IN today's dynamic era, access to reliable financing is crucial for the growth and sustainability of small and medium enterprises (SMEs). Although many financing companies offer to provide necessary funds to these businesses, the credibility of the financing companies remains one of the challenges faced by SMEs.
In the sector-level mapping conducted by the Microfinance Council of the Philippines Inc., Social Performance Task Force, AFD and Luxembourg Aid and Development in 2021, it was identified that one of the barriers to customers' empowerment is the lack of trust in the financial service providers, including the financing companies.
The lack of trust could have resulted from:
Transparency and disclosure issues. Customers are not adequately informed of the true cost of financing and other terms and conditions.
Exorbitant fees and charges. Customers are charged with excessive interests, fees or hidden charges.
Vague or complex contracts. Contracts are difficult to understand or contain ambiguous clauses.
Poor customer service. Inquiries and concerns are not addressed promptly or not addressed at all, loan approvals take a long time to process and the online platform is difficult to navigate.
Bad reputation. Instances of fraudulent activities, mismanagement and unethical employee behavior.
Data security breaches. Incidents of security breaches and unauthorized disclosure of personal and financial information.
Noncompliance. Failure to adhere to regulatory requirements, which impacts the company's legality.
Bridging the gap through internal audit
The financing companies could respond to customer disempowerment and regain their trust by improving transparency and disclosure, ensuring ethical treatment of customers, respecting clients' rights and data privacy, and resolving complaints timely. This is where internal audit is key. Internal audit help ensures that the financing company is operating with integrity, adherence to regulatory standards, policies and procedures, and best practices on consumer service and protection.
Internal audit, as a third line of defense, provides an independent and objective assurance and advisory services designed to add value and improve organization's operations, including but not limited to, customer's protection. Internal auditors use a systematic approach of evaluating and improving the effectiveness of risk management, control and governance processes to help the company achieve its objectives.
Internal audit focuses on the following areas to rebuild customers' trust and enhance the company's reputation in the financial services sector:
Enhancing transparency. Internal auditors ensure that loan agreement, disclosure statements and advertising materials contain adequate and non-misleading information to protect the customers from deceptive practices such as excessive fees and hidden charges that could severely impact their cash flows.
Improving operational efficiency. Internal auditors identify inefficiencies and recommend areas for improvement in processes that impact customer service, such as client acquisition, loan approval and handling customer complaints. Streamlining these processes enables financing companies to offer better, faster and more reliable services to its customers.
Detecting and preventing fraud. While not responsible for detecting and preventing fraud directly, internal auditors assess the effectiveness of internal controls designed to prevent and detect fraud and misconduct. By identifying weaknesses in control systems and recommending improvements, auditors help protect the customers from fraud, such as identity theft and account takeovers.
Ensuring data security. Internal auditors review data security practices and systems to ensure the protection of customer information from unauthorized access or breaches. Maintaining robust data security measures builds customer trust in the confidentiality and integrity of their personal and financial information.
Promoting ethical behavior. Internal auditors evaluate the company's ethical standards and corporate governance practices. They assess whether the company's actions align with ethical principles and ensure that management fosters a culture of integrity and customer-centricity.
Monitoring compliance. Internal auditor verifies whether the company complies with all relevant laws, regulations and industry standards. This includes ensuring proper registration with regulatory bodies such as the SEC, compliance with the reporting requirements and adoption of appropriate and reasonable collection practices.
Through regular audits and reporting, internal audit provides the customers, stakeholders and regulators with reasonable assurance that the company operates with integrity, transparency and compliance with applicable laws and regulations. Moreover, the operational improvements and cost efficiencies achieved by the financing companies through internal audits could benefit the SMEs in terms of more favorable terms and conditions, thereby supporting their growth and sustainability.
It is crucial for the customers, particularly SMEs, to engage only with financing companies registered with the SEC, adhering to regulatory requirements and committed to upholding customer rights and protection principles through an effective internal audit function.
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