EFFECT OF FRAUD ON THE GROWTH AND DEVELOPMENT OF THE NIGERIAN BANKING INDUSTRY


Content

ABSTRACT

 

The research work dwells on the effect of fraud on the growth and development of Bank in Nigeria. Cases of frauds and forgeries in banks have not only become incessant but have also been on the increase in recent years. Although frauds and forgeries in banks are global phenomena, their growth in Nigeria has been astounding. The problem of frauds and forgeries are endemic and unavoidable in the banking industry, due to the very nature of banking business which involves human beings (clients and staff) of diverse backgrounds and interests in a relationship of trust.

 

The study used primary data collected vide the administration of questionnaire. The data collected were tested using the Chi-square statistical techniques. Specific findings from the study indicate that the relatively inexperienced staffs of a bank branch are more likely to commit fraud and that more experienced bankers are more likely to swindle larger sums of money. Moreover, the causes of Bank Frauds include: general lust for affluence, recognition being accorded the wealthy people regardless of the source of their wealth, down turn in the economy, general belief that banks can sustain any amount of loss, failure of bank staff to observe laid down procedures. The study recommend that branch opening a new current account for a customer should make sure that all the bank's policies in that respect are religiously complied with. Proper references must be obtained before cheque books are issued to customers and all postings to new accounts should be carefully scrutinized while no withdrawal should be allowed without prior verification of the lodgments.


 

TABLE OF CONTENTS

 

CHAPTER ONE: INTRODUCTION

1.1 Background to the Study

1.2 Statement of the Problem

1.3 Objectives of the Study

1.4 Statement of Research Question

1.5 Statement of Research Hypothesis

1.6 Scope of the Study

1.7 Organisation of the Study

References

 

CHAPTER TWO: LITERATURE REVIEW

2.1 Introduction

2.2 The Structure of the Nigerian Banking System

2.3 Theories of Fraud

2.4 The Definition of Fraud

2.5 Causes of Bank Fraud

2.6 Types of Fraud and Ways of Defrauding Banks

2.7 Effect of Fraud on Banks  

2.8 Measures for Controlling Fraud in Banks

2.9 Role of Branch Management in Fraud Detection and Control  

References

 

CHAPTER THREE: RESEARCH METHODOLOGY

3.1 Introduction

3.2 Re-Statement of Research Questions

3.3 Re-Statement of Research Hypotheses

3.4 Research Design

References

 

CHAPTER FOUR: DATA REPRESENTATION ANALYSIS AND INTERPRETATION OF RESULTS

4.1 Introduction

4.2 Testing of Hypotheses  

 

CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS

5.1 Summary of Findings

5.2 Conclusion

5.3 Recommendations

Bibliography

Appendix


 

CHAPTER ONE

INTRODUCTION

 

1.1     Background to the Study

Cases of frauds and forgeries in banks have not only become incessant but have also been on the increase in recent years. Although frauds and forgeries in banks are global phenomena, their growth in Nigeria has been astounding. The problem of frauds and forgeries are endemic and unavoidable in the banking industry, due to a variety of reasons, for example, the very nature of banking business which involves human beings (clients and staff) of diverse backgrounds and interests in a relationship of trust; the convertible (i.e. cash or near-cash) nature of most bank assets; wide-spread application of automated systems which leave no finger-print or hand-writing evidence; wide network of branches, some remotely located, poorly staffed, ill-equipped and without adequate communication facilities; common social misconceptions e.g. that banks have limitless funds, or that bank monies are an institutional loot or booty to be plundered by the able, (Olufidipe, 2004).

 

Adekanye and Ojigbede (2006), observed that in Nigeria, bank frauds and forgeries have assumed a frightening scale and sophistication consequent upon the general economic depression of the last decade and the continuing travails of the banking sector in the wake of Government's frantic policy experimentations. In section 7 (pp. 37 - 42) of its 2004 Annual Report and Statement of Accounts, the NDIC (Nigeria Deposit Insurance Corporation) has presented an illuminating report on cases of reported frauds and forgeries in insured banks. However, the unfortunate truth from empirical observation is that majority of bank frauds are never reported to the police and NDIC) in spite of the well-known statutory requirement. Some of the frauds actually pass undetected whilst some are criminally covered up, especially where no actual or significant losses are sus­tained. The common object of such cover-ups is to avoid adverse publicity, protracted police case, litigation and/or blackmail. Worse still some of the new generation banks have been known not only to condone but actually commit and promote gross malpractices (e.g. kite flying and cross-firing) as a matter of deliberate corporate business strategy.

 

The Nigerian banking industry has therefore become not just a battle front with a clear-cut firing line between the banks and the bandits but a veritable mine-field in which some banks and their top management staff are in secret league with the enemy. Only the increased alertness and collaboration of genuine banks to­gether with improved supervisory measures by the CBN and NDIC will terminate such pirate organizations.

