THE IMPACT OF BANK FRAUD AND DISTRESS ONBANKING HABIT IN NIGERIA (A CASE STUDY OF FIRST BANK, GTB, UBA, UNION BANK AND ZENITH BANK)


Content

ABSTRACT

The problem of automated teller machine (ATM) fraud is global in nature and its consequences on bank patronage should be of concern to the stakeholders in banks. This paper investigates the dimensions of ATM fraud in Nigeria and proffer solutions that will mitigate the ATM fraud in Nigeria banking system. The paper employs both primary and secondary data to investigate the ATM frauds in Nigeria banks. The chi-square statistical technique was used to analyze the data and test the hypothesis raised. The paper concludes that both bank customers and bankers have a strong role to play in stopping the perpetrators of ATM frauds in the banks.

Card jamming, shoulder surfing and stolen ATM cards constitutes 65.2% ATM frauds in Nigeria. This fraud is usually perpetrated by the lower cadre. It involves theft, misappropriation or embezzlement of company’s fund and other assess for their own selfish interest.

Fraud is perhaps the most fatal of all the risk confronting banks. The enormity of bank frauds in Nigeria can be inferred from its value, volume and actual loss. A good numbers of bank frauds never get reported to the appropriate authorities rather they are suppressed because of the personalities involved or because of concern over the negative image effect that the disclosure may cause if information may lose confidence in the banks and this could cause a major setback in the growth of the bank in particular.

Fraud leads to loss of money, which belongs either to the banks or customers. Such losses may be absorbed by the profits for the affected trading and this consequently reduces the amount of profits which would have been available for distribution to shareholders. Losses of fraud which are absorbed to equity capital of the banks impairs that bank financial health and constraints its ability to extend loans and advances for profitable operations. In existence case rampant and large incidents of fraud could lead to a bank failure. Fraud can increase the operating cost of installing the necessary machinery for its prevention, detection, valuable time to safeguarding it assets from fraudulent men distract management. Overall the unproductive diversions of resources always reduce outputs and profits which in turn could retard the growth of the bank.

It automatically leads to loss of confidence in the bank by customers and potential customers of the bank and those seriously discourage banking habits in Nigeria.

There had been several incidents of banks going distressed due to manipulative and fraudulent activities of management and staff of the bank. When this happens innocent depositors lose their hard earned savings coupled with ineffective regulatory policies of the central bank prior to the recapitalization of the Charles Soludo administration .It also lead to a diminishing effect on the asset quality of banks. The problem is more dangerous when compounded by insiders’ loan abuses.

Indeed the first generation banks by NDIC was largely a consequences of fraud perpetrated through insiders loan abuses. If this problem is not adequately handled it could lead to distress and bank failures.

                                                                  

 

TABLE OF CONTENTS

                                                                                          Pages

Title Page                                                                                                                              i

Abstract                                                                                                                                v

Table of Content                                                                                                                 vi

 

CHAPTER ONE

1.1      Introduction                                                                                                                        1

1.2      Background to the Study                                                                                     2

1.3      Statement of the Research Problem                                                                 4

1.4      Objectives of the Study                                                                                        5

1.5      Research Questions                                                                                               5

1.6      Research Hypothesis                                                                                             6

1.7      Research Methodology                                                                                        6

1.8      Significance of Study                                                                                             7

1.9      Scope & Limitation of Study                                                                               8

1.10   Definition of Terms                                                                                                9

 

CHAPTER TWO

2.1      Literature Review                                                                                                   11

2.2      Introduction                                                                                                                        13

2.3      Origin of Fraud                                                                                                       16

2.4      Causes of Fraud                                                                                                      20

2.5      Solution to the Problem                                                                                       22

2.6      Effects of Fraud on Nigerian Banks                                                                   25     

2.7      Trends in Nigerian Banking Sector on Liquidity Regulation                        30

2.8      Empirical Studies                                                                                                    37

