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Research consultancy

THE IMPACT OF INTERNAL CONTROL SYSTEMS ON FINANCIAL PERFORMANCE IN FINANCIAL INSTITUTIONS: A CASE STUDY OF STANBIC BANK, MUKONO BRANCH

ABSTRACT

This study examined the effects of internal control systems on the financial performance of financial institutions, with a focus on Stanbic Bank, Mukono Branch. The objectives of the study were: (1) to identify existing internal control systems in financial institutions, (2) to analyze the relationship between internal controls and financial performance, and (3) to determine other factors influencing financial performance.

A descriptive research design was employed, incorporating both qualitative and quantitative methodologies for data analysis. Data was gathered from primary and secondary sources, including employees, management, and stakeholders at Stanbic Bank, Mukono Branch. The study population comprised administrative staff, human resource personnel, finance officers, and other key stakeholders.

Findings revealed that Stanbic Bank would benefit from engaging external auditors to enhance financial management, ensuring liquidity and improving profitability. Additionally, the study highlighted the need for stronger financial policies and accountability mechanisms to reduce costs and boost credibility. Management was advised to make more informed decisions to enhance profitability while preventing collusion among decision-makers.

The study recommended further research in areas such as:

• The influence of credit on small and medium enterprises.
• The relationship between record-keeping and financial institution performance.
• The impact of computerized accounting on financial institutions.

CHAPTER ONE: INTRODUCTION

1.1 Background of the Study

Financial institutions prioritize financial performance through continuous evaluation and operational adjustments (Visser, Matten, & Pohl, 2010). However, performance disparities exist due to varying internal control mechanisms. Research in Belgium underscores the significance of control environments, particularly factors like leadership tone, risk awareness, and clearly defined policies, in fraud detection and organizational efficiency (Sarens & De Beelde, 2006).

Internal controls refer to structured measures—such as audits, checks, and procedural safeguards—implemented to ensure operational efficiency, asset protection, and regulatory compliance (Business Dictionary). The Chartered Institute of Management Accountants (CIMA, 2006) defines internal control as a comprehensive framework ensuring operational effectiveness, financial accuracy, and legal adherence.

Effective internal controls are integral to corporate governance, with ethical values playing a crucial role in their success (Verschoor, 1999). A study in Nigeria found that robust internal controls deter fraud, while weak systems expose institutions to financial risks (Ewa & Udoayang, 2012). Similarly, Mawanda (2008) linked internal controls to financial performance in Ugandan higher education institutions, emphasizing liquidity, accountability, and reporting.

1.2 Statement of the Problem

Financial institutions face operational challenges, including poor portfolio management and economic fluctuations, which hinder profitability. A key issue is ineffective internal control systems, leading to missed targets and rising non-performing loans (New Vision, March 2015). This study investigates how internal controls impact financial performance at Stanbic Bank, Mukono Branch.

1.3 Purpose of the Study

To assess the effects of internal control systems on financial performance in financial institutions.

1.4 Objectives of the Study

1. To identify existing internal control systems in financial institutions.
2. To analyze the relationship between internal controls and financial performance.
3. To determine other factors affecting financial performance.

1.5 Research Questions

1. What internal control systems are currently used in financial institutions?
2. How do internal controls relate to financial performance?
3. What additional factors influence financial performance?

1.6 Scope of the Study

1.6.1 Subject Scope

The study focused on internal control systems (independent variable) and financial performance (dependent variable).

1.6.2 Geographical Scope

The research was conducted at Stanbic Bank, Mukono Branch, located in central Uganda.

1.6.3 Time Scope

The study analyzed data from 2012–2017 and was conducted over three months.

1.7 Significance of the Study

• Management: Insights will guide decision-making on internal control improvements.
• Customers: Enhanced service delivery through better financial practices.
• Government: Policy formulation to support financial sector growth.
• Researcher: Fulfillment of academic requirements for a Bachelor’s degree.

1.8 Definition of Terms

• Internal Controls: Processes ensuring operational efficiency, financial accuracy, and compliance (COSO, 2010).
• Performance: Organizational ability to operate profitably and adapt to challenges (Stoner, 2011).
• Financial Statements: Reports reflecting a business’s financial status (Wood, 2010).
• Quality of Financial Statements: Compliance with accounting standards to present accurate financial data (Brookson, 2011).