Improving Internal Control: A Practical Guide for Microfinance Institutions

This guide advocates a new approach to internal control that integrates control mechanisms into a larger risk management framework. This means that a microfinance institution (MFI) can:

• Proactively identify fraud and other risk exposures;
• Continuously learn from its experiences;
• Make operational improvements as necessary.

The toolkit states that exposure to fraud is a normal part of operations for any financial institution, as is exposure to credit, liquidity, interest rate, and transaction risks. The art of risk management is to determine the degree to which these risks should be controlled.

The document concludes that:

• MFIs should link internal control to risk management. A risk management feedback loop should involve the board and senior management in the risk identification and assessment process, as well as the creation of sound operational policies, procedures and systems. Next, internal control mechanisms should test and evaluate the MFI's ability to mitigate risk. Integration of line staff into the internal control process will provide feedback on the MFI's ability to manage risk without causing operational difficulties or customer service problems;
• MFIs lack information on fraud, they don't discuss it, and have limited controls to protect against it;
• The industry needs to learn more mitigating risks associated with mobilizing saving and controls for savings operations as the majority of MFIs today remain lending-only institutions.

The report offers the following recommendations:

• There should be an institutionalisation of a risk management process;
• Active board involvement in internal control needs to be ensured;
• Client visits should be incorporated into the evaluation process;
• Donors and practitioners should work together to assist and promote systems and standards of internal control.