OVERVIEW AND IMPACT OF FRAUD IN THE BANKING INDUSTRY IN NIGERIA

By

Author

Presented To

Department of Accountancy

PREFACE

The primary aim of this research work is to examine, detect, prevent and eliminate the impact of fraud in the bank.

The work is divided into three chapters, the first focused on the introduction, which identified many definition of fraud. It also deals with the statement of problem, significance of study, limitations of the study, significance, hypothesis and definition of terms.

Chapter two reviews related literature. While chapter three summarized the findings, conclusion and necessary recommendations were also given.

ABSTRACT

Fraud is an awful phenomenon, which like a vein has invaded Nigeria banking industries and the society in general, and puts any organization that it comes into in a state of liquidation.

This study highlights the bank fraud, extent of fraud in banks, effects of bank fraud, detection, and presentation and control measures adopted by management to check fraud incidents.

This study highlights the nature and various types of fraud, causes of bank fraud, extent of fraud in banks, effects of bank fraud, detection, and presentation and control measures adopted by management to check fraud incidents.

The purpose of this research work is to find out whether there is significance level of fraud in Nigerian banks, to know whether Nigerians practice, aid or abate fraud and to consider the adequacy of the internal control system in detecting and preventing fraud in the bank.

Hypothesis were formulated and tested with chi-square and inference drawn there from. The collection includes a well-structured and easy to follow questionnaire. Primary data were collected through this medium from 30 respondents. The findings revealed that compensation of banking services and the maintenance of effective internal control mechanism has helped to reduce the incidence of fraudulent activities in the bank. In view of this, it is the recommendation that adequate internal control system should be maintained, effective fraud management, strict adherence of administrative management policies should be ensured to check and possibly eliminate fraud incidence in the bank.

The detection and prevention of frauds should be elaborative effect between banks, their customers, the public and the government. Frauds in the banking system should as much as possible, be minimized as it kills the bank and destroys the economy of a nation.

Finally, the research adduced that continuous vigilance should be the watch work if fraudulent practices are to be reduced and possibly eliminated in banking industry.

TABLE OF CONTENT

COVER PAGE I

TITLE PAGE II

APPROVAL PAGE III

DEDICATION IV

ACKNOWLEDGEMENT V

PREFACE VI

ABSTRACT VII

TABLE OF CONTENT IX

CHAPTER ONE

1.0 BACKGROUND OF STUDY 1

1.1 OBJECTIVES OF THE STUDY 3

1.2 STATEMENT OF THE RESEARCH PROBLEM 4

1.3 SIGNIFICANCE OF THE STUDY 7

1.4 SCOPE OF THE STUDY 8

1.5 LIMITATION OF SCOPE 9

1.6 STATEMENT OF RESEARCH HYPOTHESIS 9

1.7 DEFINITION OF TERMS 9

CHAPTER TWO

2.0 REVIEW OF RELATED LITERATURE 13

2.1 CONCEPT OF FRAUD 14

2.2 SOURCES OF FRAUD 17

2.3 CAUSES OF FRAUD 19

2.4 TYPES OF FRAUD 26

2.5 IMPACTS OF FRAUDS IN NIGERIA -

BANKING INDUSTRY 35

2.6 EXTENT OF BANK FRAUDS 40

2.7 THE LAW AND FRAUDULENT PRACTICES 46

2.8 DETECTION, PREVENTION AND CONTROL -

OF FRAUD IN BANKING INDUSTRY 49

2.9 THE RELATIONSHIP BETWEEN BANKERS AND CUSTOMERS 57

CHAPTER THREE

3.0 SUMMARY, CONCLUSION AND RECOMMENDATION

3.1 SUMMARY OF FINDINGS 59

3.2 CONCLUSION 63

3.3 RECOMMENDATIONS. 64

REFERENCES 

CHAPTER ONE

1.0 BACKGROUND OF THE STUDY

With an award match to becoming an industrialized nation, Nigeria is witnessing true emergence of human resources as professional, which made possible the establishment of service industries and other business organizations. This belief was rather so strong that the urge to provide financial services can no longer be overlooked. To accelerate economic growth and economic development both government and some banks, in addition to a few banks that were already into business to operate systematic financial services.

