature if MFIs.
5. Weak information system.
6. Weak or non-existence of internal control.
7. Non-standardization of multiple loan products.
8. Handling of cash by loan officers and other field staff.

COMMON TYPES OF RISK IN MICROFINANCE:

1. Credit risk
2. Market risk
3. Operational risk-
• Human.
• Process.
• Technology.
4. Strategic risk
5. Liquidity risk
6. Management quality
7. Competition
8. Profitability
9. Staffing
10. Product development.
WHY INTERNAL CONTROL IS IMPLEMENTATED

To remain in the competitive market, MFIs are undertaking product and

geographical expansion, which introduce new risks and challenges imposed by
rapid growth. An effective system of internal control allows the MFI to assume
additional risks. It minimizes financial surprises and protects itself from significant
financial loss. Thus, internal control is an integral component of risk management.
Internal control is implemented in microfinance institutions keeping in mind
to protect:
1. Stakeholders concern
2. Donors desire
3. Board members reputation & obligations
4. Investors interest
5. Borrowers access to loans
6. Depositors safety &
7. Regulators.

Microfinance institutions use internal control mechanisms to ensure that staff

respects their organizational policies and procedures. Internal control and internal
audit play important roles in the risk management feedback loop, in which the
information generated in the internal control process is reported back to the board
and management. The information generated is
• Complete
• Accurate &
• Timely.
 CONCLUSIONS

As more microfinance institutions grow and become formal financial institutions, the need
for internal control systems increases. While each MFI has a unique risk profile and
operational structure that determine which types of controls are appropriate

1. MFIs should link internal control to risk management.

2. Institutionalize a risk management process.
3. Ensure active board involvement in internal control.
4. Incorporate client visits into the evaluation process.
5. Regulatory requirements.
6. Technical assistance.