2.9      Theoretical Background                                                                                       39

2.10   Hypothesis                                                                                                               41

2.11   Model Specification                                                                                               41

2.12   Econometric Analysis & Results. Estimation Results                         44

2.13   Determinants of Banking Sector                                                                        45

2.14   Impact of Banking Crisis On Banking Sector Liquidity                                 46

2.15   Implementation                                                                                                      50

 

CHAPTER THREE

3.1      Methodology                                                                                                          52

3.2      Analysis & Discussion                                                                                           52

3.3      Source of Data                                                                                                        53

 

CHAPTER FOUR

4.1      Data Presentation, Analysis and Interpretation

            Introduction                                                                                                                        55

4.2      Method of Estimation of Analysis                                                                      56

4.3      Presentation and Analysis on Data According To

            Research Hypothesis and Discussion of Findings                                          60

 

 

 

 

CHAPTER FIVE

5.1      Summary, Conclusion and Recommendation                                                63

5.2      Conclusion                                                                                                   65

5.3      Recommendation Based On the Conclusion                                      66

5.4      Bibliography                                                                                                            68

REFERENCES                                                                                                 

ABSTRACT

The problem of automated teller machine (ATM) fraud is global in nature and its consequences on bank patronage should be of concern to the stakeholders in banks. This paper investigates the dimensions of ATM fraud in Nigeria and proffer solutions that will mitigate the ATM fraud in Nigeria banking system. The paper employs both primary and secondary data to investigate the ATM frauds in Nigeria banks. The chi-square statistical technique was used to analyze the data and test the hypothesis raised. The paper concludes that both bank customers and bankers have a strong role to play in stopping the perpetrators of ATM frauds in the banks.

Card jamming, shoulder surfing and stolen ATM cards constitutes 65.2% ATM frauds in Nigeria. This fraud is usually perpetrated by the lower cadre. It involves theft, misappropriation or embezzlement of company’s fund and other assess for their own selfish interest.

Fraud is perhaps the most fatal of all the risk confronting banks. The enormity of bank frauds in Nigeria can be inferred from its value, volume and actual loss. A good numbers of bank frauds never get reported to the appropriate authorities rather they are suppressed because of the personalities involved or because of concern over the negative image effect that the disclosure may cause if information may lose confidence in the banks and this could cause a major setback in the growth of the bank in particular.

Fraud leads to loss of money, which belongs either to the banks or customers. Such losses may be absorbed by the profits for the affected trading and this consequently reduces the amount of profits which would have been available for distribution to shareholders. Losses of fraud which are absorbed to equity capital of the banks impairs that bank financial health and constraints its ability to extend loans and advances for profitable operations. In existence case rampant and large incidents of fraud could lead to a bank failure. Fraud can increase the operating cost of installing the necessary machinery for its prevention, detection, valuable time to safeguarding it assets from fraudulent men distract management. Overall the unproductive diversions of resources always reduce outputs and profits which in turn could retard the growth of the bank.

It automatically leads to loss of confidence in the bank by customers and potential customers of the bank and those seriously discourage banking habits in Nigeria.

There had been several incidents of banks going distressed due to manipulative and fraudulent activities of management and staff of the bank. When this happens innocent depositors lose their hard earned savings coupled with ineffective regulatory policies of the central bank prior to the recapitalization of the Charles Soludo administration .It also lead to a diminishing effect on the asset quality of banks. The problem is more dangerous when compounded by insiders’ loan abuses.

Indeed the first generation banks by NDIC was largely a consequences of fraud perpetrated through insiders loan abuses. If this problem is not adequately handled it could lead to distress and bank failures.