These banks employed young men and women, but like every aspect of human endeavour have their challenges. One of the major challenges facing the banking industry and indeed all industries is the incidence of fraud. Bakere (2002:1) observed that the incidence of frauds in banking industry has in the recent past post a very serious threat to the very existence of financial institutions and is a matter of serious concern to the regulatory authorities and the banking public. Despite the stringent measures put in place by monetary authorities and internal control measures to check the activities of fraudsters, frauds in the banks to be stated that available statistics reveal that thirty one banks reported that they experienced frauds and forgery cases for the period (January - March 2002).

Banks are institutions known to operate on the center-pin of public confidence. Today that concept no longer holds as bankers themselves either initiate frauds or partakers deeply in fraudulent activities against their banks (employers).

According to Nigerian Deposit Insurance Corporation (NDIC) Annual Reports (1999:9), most of those banks were run a ground by a few greedy directors and officials who perpetrated frauds and all kinds of unethical practices against their institutions. This is an aberration that continues to erode public confidence in banks.

This scenario has singularly contributed to the liquidation of many banks. Agbatya (1998:13) observed that one couldn't avoid considering the fact that the distress in the banking industry was occasioned by fraud.

Now that cases of fraud have been established in the banks, the need therefore arise to find out problems associated with fraud, its impact on the macro-economy and how these problems are being tackled, hence the need for this study.

1.1 OBJECTIVES OF THE STUDY

The purpose of this study is aimed at exposing the various forms of fraud in financial institutions and the appropriate roles, which monetary authorities, Board of Directors, Management and indeed all shareholders should play to ensure total elimination of fraud or at least reduce the ugly trend to the barest minimum.

Furthermore, it was meant to:

i) Evaluate if fraud exists at all in our banks

ii) Evaluate if bankers innate, aid and abate frauds in our banks

iii) Find out to what extent fraud in our financial institutions is responsible for the unstable economy.

iv) Find out if the roles played by relevant authorities make for effective check or elimination of fraud in our banks.

1.2 STATEMENT OF RESEARCH PROBLEM

Generally speaking, movements in the economy of any nation result from the inter-play of money and other economic variables. In Nigeria, the impacts of money and banking have been the dominant factors determining macro-economic performance. Despite this unique position of banks between other sectors of the economy, banks (especially commercial banks) are faced with a good number of economic crises. Notably among the cases is fraud.

As a result there 0has been a lot of criticisms form the investing public about the non commitment and dedication to duty by Nigerian bankers. This stems fro the fact that distress in the banking industry originated fraud, which was occasioned by bankers.

Directors and management of banks are also criticized for their inability to direct and control men and materials effectively. Poor accounting or reconciliation procedures may give an employee the opportunity to spot a weakness and devise a plan to take advantage of it. This is due to the weakness of internal controls in a bank. Understanding what motivates these individuals and how they are able to rationalize their behaviour is key to preventing it. Furthermore, they are criticized for using their positions and authorities to defraud their institutions. Repeated appeals and warning from well-meaning individuals and government for a change of these negative tendencies to the positive have yielded little or no dividend.

Criticisms have not been directed to bankers, Board of Directors and management alone. Government and regulatory authorities are being criticized for appointing men of doubtful integrity to oversee the affairs of banks and failing in their statutory role of supervision. While fraud have been in vogue in the banking or financial institutions, the situation worsened when those who should monitor and control fraudulent practices became the offenders. This is why the failed bank decree on frauds was targeted at the industry.

Many banks became technically distressed the number increasing from eight (8) in 1990 to forty two (42) in 1994 and fifty two (52) by the end of 2002. this is due to ineffective management and it has caused this menace to be inevitable in every banking industry or financial institution.

