TWO PAPERS PRESENTED BY TOYIN OLUFOLAHAN,

THE MANAGING DIRECTOR/CEO, OLOFIN MICROFINANCE

BANK PLC. AT A WORKSHOP

ORGANISEDBY THE BOARD OF ODUA COOPERATIVE

CONGLOMERATE FOR THE NOMINATED DIRECTORS OF
THE PROPOSED CINTRAST MICROFINANCE BANK LTD.
IBADAN.

Workshop Topic: Managing an effective and profitable

Microfinance Bank.
Paper I Topic: Management and Governance in Microfinance
Bank.
Paper II Topic: Fraud and Internal Control

Date: Friday 24th March, 2017

Venue: Boardroom of Odua Cooperative
Conglomerate Ltd( Obisesan Hall)
No. 1 Oba Adebimpe road, Dugbe, Ibadan
TOPIC: MANAGEMENT AND GOVERNANCE IN MICROFINANCE BANKS.

For the purpose of clarity, this paper shall be focusing on this topic by using tow perspectives:
1.0 Management of Microfinance Bank.
2.0 Governance in Microfinance Banks.

1.0 MANAGEMENT OF MICROFINANCE BANKS

Under this perspective, this paper shall be addressing the following points:
1.1 Introduction/what is Management?
1.2 Functions of a Manager in Microfinance Banks.
1.3 Critical success factors of Management in a Microfinance Banks.
1.4 Effective Management of Microfinance Banks.
1.5 Conclusion.

1.0 INTRODUCTION

Management of a Microfinance banks is “the act of getting people together to efficiently and
effectively accomplish its set goals and objectives.
It is the organization of the process that includes strategic planning, setting of objectives,
Managing resources, deploying human and financial resources needed to achieve the objectives and
measuring the results. Management thus comprises planning, organizing, staffing, leading or directing and
controlling of a Microfinance banks for the purpose of accomplishing its goals and objectives.
Management of Microfinance bank is responsible for the implementation of the policies set by the Board
of Directors (BOD) and for the day to day activities of an organization.

1.2 FUNCTIONS OF A MANAGER IN MICROFINANCE BANKS

The key functions of a manager in a typical Microfinance bank may include the following:
1.2.1 PLANNING: A manager must determine what the organization’s goals are and how to
achieve them. The manager of a Microfinance bank would need to have a marketing plan,
operational plan, hiring and training plan and a plan on how to manage delinquencies.

1.2.2 ORGANIZING: Managers are responsible for the day to day running of the bank
including organizing people and resources. A manager should be able to determine the number
of employees required to carry out the available tasks and the allocation of available resources
needed to accomplish the assigned responsibilities. This approach is critical to the success of a
bank.

1.2.3 STAFFING: A manager is responsible for the staffing of the bank by recruiting, selecting,
training and developing employees. A manager in a typical Microfinance bank often works with
the operation manager or Head of Human Resources Department to accomplish this goal.

1.2.4 LEADING: Managing and leading are not the same activity. Managing simply ensures that
tasks are completed on time and policies are followed, while Leading makes sure employees
typically follow managers because he or she is the supervisor or boss. Employees see a leader as
someone that motivates them and guides them to help meet the bank’s goals and objectives. In an
ideal situation, the manager also serves as the leader.

1.2.5 CONTROLLING: The controlling function involves monitoring the bank’s performance
to make sure goals are achieved. Managers need to pay attention to costs versus performance of
the bank. An effective manager will share his or her success in line with the overall goal with his
or her employees. This builds trust and a feeling of involvement for the employees. Etc.

1.3 CRITICAL SUCCESS FACTORS OF MANAGEMENT IN A MICROFINANCE

BANKS.

1.3.1 CLEAR STRATEGIC VISION: A Microfinance bank manager should have clear
strategic vision. Vision is the dream of what the manager wants the MFB to be, while strategy is
the large scale plan he will follow to achieve that vision.
1.3.2 KNOWLEDGE OF THE MARKET: In an increasingly competitive environment,
Microfinance bank should omit potential customers. MFBs should use market research methods
to adapt their services to the needs of their target customers/clients (demand-driven) rather than
providing a limited pre-defined range of services (supply-driven)

1.3.3 PRODUCT DEVELOPMENT: This is the creation of products with new or different
features that offer new or additional benefits to a customer. Product development can involve
modification of existing products or the presentation or formulation of an entirely new product
that satisfies the newly defined customers’ needs.

