BANKING FRAUD AND ITS EFFECTS ON NIGERIA ECONOMY

CHAPTER ONE

INTRODUCTION

1.1: BACKGROUND OF THE STUDY

The significance of the banking sector in any country stems from its role of financial mobilization from surplus to deficit unit, provision of a competent payment system and facilitation of the implementation of monetary policies. In intermediation, banks mobilize savings from the surplus units of the economy and channel these funds to the deficit unit, particularly private business enterprises, for the purposes of expanding their productive capacity.

The banking sector has become one of the most critical sectors in the economy with wide effect on the level and direction of economic growth and transformation and on such economic variables as the rate of unemployment and inflation which directly affect the lives of our people. Today, the very integrity and survivability of these laudable functions of Nigerian banks have been deteriorated in view of incessant frauds and accounting scandals.

Fraud however has been defined by many scholars Olufidipe (1994) defined trick deliberately practiced in order to gain some advantag (1991), fraud is described as „any premeditat a person or group of persons with the intention of altering facts in order to obtain undue personal monetary advantage‟. Another scholar Idowu (2 camouflage, or exclusion of the truth for the purpose of dishonesty/stage management to the

financial damage of an individual or an organization. Going by the definition of the chambers universal learners dictionary Kirkpatrick (1985) define fraud as any person who pretends to be something that he is not is a fraud, a snare, a deceptive, trick, cheat and a swindler.

Having explained what fraud is, it is pertinent to define bank fraud which is the subject matter of this study; however bank fraud is the use of fraudulent means to obtain money, assets, or other property owned or held by a financial institution, or to obtain money from depositors by fraudulently representing to be a bank or financial institution. For an action to constitute fraud there must be a dishonest intention and the action must be intended to benefit the perpetrators to the detriment of another person.

Going by the definitions, frauds in Nigeria cannot be restricted to the banks alone. A lot of fraudulent activities are prevalent in Nigerian economy ranging from bloody killings, ritual, kidnapping, robberies, forgery, misappropriation, cheating, and gangsters and looting. Bank fraud ranges from account-opening, money transfer fraud, cheque kiting, telex fraud, money laundering fraud, computer fraud, loans fraud and the likes.

According to Oseni (2006) the incessant frauds in the banking industry are getting to a level at which many stakeholders in the industry are losing their trust and confidence in the industry. Corroborating the view of Oseni, Idolor (2010), stressed that the spate of fraud in Nigerian banking sector has lately become a source of embarrassment to the nation as apparent in the seeming attempts of the law enforcement agencies to successfully track down culprits. Although the incidence of frauds is neither limited to the banking industry nor peculiar to Nigeria economy, however the high rate of fraud within the banking industry, calls for urgent attention with a view to finding solutions.

Fraud in its effect reduces organizational assets and increases its liabilities. With regards to banking industry, it may engender crises of confidence among the banking public, impede the going concern status of the bank and ultimately lead to bank failure (Adeyemo, 2012).

According to kimani (2011) `A way of making money is to stop losing it. 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 years old child talks about 419, the name give to the newly discovered advanced fee fraud that is hunting our nation.

In July 2004, central bank of Nigeria (CBN) unveiled new banking guidelines designed to consolidate and restructure the industry through mergers and acquisition. Banks and Other Financial Institutions Act (BOFIA) 1991, section 15, was also designed to prevent fraud and to make Nigeria banks more competitive and able to play in the global market.

The Nigeria Deposit Insurance Corporation (NDIC) 2007 annual report and statement of accounts report that cases of attempted frauds and forgeries in insured banks, as at 2007 exceeded what was recorded in the year 2006. For instance, the NDIC report for 2007 disclosed that a total of 1,553 reported cases of attempted frauds and forgeries involving over symbols ₦10 billion compare with 1,193 reported cases of fraud and forgeries involving ₦4,832.17 billion in the year 2006. The foregoing statistics clearly unfolds the extent to which fraud had had eaten deep into the financial strength benefit the perpetrators to the department of another person.

Today, banks cannot withstand the growing pressure of competition among various banks due to the monster called bank frauds. If this act of fraud is not arrested, it might delete our resources because foreign investors might not find it wise to transact business via our banks.

1.2: STATEMENT OF THE PROBLEM

Banks generally have been experiencing fraud since its evolution. This affects the performance and the profitability of banks and may possibly lead to distress. The inability to identify the immediate and remote causes of continuous cases of bank frauds in virtually all banks in Nigeria is one of the problems brought to bare.

Fraud is a major challenge to the entire banking industry; no bank is immune to it and in all facets of life (Olorunsegun, 2010). The banking public expects accountability, fairness, transparency in their day operation for effective intermediation.

