Internal Controls in Small/Medium MFIs

Highlighting the importance of internal audit and control for institutional growth
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This note stresses the need for MFIs to have a system of sound internal audit and control. Although setting up such systems may appear complex and costly, there are innovative and cost effective ways to build them.MFI audit and internal controls should cover financial transactions, operations and adherence to mission. Many small and medium MFIs sideline internal control procedures because they slow down the expansion process and seem too costly. In the long run, however, incremental costs of poor internal controls become much higher than anticipated savings. The five components of an effective internal control mechanism include:

  • Control environment;
  • Risk assessment;
  • Control activities;
  • Information and communication;
  • Monitoring.

While setting up controls, it is also important to ensure compliance by regular monitoring. For compliance to be successful, MFI staff needs to understand the issues and take necessary corrective measures. Tracking previous compliance issues and setting up mechanisms for information sharing further facilitate the process.

About this Publication

By Pandey, S.