FRAUD MANAGEMENT IN THE NIGERIAN BANKING INDUSTRY

TABLE OF CONTENTS

CHAPTER ONE
INTRODUCTION
1.1     Background to the Study                                   1
1.2     Statement of the problem                                             5
1.3     Aim and Objectives of the Study                                  6
1.4     Significance of the Study                                            7
1.5     Research Questions                                                   8
1.6     Scope of the Study                                           8
1.7     Limitations of the Study                                              9
1.8     Study Plan                                                                 10
1.9     Definition of Key Terms                                             11
CHAPTER TWO
LITERATURE REVIEW

Meaning of Fraud 13
Management Control Measures on Fraud 16
Types of Fraud 18
Causes of Fraud 22

2.5     Method of Preventing Fraud                                      28
2.6     Current Fraud Practices in Nigeria                              30
2.7     Cheque Frauds                                                         33
2.8     Fraud Control Variables                                             37
2.9     Prudential Guidelines for Banks                                  43

CHAPTER THREE
RESEARCH METHODOLOGY

Historical Profile of Nigerian Banking Industry 45
Research Hypotheses 50
Data Specification 52
Method of Data Collection 52
Method of Data Analysis 53

CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS

4.1 Total Amount involved in Fraud and Forgeries 54
4.2 Total Expected loss in Fraud and Forgeries 56

4.3     Total Cases in Fraud and Forgeries                        57
4.4     Staff Involvements in Fraud and Forgeries                 58
4.5     Test of Hypotheses                                                  59

CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS

Summary 68
Conclusion 70
Recommendations 71

References 74

CHAPTER ONE

INTRODUCTION
1.1 Background to the Study
The level of fraud in the present day Nigeria has assumed an epidemic dimension. It has eaten deep into every aspect of our life to the extent that a three old child talks about yahoo mail or 419, newly discovered sobriquet for advanced free fraud that is hunting our banking industry. Nigeria, with all of its natural and human resources tethers on the brink of destruction because of fraud. Much of what we do is “cutting leaves” instead of dealing with the root problem.
Generally, fraud takes its roots from the human heart. It is an axiom that the heart is deceitful above all things and is desperately wicked. Fraud is the number one enemy of the business world, no company is immune to it and it is in all works of life, Nwankwo (1991). The fear is now rife that the increasing wave of fraud in the financial institutions in recent years, if not arrested might pose certain threats to stability and the survival of individual financial institution and the performance of the industry as a whole and no area of the economy is immune from fraudsters and even the banking system. Fraud if not checked might cause run on in the banking sector.

The existence of financial intermediaries automatically takes care of the sizes of fund existing in the economy. Financial intermediaries are financial institutions that intermediate between the surplus sector of the economy (household) and the deficit sector of the economy (government, business enterprise) by mobilizing the surplus sector of the economy to save part of their income that are not consumed and repackage it for lending to the deficit unit at a considerable interest rate. Examples of financial institutions we have in Nigeria are: Banks, Insurance companies, savings and loans.
The major problems confronting the financial institution today is “fraud”, which has sent many of them out of business and is making the industry customers to loose confidence in them since, since they have not been able to curb the ugly event called “fraud”.

The annual report of the Nigeria Deposit Insurance Corporation (NDIC) over the year indicates that bank fraud remains unabated and this still threatens the well-being of the banking industry. NDIC warns the nation year after year about dangers posed to the banking sector by fraud and also explained to the players in the industry that the sad and unfortunate incidence of increasing frauds and forgeries in the industry will not only deplete the banks capital but will contribute to the erosion of depositors confidence in the system. Before 1986, banks reporting cases on fraud were of no consequence. Returns were very low or just moderate, the number of banks was few and salary levels were low compared to other sectors of the economy.
By and after 1986, with the introduction of Structural Adjustment Programme (SAP) profits rose to high levels returns on investment rose, salaries became more attractive and public attention to banking increased.

By 1989, some banks recorded 3105 million frauds with commercial banks having 392.2 million and merchant banks having 37 million, (References to Business Times of 20th August, 1990).
Fraud as defined by Olufidipe (1994) as “Deceit or trickery deliberately practiced in other to gain some advantage dishonestly”. Fraud is a hydra headed phenomenon that displays its presence in different forms. Such various form includes: money transfers fraud, fraudulent lending, cheque kitting, transaction fraud, letter of credit fraud, borrowing from the till, Anti-money laundering, credit and debit card fraud, first party fraud, internet fraud to mention but a few.

Fraud does not just happen, but perpetrate by human beings with reasons or motivations. The two main causes of fraud are both external and internal factors. Bank fraud and robbery are manifestations of deviant social behaviour. Today, the rising trend in bank fraud and robbery can be traced to certain antecedents of the contemporary society. In Nigeria of recent years and today, there is prevalent moral decadence reflecting fast weakening and debased value system. For example, wealth, irrespective of its source now commands a high premium in Nigerian society.
The internal cause of fraud today in the banking industry can be traced to the following internal environmental factors: corrupt or weak management, ineffective control system, poor personnel practices, shortage of experienced and expertised staff, because the installation and day-to-day implementation of a bank are the responsibilities of the top management of the bank. Infact, as affirmed by Comer (1985), “the scale of fraud in an organization is a reflection of the ability of its managers to manage”, i.e. in a bank where the top management is known to engage in corrupt banking practices, fraud will be common among the junior staff.