Though there were known cases of fraud in the sector, one major question still remain unanswered which is what is the nature and different ways through which fraud can be perpetuated in banks. It is asserted by Adeyemo (2012) that fraud in the bank is possible with corroboration of an insider. The banks are expected to ensure that they carry out their responsibilities with sincerity of purpose which is devoid of fraudulent practices. This is relevant if the banking sector is to gain public trust and goodwill.

Another problem is that the government and its agencies have not put enough effort in the prevention and control of bank fraud in Nigeria; otherwise the level of bank fraud would have reduced to a bearable level. Agencies like money laundering Act which helps to place surveillance on any account through which such excess cash deposits or withdrawals are made, Nigeria Deposit Insurance Corporation which is involved in managing bank distress, failed banks and financial malpractices in banks Act which was vested with powers to recover the debts of failed banks, dishonored cheques Act which affects banks in their collection and payment of cheques on behalf of their customers and Bill of Exchange Act which helps to collect the proceeds of trade bills of exchange and cheques are not putting enough effort in the prevention and control of bank fraud that is the reason why bank fraud is increasing day by day in Nigeria.

However, environmental or social factors pose a problem in the activities of banking industry as they contribute to bank fraud in Nigeria. Environmental factors are those that can be trace to the

immediate and remote environment of the bank these factors are manifest in the following manner; the desire to get rich quick slow and complex legal process, poverty and the widening gap between the rich and the poor, competition among bank staff, the desire to belong to any social class, job insecurity, peer group pressure and societal expectations.

1.3: OBJECTIVES OF THE STUDY

The general objective of this study is to identify bank fraud and its effect on bank performance in Nigeria but the general objectives of this study are;

To identify the causes of bank fraud in Nigeria.

To identify the forms of bank fraud in Nigeria.

To examine the efforts of government and its agencies in the prevention and control of bank fraud in Nigeria.

To examine the extent to which environmental or social factors contributed to bank fraud in Nigeria.

1.4: RESEARCH QUESTIONS

The following research question guided this study;

1.      What are the actual causes of bank fraud in Nigeria?

2.      In what way do directors/ managers contribute to bank frauds in Nigeria?

3.      What are the efforts of government and its agencies on bank fraud in Nigeria?

4.      What constitutes environmental or social factors of bank fraud in Nigeria?

1.5: RESEARCH HYPOTHESES

The following research hypothesis were formulated and later tested. They include;

H0: Lack of adequate motivation is not a major cause of fraud in banks.

H1: Lack of adequate motivation is a major cause of fraud in banks.

H0: Looting of fund by bank manager/directors does not constitute the major form of fraud in Nigeria.

H1:  Looting of fund by bank manager /directors constitutes the major form of fraud in Nigeria.

H0: Government effort and its agencies have negatively impacted on combating of fraud in Nigeria

H1: Government effort and its agencies have positively impacted on combating of fraud in Nigeria.

H0; Environmental or social factors does not have a negative impact on bank fraud.

H1; Environmental or social factors have positive impact on bank fraud.

1.6: SCOPE OF THE STUDY

This study centers on fraud in the Nigerian banking industry with a keen interest on five ( 5 ) insured banks with data covering 2002-2015. The five insured banks covered includes First Bank of Nigeria Plc, Union Bank of Nigeria Plc, United Bank for Africa Plc, Diamond Bank Plc, Zenith Bank Plc, all in Enugu state, Oparah Avenue Branch . To achieve the objectives of this study, primary and secondary data were used. One hundred and twenty five (125) questionnaires were administered to the study respondents that were purposively selected from five (5) insured banks in Enugu.

1.7: SIGNIFICANCE OF THE STUDY

This research work will be beneficial to the following groups;

(a) Banks and Financial Institutions

It will be beneficial to the authorities concern with banking operation, managements, staff customers and prospective investors in the industry so as to identify the various means (theft,embezzlement, forgeries e.t.c) employed in defrauding banks and to identify the cause of frauds in banks in Nigeria.

(b) Government

The government will find this work relevant to future policy and decision making with particular to restructuring its agencies for better performance in detaching frauds in Nigeria banks.

(c) General Public

The study will be useful to the general public because the banking industry touches the life of everyone in an economy. Banks all over the world have contributed immensely to the economic growth and development of nations. As such, problems such as fraud which can hinder the smooth operation of the banking industry should be viewed with all seriousness in other not to intercept or destroy the rate of development.

(d) Academia

It will also be beneficial to people who which to carry out further research in this area, to find this work relevant in their research.

1.8: LIMITATION OF THE STUDY

Bank fraud and its effect on the performance of banks is an extensive topic that may involve commercial banks and community banks. The researcher will like to touch all aspects of banking activities, but for lack of time and financial constraints, the researcher limit his work to frauds in five (5) insured banks.

1.9: DEFINITION OF TERMS

FRAUD: Fraud is a type of criminal activity, defined as:'abuse of position, or false representation, or prejudicing someone's rights for personal gain'.Put simply, fraud is an act of deception intended for personal gain or to cause a loss to another party.

BANK: An establishment