1.3.4 EMOTIONAL INTELLIGENCE: To be an effective manager in a typical Microfinance

bank, one has to have emotional intelligence. Emotional intelligence is described as “ the ability
to recognize one’s emotions, understand what they are telling you and realize how they affect
people around you’
Emotional Intelligence is thus a key element of success for managers of MFBs and enables them
to effectively manage people and relationships.

1.3.5 BUILDING A POSITIVE WORK ENVIROMENT: A manager of a Microfinance

bank should be able to respond to threats and opportunities within its dynamic work
environment. Ability of a manager to reduce those factors threatening the work environment and
to make the best use of the opportunities abound in the work environment represents a key
element of the bank’s success factors. Etc

1.4 EFFECTIVE MANAGEMENT OF MICROFINANCE BANK: Effective management of

Microfinance bank is determined by the ability of the manager to efficiently and effectively
adjust the management styles in response to the needs of the particular situations and people.
Typical management styles that could be adopted by the MFBs manager are discussed below:

1.4.1 AUTOCRATIC STYLE: A manager with this style possess strong, results driven
authority that makes things happen.
1.4.2 CHARISMATIC STYLE: This is a manager that uses his dynamic personality to
influence his employees.

1.4.3 BUREAUCRATIC STYLE: A manager with this style follows the rules and ensures that
others also follow the rules and regulations.

1.4.4 DEMOCRATIC STYLE: This managerial style enables the manager to involve
subordinates in decision making process.

1.4.5 LAISSEZ-FAIRE STYLE: This managerial style encourages a manager to give staff total
freedom to achieve results.

1.4.6 SUPPORTIVE STYLE: The manager using this type of style assists staff emotionally and
professionally to get things done.
In a nutshell, effective manager of MFBs should be dynamic enough to freely adopt and adjust to
all the managerial styles explained above in order to get the best out of his employees and
ultimately to achieve the goals and objectives of the bank.

1.6 CONCLUSION:
Effective management in Microfinance bank is very central to the overall development and
success of MFBs. For this reason, it is the responsibility of the manager to be equipped with the
necessary knowledge, skill and right attitude in order to effectively manage a successful MFB; to
do otherwise, can negate the achievement of the bank’s goal and objectives.

2.0 GOVERNANCE IN MICROFINANCE BANKS

This perspective shall focus on the following points:

2.1 Introduction
2.2 Definition of Corporate Governance
2.3 Pillars of Corporate Governance
2.4 Key elements of Corporate Governance
2.5 Best practice standard of Corporate Governance in Microfinance Banks.
2.6 Governance Structure
2.7 Conclusion

2.1 INTRODUCTION:
Implementation of good corporate governance in Microfinance banks requires effective
collaboration between the board of directors and the management of the Microfinance bank.
Effective collaboration in the sense that each party understands its roles and responsibilities in
the governance of the bank and fulfills it; directors set and management implement policies that
will ensure separations of powers and fulfillment of the duties of each officer of the bank.

2.2.1 DEFINITION OF CORPORATE GOVERNANCE

Corporate governance refers to the system by which corporations are directed and controlled.
The governance structure specifies the distribution of rights and responsibilities among different
participants in a Microfinance bank (such as the board of directors, managers, shareholders,
creditors, auditors, regulators and other stakeholders) and specifies the rules and procedures for
making decisions.
2.2.2 Governance is a mechanism for monitoring the actions, policies and decisions of
corporations.
2.2.3 Governance is a process by which a board of directors, through its management guides an
institution ( a Microfinance bank) in fulfilling its corporate mission.
A board of directors is established to provide oversight and give direction to the manager of the
bank.

2.3 PILLARS OF CORPORATE GOVERNANCE

The four pillars of corporate governance are listed below:

 Transparency
 Fairness
  Accountability
 Responsibility

2.4 THE KEY ELEMENTS OF CORPORATE GOVERNANCE

The key elements of corporate governance are highlighted below:
 Good board practices
 Effective control process
 Transparent disclosure
 Well-defined shareholders
 Board commitment.

