ROLE OF INTERNAL CONTROL SYSTEM ON FINANCIAL PERFORMANCE OF FINANCIAL INSTITUTIONS IN RWANDA A CASE STUDY OF UMURENGE SACCO BWISHYURA 2021-2023

Abstract

Due to weak internal control system, financial institutions especially, Umurenge Saccos, have recorded incessant cases of errors and fraud, embezzlement, unauthorized debit, providing loans to customers who do not meet the requirements and other malpractices, these situations affected negatively the financial performance of them. However, the study aimed at analyzing the role of internal control on financial performance of financial institutions in Rwanda and specifically to assess the relationship between control environment and financial performance of Bwishyura Sacco; to examine the relationship between control activities and financial performance of Bwishyura Sacco; to investigate the relationship between risk assessment and financial performance of Bwishyura Sacco. The study used descriptive research design and also used quantitative method in data collection and analysis. The population size for this study was composed of 19 employees of Bwishyura Sacco. Universal sampling technique was used to select respondents. Due to the fact that study population was small, the researcher used 19 respondents as sample size since they are few in number. Primary data were gathered using questionnaires Secondary data were collected using documentary reveiw. Data gathered from the field were recorded and coded into (SPSS) software version 16.0 and they were analyzed using frequencies, mean and standard deviations. Multiple regression analysis was used to enable the researcher to establish the relationship between the variables under study. The study found out that there is a positive high relationship between control environment and financial performance of Bwishyura Sacco which is equal to .715**and the sig. is .000 which is less than 0.01. In addition, study revealed that there is a positive high relationship between control activities and financial performance of Bwishyura Sacco which is equal to .823**and the sig. is .000 which is less than 0.01. Moreover, the study depicted there is a positive high relationship between risk assessment and financial performance of Bwishyura Sacco which is equal to .837**and the sig. is .000 which is less than 0.01. Furthermore, the findings indicated that internal control plays a significant role in financial performance of Bwishyura Sacco. The study also found out coefficient correlation R=0.898. This indicates that there is a positive strong relationship between internal control and financial performance of Bwishyura Sacco. The coefficient of determination, adjusted R Square indicates the variation in the dependent variable (financial performance) due to changes in the independent variable. From the findings in the above table the value of adjusted R square was 0.858. This indicates that there was a variation of 85.8% in financial performance of Bwishyura Sacco due to changes in internal control components (Control environment; Control activities and Risk assessment). The overall result shows that 85.8% of the variation in financial performance of the bank is explained by internal control components (Control environment; Control activities and Risk assessment). However, 14.2% of the variation in the financial performance of this Sacco is explained by other factors which are not captured by this model. The study concluded that internal control is a critical factor influencing the profitability the Sacco. The study recommended that Bwishyura Sacco should strengthen its risk assessment processes to effectively identify, evaluate, and mitigate risks, which could help protect its assets, reduce losses, and boost financial performance.