To minimize or control the alarming rate of fraud in the banking industry, there ought to be need for the players in the industry to set up and implement an effective and efficient control system that will adequately monitor the daily activities of the industry without leaving any gap. Consequently, appropriate personnel policies and practices should be put in place since fraud is committed by people of moral decadence.

1.2 Statement of the Problem
The problem which militates against fraud management in the banking industry which this study seeks to profer solution to are:

Lack of efficient and effective internal control system in the banks.
Inability of the bank officials to consistently follow the established banks procedures in the course of their operation.
Inadequate training opportunities to the bank officials on fraud detection.
Non availability of developed process of identifying fraud, related control designed to minimize the risk involved constantly, review and update.
Lastly, ineffective physical control system of operation.

1.3 Aim and objectives of Study
The aim of the study is to examine fraud management in Nigerian banking industry. The objectives of the study includes the following:

To explain what is meant by the term fraud.
To describe the various types of fraud.
To identify and explain causes of fraud in Nigerian banking industry.
To examine fraud and forgeries cases in Nigeria.
To make recommendations as to how fraud and forgeries can be drastically reduced if not totally eradicated in Nigerian banking industry.

1.4 Significance of the Study
This research work will educate the general public as to the following:

Meaning of fraud
The causes of fraud
The types of fraud
The role of auditors and other measures to minimize the cause, preventing and control of fraud.

Through this study, bank customers would be sensitized and be caution in dealing with the bank as to the occurrence of fraud.
Also, the officials of the bank would be educated to be cautious when rendering their services and help their customers against fraud.
It is essential to note that fraud can erode the assets of the banks thereby causing the untimely death of the bank, if not controlled or minimized. Hence, this study will be relevant to the banking industry to help check fraud.

1.5 Research Questions

To guide the conduct of this research, the following questions are raised:

What is meant by the term fraud and forgeries?
What are the various types of fraud in Nigerian banking industry?
What are the causes of fraud on the Nigeria economy?
What are the various method of fraud prevention?

1.6 Scope of the Study
The scope of the study is to examine critically fraud management in the Nigerian banking industry (2000-2008). The study also covers nature of fraud, types, causes, management control measures and effects of fraud on Nigerian economy.

1.7 Limitations of the Study
The major problems encountered in carrying out this research work are:

1.       Due to annual upgrade of SPSS package, it took the researcher a lot of time and effort to get the recent, compatible and suitable version for the research work
2.       Negative attitude of the government officials in given out needed data.
3.       Due to the hectic nature of CBN, NDIC officials, the researcher have to pay several visits to these places which cost time and money.
4.       Also, some information were being coded by the organisations’ which was not released to the researcher.
However, effort has been made to ensure that this situation does not hinder the completion and quality of the research work.

1.8 Study Plan

This study will be presented in five chapters. The first chapter is the introduction which includes background, statement of the problem, aim and objectives, significance, research questions, scope, limitations, study plan and definition of key terms.
The second chapter focuses on the review of related literature on the meaning of fraud, management control measures on fraud, types of fraud, causes of fraud, method of preventing frauds, current fraud practices in Nigeria, cheque frauds, fraud control variables and prudential guidelines for banks.
Chapter three constitutes discussion on research methodology that is, historical profile of Nigerian banking industry, research hypotheses, data specification, method of data collection and method of data analysis.
Chapter four is made up of data presentation and analysis.
Chapter five comprised of summary, conclusion and recommendations.

1.9     Definition of Key Terms
1.       Financial Intermediaries: They are financial institutions that intermediate between the surplus sector of the economy (household) and the deficit sector (government, business enterprises) by mobilizing the surplus sector to save part of their income that are not consumed and repackage it for lending to the deficit unit at a considerable interest rate.
2.       Depositors: Someone who deposits money in a bank or building society especially in a deposit account.
3.       Financial Institution: Banks, insurance companies, savings and loans.
4.       Customer: Someone who uses the services of a business.
5.       Bank: Financial organization which keeps money in accounts
for its client, lends money and exchanges currency.
6.       Bankrupt: Someone who deposits money in a bank or building society especially in a deposit account.
7.       Management: The skill or practice of controlling, directing or planning something especially a commercial enterprises or activity.
8.       Money Transfer Fraud: They are money transfer service in which funds are moved to or from a bank to a beneficiary account at any banking point nationwide in accordance with the instructions from the bank’s customer.
9.       Letter of Credit: It’s a credit instrument given by a bank whereby it undertakes to make payment or assures the beneficiary that payment will be made subject to the term of the credit.

10. Cheque Kiting Fraud: It is the building up a large apparent balance in one or more bank account based on uncollected cheques drawn against similar accounts in other sometimes distant banks.

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