2.5 BEST PRACTICE STANDARD OF CORPORATE GOVERNANCE IN

MICROFINANCE BANKS

2.5.1 FORMATION OF BOARD OF DIRECTORS.

2.5.1.1 TYPES OF BOARD OF DIRECTORS

 THE RUBBER-STAMP BOARD: It only reacts to and supports the management.

 THE HANDS-ON BOARD: It is directly involved in the operations of the bank and
taking up some of the management’s role.
 THE REPRESENTATIONAL BOARD: It is made up of highly influential individuals
with access to sources of power and funds.
 THE ENGAGED BOARD: It is well equipped to make informed decisions on a timely
and efficient basis. It has right mix of skills to add value to the board. It guides and
judges the Managing Director. It understands its responsibilities to oversee the
management of the bank.
2.5.2 THE BOARD SIZE AND ITS COMPOSITION:

The composition of the board of a Microfinance bank is made up of owners or those who
represent the interest of owners. The size of the board should be large enough to enable the
individuals on the board to take responsibility for their roles and responsibilities even if one or a
few directors are indisposed. Central Bank of Nigeria regulatory guidelines have specified lower
and upper limits of 5 and 7 for the size of the board of a Microfinance Bank.

2.5.3 THE BOARD MEMBERSHIP TERMS

The terms of board membership needs to be clearly defined so that the directors do not feel
unaccountable. There should be a mechanism for removal of inactive members in order to
prevent divisions within the board or the bank. The board needs to be properly structured to
enable members to effectively perform their duties and responsibilities as related to their position
in the board. There should be a non-biased periodic election as a way of retaining directors that
perform or excel while dropping those that did not live up to expectation.
It also allows new entrants to bring in new ideas.

2.5.4 FACTORS INFLUENCING THE CHOICE OF MICROFINANCE BANK BOARD

OF DIRECTORS.

Here are three points to consider:

2.5.4.1 SKILLS AND CHARACTERISTICS: The skills and characteristics of board members
are important not only to determine those who serve as directors but also as head of board
committees. It will also require some technical skills to chair a Board Committee such as Board
Credit Committee, Finance Committee, Audit Committee etc

2.5.4.2 Directors’ ability and willingness to fulfill their duties as lay down by the board.
2.5.4.3 COMMITMENT TO DEVELOPEMNT: The Board’s commitment to developing the
knowledge and skills of new and existing members is very important for effective governance.
The quality of the decision-making of a board is dependent on the knowledge and skills that the
individual directors have.

2.6 GOVERNANCE STRUCTURE: There are three mechanism a board needs to establish and
to operate effectively:

2.6.1 SEPERATION OF RESPONSIBILITIES: There should be a clear distinction between

the responsibilities between the CEO/Managing Director and that of the Board Chairman. The
Chairman cannot play his/her role properly and effectively if the same person is also playing the
role of CEO/Managing Director.

2.6.2 COMMITTEES: Creating and utilizing well defined Board Committees to address key
issues in preparation for consideration by the full board can be useful. Board meeting should not
be taken up by work that can best be done in a Board Committee.

2.6.3 PROCEDURES: Well-defined and clear procedures are essential for effective governance
to enable individual Board members discharge their roles effectively. Proper documentation with
accurate Board minutes and a Board policy manual are essential for effective governance which
is one of the critical success factors for any Microfinance bank.

2.6.4 ESSENTIAL ASPECTS OF GOOD ETHICAL BEHAVIOUR OF BOARD

MEMEBRS: These may include:
 DUTY OF LOYALTY: This duty demands that the Directors place the interest of the
bank above self or that of other organization.
 DUTY OF CARE: This duty demands that the directors should be fully informed and
participate in decisions prudently and take responsibility for their actions.
 DUTY OF OBEDIENCE: This duty requires that Directors should be faithfully to the
bank’s mission by being open and transparent with shareholders, regulators and
customers/clients.
2.6..5 FIDUCIARY RESPONSIBILITY OF DIRECTORS IN MICROFINANCE BANKS.

Microfinance bank Boards have three responsibilities to consider:

i. Protection of Depositor’s funds and maintaining the bank’s solvency.
ii. Protection of Investors’ Funds
iii. Protection of Global Image of Microfinance banks.
The Board of large MFBs must understand that their fiduciary responsibilities extend beyond
their governed bank to the wider Microfinance Industry.
NOTE: Fiduciary is a person or persons to whom property or power is entrusted for the benefits
of another.