                                                                  

 

TABLE OF CONTENTS

CHAPTER ONE

1.1      Introduction                                   

1.2      Background to the Study

1.3      Statement of the Research Problem    

1.4      Objectives of the Study               

1.5      Research Questions          

1.6      Research Hypothesis

1.7      Research Methodology   

1.8      Significance of Study        

1.9      Scope & Limitation of Study      

1.10   Definition of Terms

 

CHAPTER TWO

2.1      Literature Review  

2.2      Introduction

2.3      Origin of Fraud                  

2.4      Causes of Fraud                 

2.5      Solution to the Problem  

2.6      Effects of Fraud on Nigerian Banks          

2.7      Trends in Nigerian Banking Sector on Liquidity Regulation

2.8      Empirical Studies                           

2.9      Theoretical Background  

2.10   Hypothesis                          

2.11   Model Specification          

2.12   Econometric Analysis & Results. Estimation Results

2.13   Determinants of Banking Sector                       

2.14   Impact of Banking Crisis on Banking Sector Liquidity

2.15   Implementation     

 

CHAPTER THREE

3.1      Methodology

3.2      Analysis & Discussion                  

3.3      Source of Data

 

CHAPTER FOUR

4.1      Data Presentation, Analysis and Interpretation

4.2      Method of Estimation of Analysis

4.3      Presentation and Analysis on Data According To Research

Hypothesis and Discussion of Findings

 

CHAPTER FIVE

5.1      Summary, Conclusion and Recommendation           

5.2      Conclusion                                                  

5.3      Recommendation Based On the Conclusion 

5.4      Bibliography                                               

REFERENCES                                   

 

 

 

CHAPTER ONE

INTRODUCTION

 

1.1                        BACKGROUND TO THE STUDY             

Fraud can be seen as the intentional misrepresentation,concealment or omission of the truth for the purpose of deception, manipulation to the financial detriment of individual or organization (such as bank) which also include embezzlement, theft or any attempt to steal or unlawfully obtain or misuse or harm the asset of the bank.(Adeduro 2008 and Bostley and Drover 2002).

Fraud and management have been the precipitating factor in the distress of banks and as much as various measure have been taken to minimize the incidence of fraud, it still rises by the because fraudster always device tactical ways of committing frauds. This has become a point of great attention in the banking industry or peculiar to Nigeria alone, high incidence of fraud within the banking industry has become a problem to which solution must be provided in view of the large sums of money involved and its adverse effect and implications on the economy.

Fraud in its effects reduces the asset and increase the liability of any company, in the case of banks , this may result in the loss of potential customers or crisis of confidence of banking  public and on the long run and up in another failed bank situation.

 

Fraud is one of the numerous enemies of business world, no company is immune to it, it is in all works of life in government, the export trade, shipping transaction, banking, insurance and everywhere. Special organization have been formed to combat it and Interpol (international police) tries to deal with at the international level but has not and cannot be eradicated (Nwankwo2001)fraud is a universal phenomenon which has been in existence for so long , its magnitude can not be known for sure because most of it is undiscovered or undetected and not all that is detected is published .It is a known fact that no area of banking system is immured to fraudsters not even the security team designed to prevent it.Its management has become a central point in banking like management of risk of the above facts.

The computer crime research centre (2009) opined that the traditional and ancient society of any monetary instrument and that the entire exchange of goods and merchandise was managed by the barter system. The4 use of monetary instrument as au nit of exchange replaced the barter system and money as sole purchasing power. The modern contemporary era has replaced this traditional monetary instrument from paper and metal based currency to plastic money in form of credit cards, debit cards etc.

The evolution of this various plastic money has resulted in the increasing use of ATM all over the world. The use of ATM is not only safe but is also convenient. The advantage of safety and convenience has unfortunately been lessened by frauds that arepenetrated by plastic money.

The case of settlement of bills such as electricity, school fees, phone bills, insurance premium, travelling bills and even petrol bills has made the use of plastic money more important in Nigeria banking system. The convenience and safety that credit cards carry with their use has been instrumental in increasing credit cards volumes and usage in Nigeria.

