Abstract

Microfinance has evolved by providing micro credits to respond to the furthermost financial and non-financial needs of the citizens, to eradicate poverty and increase financial inclusion. Most studies undertaken in the past few years have focused mainly on outreach of MFI’s and their impact on profitability and not on internal control system and lack of clarity on the extent to which internal control system influences financial performance (Narver, 2007) will therefore

continue to inhibit common understanding and explanation which might deter performance improvement in Ugandan microfinance institutions. Failure by MFIs to monitor portfolio quality closely and take action when necessary and this has threatened the going concern of microfinance industry in Uganda. The study analyzed the relationship between internal control system and financial performance of MFIs in central region Uganda and it was hypothesized that internal control system positively influences financial performance of MFIs in central region Uganda. MFIs have come under spotlight for cases of poor financial performance. Lack

of empirical studies to assess the impact of internal control system on the financial performance of microfinance institutions in Uganda is the motivation behind this study. Therefore, this study is important not only because it fills the gap, but also it set out to address this evident knowledge gap. The study adopted positive-phenomenological, epistemology and quantitative-qualitative methodology dimension with cross sectional and correlation designs, the unit of analysis was

Microfinance Institutions registered with Association of Microfinance Institutions, and employees were the units of inquiry. Structural Equations Modeling with Analysis of Moment Structures were used to for statistical modeling Besides, Hierarchical regression was used to test the predictive power of the variables

and indicate precisely what happens to the model as different predictor variables are introduced in the model fit. This study revealed that two of the predictor variables are strong predictors of financial performance of MFIs. The study further revealed that internal control system was found to be strongly and positively

correlated with financial performance. And internal control system elements were found to be positive predictors of financial performance. The present study supported a multi-theoretic approach in explaining financial performance of MFIs in Uganda. 

The study supports the stewardship theory in explaining the controls system together with stakeholder as the theories that help in explaining financial performance of MFIs. 

The study confirmed efficient control system factor structure of observed variables and the latent variables. As a result, the study

provided models for efficient internal control systems. These models can then used to provide a trajectory for improving financial performance of MFIs in Uganda

.Regardless of the existence of control systems in MFI, the results revealed that internal control systems were less efficient due to lack of close monitoring. It

recommended that MFIs should enhance controls to ensure that resources are obtained and used effectively and efficiently in the accomplishment of the organization’s goals Policy makers, AMFIU, PSFU and MFIs may use these findings as a way of improving financial performance of MFIs in Uganda since the MFIs are great contributors to the Ugandan economy