2.6.6 LEGAL OBLIGATION OF THE BOARD OF DIRECTORS

The Board should ensure that the bank

 Maintain compliance with by-laws, articles of Incorporation, Internal policies and
procedures.
 Understand and abide by the regulatory requirements of its activities.
 Maintain compliance with CBN, governments and other regulatory bodies rules and
regulations.
2.6.7 FUNCTIONS OF THE BOARD CHAIRMAN

In consultation with the MD/CEO, the chairman plays the following key roles:
i. Plans and organizes Board activities.
ii. Chairs annual and special meetings of the shareholders
iii. Works with the CEO to achieve the bank’s vision and strategic business plan.
iv. Manage external relationship’s
v. Provide link between Board and Management
vi. Ensure Active Board Committee.
2.6.8 DUTIES AND RESPONSIBILITIES OF THE BOARD: Can be broadly grouped into
four categories popularly referred to as CASS.

 COMPLIANCE: With Articles of Association, regulatory guidelines and other legal

requirements etc because the Board can be held liable for the bank’s activities.
 ACCOUNTABILITY: The Board ensures management accountability by hiring
competent professionals, establishing clear goals and closely monitoring their
performance.
 STRATEGIC DIRECTION: The Board has the responsibility for setting policy and
providing strategic direction to the MFB.
 SELF-ASSESSMENT: The Board is expected to continually improve its performance
by assessing its performance on a regular basis and maintaining continuity and renewal of
its membership.

CONCLUSION:

Good governance is about both achieving desired results and achieving them in the right way.
Therefore, effective governance must strike the appropriate balance in the relationship between a
Board of Directors and Management in their combined efforts to move the Microfinance bank
forward. Each brings unique skills to this joint effort and views the institution from different
lenses.

Prepared and Delivered by:

Mr Toyin Olufolahan
Managing Director, Olofin Microfinance Bank Plc
FRAUD AND INTERNAL CONTROL SYSTEM IN MICROFINANCE BANKS

INTERNAL CONTROL SYSTEM IN MICROFINANCE BANKS

The following points shall be discussed under this section:

 Introduction
 Definition of Internal Control System
 Factors considered for effective implementation of Internal Control System
 Responsibility of Internal Control System in MFB.
 Limitation of Internal Control System in MFB.
 Conclusion.

INTRODUTION

Internal Control System is considered to be essential in Microfinance bank as this will enhance
the effectiveness and efficiency of the management of the bank. An effective and efficient
Internal Control System ensures that all recorded transactions are real, properly valued, recorded
timely, correctly classified, correctly summarized and correctly posted. These features made the
Internal Control System a critical component of bank management and a foundation for the safe
and sound operation of Microfinance Banks.

DEFINITION OF INTERNAL CONTROL SYSTEM

i. Internal Control System refers to all the policies and procedures adopted by the management of
Microfinance Bank to help ensure, as far as is practicable, the orderly and efficient conduct of its
routine business.
ii. The Auditing Practice Committee (APC) defines the Internal Control System as “ the whole
system of controls, financial and otherwise, established by the management in order to carry on
the business of the enterprise (i.e. MFBs) in an orderly and efficient manner, ensure adherence to
management policies, safeguard the assets and ensure so far as possible the completeness and
accuracy of the records”.
The key points from the above definition (ii) is to ensure that:
 The business of the entity (MFB) is carried in an orderly and efficient manner devoid of
any abnormalities;
 The various activities within the entity (MFB) is in conformity to established
management policies;
 The assets of the entity is not stolen or mis-applied always; and
 The underlying records and allied documents are secured, complete, accurate and valid.
Strong Internal Control System can help to ensure that the goals and objectives of Microfinance
banks are met, such as;
 Achieve long-term profitability targets and maintain reliable financial and management
reporting.
 Comply with laws and regulations as well as policies, plans, Internal rules and
procedures.
 Prevention and completeness of accounting records.
 Protection of staff members against disinformation
 Create control environment which is the overall attitude, awareness and actions of the
Board of Directors and managers regarding the Internal Control System and its
importance.

