ANALYSIS OF INTERNAL CONTROL SYSTEMS IN CREDIT UNDERWRITING FOR MITIGATING NON-PERFORMING LOANS: A CASE STUDY OF KSP CU HARAPAN KITA CENTRAL BELAWAN (2022–2024)

Abstract

Savings and Credit Cooperatives (Koperasi Simpan Pinjam / KSP) and Credit Unions (CU) play a pivotal role in expanding financial inclusion and delivering micro-credit to lower- and middle-income demographics. However, credit underwriting inherently exposes cooperatives to default risks, necessitating robust Internal Control Systems (ICS) to maintain loan quality and solvency. This study examines and critically evaluates the implementation and efficacy of internal control mechanisms governing credit allocation in mitigating Non-Performing Loans (NPLs) at KSP CU Harapan Kita Central Belawan over the 2022–2024 period. Employing a qualitative descriptive case study methodology, primary empirical evidence was gathered through participant observations, structured documentary audits of official Annual Member Meeting (RAT) financial reports and loan delinquency ledgers, and in-depth semi-structured interviews with key organizational actors: the Vice General Manager, Head of Credit Department, and Branch Unit Head. Analytical evaluations were structured around the Committee of Sponsoring Organizations of the Treadway Commission (COSO) framework (control environment, risk assessment, control activities, information and communication, and monitoring) analyzed via the Miles and Huberman qualitative interactive model (data reduction, data display, and conclusion verification). Empirical findings indicate that KSP CU Harapan Kita has instituted formal credit underwriting procedures incorporating the 5C credit assessment principles (Character, Capacity, Capital, Collateral, and Condition of Economy), organizational segregation of duties between credit analysts and loan committees, and progressive remedial collection protocols (written reminders, telephone follow-ups, and field home visits). Despite these formal controls, credit portfolio quality remains severely impaired. The Non-Performing Loan ratio exhibited chronic elevated volatility: 13.46% in 2022 (total delinquent credit of IDR 1.069 billion on IDR 7.944 billion portfolio), improving temporarily to 10.35% in 2023 (IDR 860.72 million delinquent on IDR 8.313 billion portfolio), before deteriorating sharply to 15.14% in 2024 (IDR 1.391 billion delinquent on IDR 9.184 billion portfolio)—consistently breaching the statutory 5.0% maximum prudential health threshold established by regulatory authorities. The primary operational causes of credit distress stem from a confluence of internal control gaps (inconsistent pre-disbursement on-site collateral appraisals, limited credit risk analytical competencies among field officers, and fragmented post-disbursement loan monitoring) and adverse external borrower realities (macroeconomic inflation, coastal informal business volatility, and lack of debtor repayment discipline). In conclusion, internal control at KSP CU Harapan Kita operates functionally in administrative loan processing but remains sub-optimal in mitigating credit default risks. To restore financial soundness, the cooperative must institutionalize digital credit scoring models, enforce mandatory on-site collateral verifications, implement dynamic post-disbursement surveillance, and establish early-warning delinquency indicators