Title of the Research Project (Assessing the Effect of Internal Audit on Portfolio at Risk (PAR) Management: Evidence from Selected Microfinance Institutions in Lusaka, Zambia)

Abstract

This study examines the impact of internal audit practices on portfolio-at-risk (PAR) management within selected microfinance institutions (MFIs) in Zambia, emphasizing their role in enhancing financial resilience and sustainability. Using a mixed-methods researchapproach, the study employs a quantitative correlational design to assess the relationship between internal audit controls and PAR management. Regression analysis and Pearson correlation were used to measure the extent to which internal audit practices influence PAR levels, while qualitative insights were obtained through structured interviews with internal auditors and risk managers in MFIs. The findings reveal a strong positive relationship between internal audit practices and effective PAR management. Specifically, regression results indicate that a unit improvement in internal audit controls results in a 2.077-unit reduction in PAR levels (p < 0.05), demonstrating the significance of strong internal control mechanisms in reducing credit risk. Descriptive statistics further show that MFIs with well-structured internal audit systems consistently report lower PAR levels, highlighting the role of internal audit in improving financial stability and risk mitigation. However, the study also identifies a gap between audit recommendations and their implementation, with a weak correlation (r = 0.15, p > 0.05) between audit findings and actionable improvements. This misalignment is primarily attributed to organizational inertia, limited stakeholder engagement, and insufficient training, which hinder the effective application of audit insights. The study emphasizes that without proactive efforts to address these barriers, MFIs may struggle to fully leverage internal audit recommendations for improved PAR management. To enhance the effectiveness of internal audits, the study recommends strengthening audit frameworks, increasing stakeholder involvement, and implementing targeted training programs to equip audit teams with advanced risk mitigation skills. Notably, 63.6% of the surveyed institutions have already adopted proactive risk reduction strategies, reinforcing the need for a forward-thinking approach to financial management in the microfinance sector. Additionally, the study underscores the importance of technological integration in internal control mechanisms, advocating for the adoption of automated audit and risk assessment tools. These tools enhance real-time monitoring of PAR levels, minimize human error, and facilitate timely corrective actions, thereby improving audit efficiency and risk management effectiveness. By providing empirical evidence on the crucial role of internal audit practices in financial sustainability, this study contributes to the growing body of literature on risk management within MFIs. The findings highlight the necessity of fostering a culture of adaptability and continuous learning to overcome resistance to change and ensure that audit recommendations translate into meaningful improvements. Implementing the proposed strategies will enable MFIs to strengthen financial resilience, enhance loan portfolio quality, and improve long-term sustainability in an increasingly competitive microfinance landscape. Key words: Internal Audit, Internal Audit Practices, Internal Audit Controls, Internal Audit Recommendations, PAR Management, MFIs