TYPES OF INTERNAL CONTROL SYSTEM

Type of Internal Control System that can be put in place in a Microfinance Bank is summarized
with acronym “PAPAMOSSAB”;
1. PHYSICAL CONTROL: These are concerned mainly with the custody of assets and
involve procedures and security measures designed to ensure that access to assets is
limited to authorized personnel.
2. ARITHMETICAL AND ACCOUNTING CONTROL: These are the controls with the
recording functions which check that the transactions to be recorded and processed have
been authorized.
3. PERSONNEL CONTROL: These are the procedures to ensure that personnel have
capabilities and required skills to enable them carry out their responsibilities. It involves
the qualification, competence and integrity of the personnel which are important features
required to set up an effective Internal Control System.
4. AUTHORIZATION AND APPROVAL: All transactions should require authorization
or approval by appropriate responsible person. The limits, for these authorizations should
be specified.
5. MANAGEMENT CONTROL: These are the controls exercised by Management
outside the day-to-day routine of the system. They include the overall supervisory
controls exercised by management, the Internal Audit function, the review of
management accounts and comparison thereof with budgets.
6. ORGANISATION CONTROL: Bank should have a plan of their organization, defining
and allocating responsibilities and identifying lines of reporting for all aspects of the
bank’s operations, including the Control System.
7. SEGREGATION OF DUTIES: Segregation of duties reduces the risks of intentional
manipulation or error and increases the element of checking. Functions which should be
separated include those of authorization, execution, custody and recording.
8. SUPERVISION CONTROL: Any system of Internal Control should include the
supervision by responsible officials of day-to-day transactions and the recording thereof.
9. ACKNOWLEDGEMENT OF PERFORMANCE: There should be procedures
designed, communicated and enforced to ensure that every person performing a function
acknowledges his activities by means of signature and initials.
10. BUDGET AND BUDGETARY CONTROL: This entails the setting of standard and
determination of variance, which help the bank to remain on course.
 FACTORS CONSIDERED FOR EFFECTIVE IMPLEMENTATION OF INTERNAL
CONTROL SYSTEM IN MFB

 The nature and size of the business conducted.

 The staff strength of the bank especially the number of administrative and accounting
staff.
 The materiality of the transaction concerned
 The management style of the bank, especially the trust placed in the integrity and
honesty of the key personnel and the ability of top management to supervise their
own subordinate staff.
 The cost-benefit analysis of operating the Internal Control System where the cost is
more than the benefits, a rational decision has to be taken which may affect the
implementation of Internal Control System e.t.c.

WHO ARE RESPONSIBLE FOR INTERNAL CONTROL SYSTEM IN

MICROFINANCE BANK?

Although, every employee of the bank is responsible for the Internal Control in their area of
operation but the final responsibility for Internal Control rest with the Board of Directors of the
bank.
The Board of Directors of Microfinance banks are responsible for Internal Control System in the
following ways:
 Approving and periodically reviewing the overall business strategies and significant
policies of the bank;
 Understanding the major risks run by the bank;
 Setting acceptable levels for these risks and ensuring that Senior Management take the
steps necessary to identify, measure, monitor and control these risks;
 Approving the organizational structure;
 Ensuring that Senior Management is monitoring the effectiveness of the Internal
Control System; and
  Ensuring that an adequate and effective system of Internal Control is established and
maintained while the Board of Directors is responsible for putting in place the
necessary Internal Control mechanism, Senior Management is responsible for the
implementation of the strategies and policies approved by the Board.

LIMITATION OF INTERNAL CONTROL SYSTEM IN MICROFINANCE BANKS

 COST VERSUS BENEFITS: A control should be cost effective, that is, the cost of
implementing a control relative to the probability of risk of a loss and the size of the loss.
Some control system may not be instituted merely because they are not cost effective.
 ABNORMALITIES: Controls are typically directed towards normal everyday
transactions. The abnormal and unusual transactions are generally not covered, primarily
because of cost benefit issues.
 HUMAN ERROR: This may be due to errors of judgment and interpretation,
misunderstanding, carelessness, fatigue or distraction. These errors can undermine the
successful implementation of Internal Control System. Thus, it is the responsibility of the
Internal Control Supervisor to monitor and report such errors.
 STAFF TURNOVER: Staff who has worked in an area for some time are normally
more efficient and familiar with processes than new staff. Rotating staff, High staff
turnover or rapid expansion and adding new staff limit the effectiveness of Internal
Controls.
 WORK PRESSURE: Pressure exerted from within caused by heavy work load and
pressure from outside the bank can influence the integrity and competence of staff.
Pressure caused by heavy work load can make the workers to circumvent Internal Control
processes and procedures thereby exposing the MFB to risks.
 COLLUSION: If a Control System is solely dependent on segregation of duties,
Internal Controls can easily be compromised when two or more of those responsible go
together to purposely defraud the organization. The possibility of collusion will be
minimized by Information Technology Control, frequent and random checks and some
form of staff reshuffling.
CONCLUSION