Olufidipe, (2004) warned that banks must wake up to the concern of elements in their operating environment and serious threats to their internal security arising from internal factors such as absence of a tough, unambiguous corporate policy committing top management to pursue the severest sanctions including prosecution for acts of dishonesty; lack of clear procedural guidelines or updated Instructions Manual; poor staffing of vital functions and loss of experienced personnel; low worker morale and employee frustration; staff dismissed or terminated for fraud being re-engaged in other financial institutions e.g. Mortgage Banks and Finance Houses from where they could launch sneak attacks on their erstwhile employers; unplanned acquisition of new technologies e.g. Computerization. External factors such as societal degeneracy which promotes the get-rich-quick syndrome and worship of materialism; exploitable defects in the legal and penal systems.

 

1.2    Statement of the Problem

Though the Nigerian banking industry is one of the most profitable within the economy, higher performance could be attained in terms of their private returns and obligation to the society. This must be so if the banking industry is to perform a leading role in reactivating the economy. The sub-optimal performance of the Nigerian Banking Industry is due to an array of problems. Of these problems, the issue of fraud in our banks is one of the most intractable and monumental. The magnitude on the industry has inspired this research on fraud in banks.

Cases of frauds and forgeries in banks have not only become incessant but have also been on the increase in recent years. Although frauds and forgeries in banks are global phenomena, their growth in Nigeria has been astounding. The 1993 Nigeria Deposit Insurance Corporation's (NDIC) Annual Report, for instance, presents a disturbing picture of rising trends of frauds in banks.

From N351.93 million in 1992, the amount involved in frauds in commercial banks alone rose to N1,377.15 million in 1993 whereas the Actual/Expected loss rose from N64.8 million to N241.0 million. We are aware that frauds cut across all sectors of the economy and that the size of an enterprise usually determines the volume of fraud perpetrated. We are also not aware of the role which such problems inadequate manpower and manpower training, poor internal control system, inadequate incentives and unsuitable legal framework for dealing with offenders, play in the perpetration of frauds, (Alashi, 2005).

In addition to these, the lack of commitment on the part of staff and the employment policies of some banks tend to make frauds and forgeries attractive. Be that as it may, we consider the high rate of frauds in banks as clearly unacceptable. Something drastic ought to be done to urgently stem the tide in view of its image implications for the banking industry and the crisis of confidence which it could engender among bank customers. We therefore urge executive and top managements of banks to, as a matter of urgency, to adopt strategies that will block all loopholes that encourage frauds and forgeries in their organizations.

 

1.3    Objectives of the Research

The primary objective of this research is to find practical means of minimizing the incidence of fraud in our banks. To achieve this objective the following secondary objectives have been specified

1.                 To review existing literatures, collect and collate information on fraud in banks

2.                 To identify the cause(s) and the various types of fraud perpetrated in banks.

3.                 To identify the various means employed in defrauding banks

4.                 To determine the effects of fraud on the business of banking.

 

1.4    Statement of Research Question

The following questions are stated to guide the researcher in searching for relevant data in proffering solutions to the research problem.

1.                 Why do bank personnel commit fraud?

2.                 How effective are fraud control system in our banks?

3.                 How can the problem of fraud be controlled in our banks?

4.                 Can we ever have sufficient information to predict when and how fraud will occur?

These question form the problem of this research work and the need to provide workable answers to them constitutes the justification for the research.

 

1.5    Statement of Research Hypotheses

For the realization of the above objectives, we hypothesize as follows:

1.                          That there is no relationship between the "size of fraud In a bank branch and the 'size' of the bank branch.

2.                          That the relatively inexperienced staffs of banks are not more likely to commit fraud.

 

The 'size' of fraud is defined in two ways; the numbers of fraud cases and the amount involved.

 

1.6    Scope of the study

The study covered the commercial and merchant banks operating in Nigeria between 2001 and 2008. These banks had a total of 1,485 branches of which 1,071 filed cases on fraud with Central Bank of Nigeria. Out of the 1,071, 12% or 126 bank branches spread nationwide were selected and surveyed.

 

The information used for the analysis covered the eight-year period between 2001 and 2008. In order to attain the objectives of this research the scope of the study was defined to embody all relevant aspects of fraud in banking operations. Information was obtained on the number of fraud cases perpetrated in each bank; the different types of fraud and the frequency of each; the amount involved in the various types of fraud; the amount of loss to banks and to customers; the person involves in fraud; the period of concealment; the incidence of collusion; the causes of fraud and the level of effectiveness of fraud preventive measures. The study also focused on areas relating to staff strength of banks, size of deposits, size of loans and advances, age of fraudsters, years a of banking experience of fraudsters, the means of fraud prevention and detection and the punishment meted out to fraudsters.

 

1.7    Organization of the Study.

The research work is divided into five chapters. Chapter one is the introduction. Chapter two deals with the review of relevant literature which include the types of fraud and ways of defrauding banks, causes of bank fraud, effect of fraud on banks and the measures for controlling fraud in banks. Chapter three discusses the methodology, the study area, sources of data and method of data collection, method of analysis, problems encountered and the limitations of study. The analysis of various cases of frauds filed with the Central Bank of Nigeria in terms of fraud centre, frequency of fraud, amount involved, methods used by fraudsters, person involved in fraud and the incidence of collusion and the result obtain from the testing of postulated hypotheses are presented in chapter four. While the conclusions and recommendations of the study are contained in chapter five.  


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