Determinants and effects of the internal audit function in microfinance institutions : a global perspective : a thesis presented in partial fulfilment of the requirements for the degree of Doctor of Philosophy in Accountancy at Massey University, Manawatu Campus, New Zealand

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Massey University
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This research investigates the determinants and effects of the internal audit (IA) function in microfinance institutions (MFIs) using data from the World Bank’s Microfinance Information Exchange database. The sample is comprised of 1,025 MFIs during the period 2010–2018. MFIs are specialised financial institutions established to provide vital financial services to the poor, and it is of particular interest to identify and understand the determinants of their IA function. Moreover, IA has wider implications for the microfinance industry which is reported to lack effective governance and control mechanisms. This thesis therefore consists of two distinct studies: (i) the study of the determinants of IA function in MFIs; (ii) the study of the association between IA function, loan losses, and financial performance in MFIs. In the first study, I find that as MFIs increase outreach, proportion of female board directors, and level of financial performance, the existence of the IA function in MFIs is advanced. I also find that sensitivity to operational costs can deter MFIs from investing in the IA function. In the second study, I find that the IA function reduces the rate of loan loss occurrence in MFIs. I also find that the IA function improves the financial performance of MFIs through its significant positive effect on institutional operational self-sufficiency. Furthermore, I find that the negative association between loan losses and financial performance is not significantly higher in MFIs without IA, than in those with IA. The IA function therefore both reduces the risk of writing off bad loans and improves profitability, but it cannot solitarily eliminate the adverse impact of loan losses on MFI financial performance. This thesis extends the corporate governance and IA literature by identifying the factors that determine IA existence from the MFI perspective. It also provides evidence of the effect of the IA function on MFI loan losses and financial performance. This thesis reveals the potentiality of the IA function for improving governance and risk management in MFIs and its findings provide policy and practice implications for the microfinance industry, development agencies and governments to consider.
Financial services industry, Auditing, Microfinance, Auditing, Internal