Internal Control System is not only a management tools of ensuring that the banks are carrying
out their operations in most effective and efficient manner but also a statutory requirement for
Microfinance bank. It is expected that every stakeholders in Microfinance bank most especially
the Board of Directors, Management and other Senior Staff should play their roles in ensuring
that strong Internal Control System is established and implemented without any influence on the
part of stake holder to disrupt the controls put in place by the management.

FRAUD IN MICROFINANCE BANK

This topic shall be discussed under the following points:

1. Definition of fraud

2. Common types of fraud in MFB

3. Causes of fraud in MFB

4. Fraud detection signals in MFB

5. Fraud reduction/ prevention stategies.

6. Fraud by employees

7. Response to fraud in MFB.

8. Key challenges to fraud prevention

9. Conclusion.

1. DEFINITION:

Fraud is a deception deliberately practiced in order to secure unfair or unlawful gain.

Although the control systems in a microfinance bank cannot be fraud- proof, MFBs are
encouraged to maintain zero tolerance for fraud, hence the dangerous signals should be
monitored.
2. COMMON TYPES OF FRAUD IN MICROFINANCE BANKS.

The Most common types of fraud that may occur in microfinance bank may include the
following:

 Fictitious loans
 Kickbacks
 Cash theft
 Collusion in issuance of loans
 Manipulation of financial data
 Rescheduling and refinancing.
 Inappropriate write offs. e.t.c.

3. CAUSES OF FRAUDS IN MICROFINANCE BANKS.

 INCREASE IN DELINQUENCY:- There is a link between fraud and delinquency. The

internal control officer should re- examine both lending policies and reporting procedures
by conducting monthly surprise checks.
 ACCOUNTING IRREGULARITIES:- There is a link between fraud and inadequate
book keeping. In each branch, the internal control supervisor should examine accounting
procedure and maintain a system of independent review.
 UNMOTIVATED EMPLOYEE:- There is a link between fraud and unmotivated
employees caused by poor remuneration. Employee with poor wages often demand for
tips, bribes and gratification from potential loan applicants.
Microfinance banks should examine the institutional culture, review the wages structure
and make it competitive, review staff bonuses and allowances and create a "fraud
awareness" philosophy. e.t.c.
4. FRAUD DETECTION SIGNALS IN MICROFINANCE BANKS.

1. An employee exceeds scope of responsibilities. For example, individual negotiates

contracts and assumes responsibility for approving invoices in order to get kickbacks.
2. An unusual reduction in, or loss of a regular customer's business. For example, key
employee has silent partnership with a new competitor.

3. Customer relation officer or loan officer also approves a loan. For example, asset
appraisals or financial information is inflated and loans are given in exchange for
kickbacks.

4. Absentee ownership of a small business that borrows from the banks. For example,
manager pays personal debts with company funds.

5. An employee appears to be living beyond his/her means. For example, employee is

embezzling to support the "highlife"

6. Open ended contracts with clients and suppliers.

7. Technology errors. For example staff colluding with engineers to over bill the bank in
the name of correcting the error. e.t.c.

5. FRAUD REDUCTION OR PREVENTION STRATEGIES IN MICROFINANCE

BANKS:

1. SIMPLICITY OF OPERATIONS: By simplifying the bank operations, it becomes

difficult for staff to make mistakes, with the reduction in mistakes and clarity of the
operations of the bank, staff will find it difficult to commit fraud.

2. TRANSPARENCY: This is the ability to see clearly what is happening at a lending

point or credit unit and to pinpoint responsibility for outcomes. preventing fraud should
be the key element in several phases of the lending process of microfinance banks.
 3. LOAN PROCESSING: To prevent fraud in loan processing, loan origination,
appraisal, approval and monitoring should be done by different officers of the bank.