 

ATM has also increased the propensity to fraudulent practices by the ATMs fraud perpetrators. Banks have gone on ATM deployment, frenzy; some have adopted the strategy of installing two ATMs per branch. Banks with large customer base continue to lead the pack in number in number of transaction carried out. However, the number of the transaction per ATM remains a significant measure of the efficiency of these ATMs.Such transaction volumes can also be used to measure the kind of returns banks are getting from the regular patronage of their ATMs.

 

1.3      STATEMENT OF THE RESEARCH PROBLEM

It is instructive to know that many operatives have different reasons for joining various banks. Many have the intention of working for a short time in the banking industry (get whatever they could and find another job that is less demanding), some are in the industry because of their love for banking and all its stands for. While majority are there to enrich themselves by fraudulent means. Due to the upsurge of great viability in the banking sector, its dynamic and fast expanding level of activities ,banks are faced with different kinds of challenges, among which is trying to prevent various fraudulent intentions of both staff and customers.

 

1.4OBJECTIVES OF THE STUDY

The main aim of this study is to find a practical means of minimizing the incidence of frauds in Nigeria Banks.While specific objectives are to:

       I.            Identify various means employ in defrauding banks.

     II.            Determine the effect of fraud on the banking system

  III.            Determine the magnitude and frequency of frauds in banks

  IV.            Suggest measures of reducing the incidence of bank fraud

    V.            To examine the various ATM fraud in Nigeria

  VI.            To provide solution that will mitigate the banking industry

 

1.5      RESEARCH QUESTIONS

With the aforementioned problems one cannot help but ask the following questions:

i)                   Are the fraud detection systems in the banks adequate and effective in preventing fraud?

ii)                 Does the recruitment method have a direct link with the rate of fraud in the banking sector?

iii)               Can the bank ever operate without the incidence of fraud?

 

1.6       RESEARCH HYPOTHESIS

Hypothesis One

HO:                  Poor salaries and inadequate working condition do not induce bank staff to commit fraud.

H1:                  Poor salaries and inadequate working condition induce bank staff to commit fraud.

 

Hypothesis Two

HO:                  In adequate fraud detection system in operation in banks cannot be the cause of frequent fraud in the industry.

H1:                  In adequate fraud detection system in operation in banks is the cause of frequent fraud in the industry.

 

1.7                        SIGNIFICANCE OF THE STUDY

Financial institutions are challenged today by creative criminal using sophisticated fraud tactics , evolving regulations and legislations, increasing pressure to releases new and innovative products,and the imperative to enhance customer experience to improve acquisition and retention .With customer –centric enterprise = wide fraud prevention capabilities, Actimize enables those firms to adequately addressthese challenges and to:

1            Enable end-to-end fraud coverage: Detect and prevent fraud across banks channels and financial products and respond rapidly to changing fraud and patterns and regulations, with a comprehensive set of fraud management tools and capabilities.

2            Reduce financial Losses:  Apply proven analytics detection logic authoring and actimise breathe of global fraud expertise for superior detection model performance .Monitor transaction in real times, allowing for targeted interdiction to minimize and improve customers’ experience.

3            Increase productivity and lower operational cost: Streamline fraud operations and support core fraud management functions alert routing and prioritizations, workflow management,investigation and operational performance report with intuitive web- based tools.

4            Enhance customers’ experiences:  Enable risk based authentication methods and customer.

 

 

 

1.8                        SCOPE AND LIMITATIONS OF THE STUDY

This project work is examines the impact of Bank Fraud and Distress on Banking Habit in Nigeria. The scope of the project covers five banks in lagos state metropolis. The intended banks are First bank, GTB, UBA, Union bank and Zenith Bank.

 

In carrying out this research work, some difficulties were encountered which are listed below:-

(a)        Unwillingness on the part of the management to disclose information that might be of importance because the company believes they are too vital to be released to a student researcher

(b)       Non-challant attitude of some staff in answering relevant questions that pertains to the case study is one major difficulties and constraints of the work.

(c)        Financial difficulties and time constraints were major problems faced in the course of writing this project work.