Many concerned citizens see these solutions as contributing to the poor performance of banks as evidence by distress in the banking system.

It is in recognition of these problems that this study seeks to investigate into the problems that this study seeks to investigate into the problem associated with fraud in the banking industry and to rectify this ugly trend to enhance effective financial system.

1.3 SIGNIFICANCE OF STUDY

Nigeria being a developing nation is striving to achieve a vibrant and dynamic economy. In order to achieve on enabling economic environment, there is need for a second reliable and efficient financial and banking system devoid of fraudulent practices. It is for the unique relevance of banking in an economy policy makers, industrialists, portfolio investors and well meaning Nigerians are giving prominent attention to the issue of fraud being orchestrated in our banking system.

The significance of this study therefore, is to modify the attitude of Nigeria bankers from the negative influences of fraud to the positive aspect of honesty and integrity. It is also significance in the sense that it gives in details ways or measures to be employed by management of financial institution on how to combat fraud.

The result of this study if made available will help to enlighten Nigerian on the ills of frauds. It will help to remind government, bank managers, investors, industrialists and banking public of the effective but harmonious manner of curbing fraud and to enhance an excellent banking culture. This research is also significance to me hence written in partial fulfillment of the requirement for award of national diploma in accountancy.

1.4 SCOPE OF STUDY

This study is limited to Enugu state, a state comprising of seventeen (17) local government areas but the researcher dwells much on Enugu urban which is made up of three (3) first bank branches with Enugu main as the East Banking Operation (EBO). The result obtained could be applicable to the whole state in particular and Nigeria (FBN) PLC has been choose case study, other banks such as United Bank for Africa (UBA), Union bank of Nigeria (UBN), Diamond bank and others can find this study beneficial to them since they are all operating in the same economic environments.

The study intends to investigate into the impact of fraud in the banking industry. This study therefore, covers the views of bankers, financiers and accounts on the subject matter.

1.5 LIMITATION OF SCOPE

In the process of carrying out this research work on the overview and impact of fraud in the banking industry in Nigeria with first bank of Nigeria (FBN) PLC as case study, concrete efforts were made to arrive at a logical conclusion. This work, which is as a result of high cost of transportation fare to the various bank branches to gather data, cost of materials to carry out this work to a conclusive standard was equally exorbitant.

Although the respondents turned out to be corporative by completing the questionnaire, initially it took a lot of time and energy to convince them but no much problem was encountered because they are professional colleagues except that the officers had to be visited several times before they could create time to complete their questionnaires.

1.6 STATEMENT OF HYPOTHESIS

i) Ho: There is no significance level of fraud in Nigeria banks.

Hi: There is significance level of fraud in Nigeria banks.

ii) Ho: Nigerians do not practice, aid or abate fraud.

Hi: There is no significance negative impact of fraud on the performance of banks.

According to chambers 20th century dictionary, fraud is defined as deceit, trickery, sharp practice, or breach of confidence perpetrated for profit or to gain some unfair or dishonest advantage. This incorporates forgery, embezzlement/misappropriation, conversion, misrepresentation and all other manipulation as covered by criminal codes 419 and 465.

INTERNAL CONTROLS

These are methods used by management to safeguard assets, ensure accounting accuracy and maintain adherence to prescribed policies. They are basic fundamental measures to help minimize risk. These policies form part of the mandate, which falls under the responsibilities of the directors and officers of a company. It is their duty to shareholders and members of the organization to ensure that these policies and directives are strictly adhered too and carried out in the most efficient manner possible.

MONETARY POLICY

The monetary policy of a nation is a facet of its broad economic policies. It deals with the discretionary control of money supply by monetary authorities in order to achieve desired economic goals.

MONEY

Money can be defined as anything, which is generally acceptable in a given society as a means of exchange and for settlement of debts. Money can be in form of commodity money, legal tender, bank deposits, bank note, currency etc.