4. LOAN MONITORING: Clients should not be given more than one loan at a time in
order to prevent client from using one loan to pay another. someone(i.e. senior loan
officer) should be designated to monitor delinquent loans.

5. LOAN REPAYMENT/ CASH DEPOSIT: Both should be captured as soon as

possible on the bank's system (MIS) in order to avoid cash suppression by cashier or
bank officers and ensure that the reports printed from the system can be as accurate as
possible.

6. SUPERVISION: Periodic supervision visits should be carried out by the unit Heads on
randomly selected clients. The internal control supervisor should conduct at least
monthly internal audit in each unit. The Head of internal control (Audit Unit) should
conduct a monthly review on the reports submitted by Branch managers/Unit
supervisors/Head of units or Cash centres.

7. SANCTIONS: Response on delinquent clients and staffs that commit fraud should be
swift, decisive and consistent. The actions taken would send a clear message that fraud
is taken seriously and will not be tolerated.

8. HUMAN RESOURCE POLICIES: This should be designed to attract the potential

employees of high integrity and honesty with attitude of zero tolerance to fraud. HRM
policies should also focus on organising awareness training on fraud signals and
prevention for the staff.

9. CREDIT COMMITTEE: The composition should be made of officers with high

integrity, honesty and well experienced in loan processing in order to make the
committee effective and result oriented.

10. CLIENT EDUCATION: The bank should regularly organise client forum where
clients can be given orientations on how to detect fraud and how to prevent it. e.t.c.

6. FACTORS CONTRIBUTING TO FRAUD BY EMPLOYEES:

 1. SITUATIONAL PRESSURE:- Situation can force employees into committing fraud.
such situations includes: personal financial difficulties; personal vices or addictions such
as gambling, drugs, extensive debt, e.t.c; job dissatisfaction; unrealistic deadlines and
performance goals; pressure from fellow employees or friends, pressure from extended
family responsibilities: and pressure for status symbols like vehicle, a large house, e.t.c.
The MFB should know its employees background very well and know what motivates
and inspired them.

2. OPPORTUNITY: The cause of fraud could be an opportunity that presents itself to

staff such as: a close working relationship with bank suppliers or contractors; lack of
proper internal control, failure to enforce the existing controls, incomplete or late
bookkeeping and reporting. e.t.c. The MFB should make all efforts in limiting
opportunities for employee fraud through internal controls, policies, procedures and
system.

3. PERSONAL CHARACTERISTICS: The personal characteristics of staff may lead

them to commit fraud. These include lack of strong moral character, greed and personal
egotism.

The management of MFB should find solution to help staff with such characters to
overcome them.

7. THE CONTINGENCY PLAN OF RESPONDING TO FRAUD IN

MICROFINANCE BANKS.

If fraud is identified, the MFB needs to quickly move into damage control mode and follow
the contingency plans. The contingency might include:

 the Process for termination of employment,

 review of the bank policies on fraud,
 initiating legal proceedings and efforts to recoup losses,
 the process of approaching the clients who were victimized,
 Processes to protect the brand image of the bank,
  processes to develop public relations and build trust and changes that need to be
made in the internal control policies. e.t.c.

8. KEY CHALLENGES TO FRAUD PREVENTION IN MICROFINANCE BANKS.

The key challenges that the MFB will experience in trying to establish effective internal
control include:

 Maintaining effective control of fraud without excessive cost or burdensome

procedure as the program grows.
 Maintaining high staff morale and culture of ethic in a large growing program.
 Maintaining awareness of new more complex types of fraud as the MFB develops
new products and becomes more sophisticated. e.t.c.

9. CONCLUSION:
Reducing the risk of fraud is primarily a matter of good motivational management, of
creating a work environment that reduces the incentives for employees to commit fraud.
To eliminate the risk of fraud with clients, MFBs should adopt the policy of minimum
use of paper transactions and maximum utilisation of technology. The MFB should
make all possible efforts in limiting opportunities for employee fraud through strong
internal controls, policies and procedures. Finally, MFBs should put in place measures
to prevent fraud, maintain internal controls and ensure un- interrupted operations of the
bank.

Paper delivered by:

Mr. Toyin Olufolahan
Managing Director
Olofin Microfinance Bank Plc.