 

1.10   DEFINITION OF TERM

The term defined below shall be used in this study accordingly for the purpose of clarity.

a)          Banking:  Is one of the key drivers of any nation economy. Banking provides a safe place to save excess cash, known as deposit. It also supplies liquidity to the economy by loaning this money out to help business grow and to allow consumer to purchase homes, cars  and consumer products,Banks primarily make money by charging higher interest rates on their loans then they pay for deposits.

b)         Fraud:  According to Adeduro (1998) and Bostley and Drover (1972), fraud can be seen as intentional misrepresentation concealment, or mission of the truth for the purpose of deception/manipulation to the financial detriment of an individual or organization (such as a bank) which also include embezzlement,theft or any attempt to steal or unlawfully obtain, misuse or harm the asset of the bank.

c)          Cheque:  Maybe defined as an unconditional order drawn upon a specified banker, signed by the maker, directing the banker to pay on demand a certain sum of money only to the order of a person or to be the bearer of the instrument.

d)         Account:  Account is a record of financial transaction for an assets or individual such as a bank, brokerage credit card company or retail store. More generally, and arrangement between a buyer and as seller in which payment are to be made in the future.

e)          Economic growth and development:  This can be defined as productive capacity which has a positive effect on the social welfares of the people in a particular country.

f)           Diversion:   This is an insistence of turning something aside from its course.

g)          Transfer: A changing of ownership, such as real estate, a security or a financial account from one party to another.

h)         Management: This is the organization and coordination of the activities of an enterprise in accordance with certain policies and in achievement of defined objectives.

 

REFERENCES

Adekanye, F. (2006). The Elements of Banking in Nigeria. (3rd ed.) F & A             Publishers Ltd.

Agénor, P-R., Aizenman, J., and Hoffmaister, A.W. (2004). The Credit Crunch in East Asia: What Can Bank Excess

Liquid Assets Tell Us? Journal of International Money and Finance 23, pp. 27-49.

Ajayi, S.I., and Ojo, O. (2001). Money and Banking Analysis and Policy in the Nigerian Context London: GeorgeAllen and Unwin.

Brighi, P. (2002). Interbank Exchanges, Liquidity Management and Banking Crises. Economic Notes, Vol. 31, pp.

Driscoll, John C. (2003). Does Bank Lending Affect Output? Evidence from the U.S. States. FEDS Working PaperNo. 2003-31. [Online] Available from: SSRN: http://ssrn.com/abstract=436584 (March 1, 2011).

Fadare, S. (2010). Recent Banking Sector Reforms and Economic Growth in Nigeria. Middle Eastern Finance andEconomics ISSN: 1450-2889 Issue 8 pp 146 – 160.

Fadare, S. (2011). Banking Crisis and Financial Stability in Nigeria. International Research Journal of Finance andEconomics ISSN 1450-2887 Issue 63 pp 199 – 215.

Ibeabuchi, S.N. (2007). Overview of Monetary Policy in Nigeria. Economic and Financial Review Volume 45December 2007 Number 44 pgs 15 – 37.

Nwankwo G. O. (2000). The Nigerian Financial System. London, Macmillan Publisher Ltd.

Okonjo-Iweala, N. and Osafo-Kwaako, P. (2007). Nigeria’s economic reforms: progress and challenges. BrooklynGlobal Economy and Development. [Online] Available from:http://www.brookings.edu/~/media/files/rc/papers/2007/0323globaleconomics_okonjo%20iweala/20070323okonjo_iweala.pdf (March 1, 2011).

Soludo, C.C. (2004). Consolidating the Nigerian banking industry to meet the development challenges of the 21stcentury. Address by Mr. Charles Chukwuma Soludo, Governor of the Central Bank of Nigeria, at the SpecialMeeting of the Bankers’ Committee, Abuja, 6 July 2004. [Online] Available from:http://www.bis.org/review/r040727g.pdf (March 1, 2011).

 

 

 

 

 

 

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