Bank fraud and its effect on bank performance in nigeria

Thesis Overview

<p> INTRODUCTION<br>1.1: BACKGROUND OF THE STUDY<br>The significance of the banking sector in any country stems from its role of financial<br>mobilization from surplus to deficit unit, provision of a competent payment system and<br>facilitation of the implementation of monetary policies. In intermediation, banks mobilize<br>savings from the surplus units of the economy and channel these funds to the deficit unit,<br>particularly private business enterprises, for the purposes of expanding their productive capacity.<br>The banking sector has become one of the most critical sectors in the economy with wide effect<br>on the level and direction of economic growth and transformation and on such economic<br>variables as the rate of unemployment and inflation which directly affect the lives of our people.<br>Today, the very integrity and survivability of these laudable functions of Nigerian banks have<br>been deteriorated in view of incessant frauds and accounting scandals.<br>Fraud however has been defined by many scholars Olufidipe (1994) defined fraud as „deceit or<br>trick deliberately practiced in order to gain some advantages dishonestly‟. According to Boniface<br>(1991), fraud is described as „any premeditated act of criminal deceit, trickery or falsification by<br>a person or group of persons with the intention of altering facts in order to obtain undue personal<br>monetary advantage‟. Another scholar Idowu (2009) also sees fraud as a deliberate falsification,<br>camouflage, or exclusion of the truth for the purpose of dishonesty/stage management to the<br>financial damage of an individual or an organization. Going by the definition of the chambers<br>universal learners dictionary Kirkpatrick (1985) define fraud as any person who pretends to be<br>something that he is not is a fraud, a snare, a deceptive, trick, cheat and a swindler.<br>2<br>Having explained what fraud is, it is pertinent to define bank fraud which is the subject matter of<br>this study; however bank fraud is the use of fraudulent means to obtain money, assets, or other<br>property owned or held by a financial institution, or to obtain money from depositors by<br>fraudulently representing to be a bank or financial institution. For an action to constitute fraud<br>there must be a dishonest intention and the action must be intended to benefit the perpetrators to<br>the detriment of another person.<br>Going by the definitions, frauds in Nigeria cannot be restricted to the banks alone. A lot of<br>fraudulent activities are prevalent in Nigerian economy ranging from bloody killings, ritual,<br>kidnapping, robberies, forgery, misappropriation, cheating, and gangsters and looting. Bank<br>fraud ranges from account-opening, money transfer fraud, cheque kiting, telex fraud, money<br>laundering fraud, computer fraud, loans fraud and the likes.<br>According to Oseni (2006) the incessant frauds in the banking industry are getting to a level at<br>which many stakeholders in the industry are losing their trust and confidence in the industry.<br>Corroborating the view of Oseni, Idolor (2010), stressed that the spate of fraud in Nigerian<br>banking sector has lately become a source of embarrassment to the nation as apparent in the<br>seeming attempts of the law enforcement agencies to successfully track down culprits. Although<br>the incidence of frauds is neither limited to the banking industry nor peculiar to Nigeria<br>economy, however the high rate of fraud within the banking industry, calls for urgent attention<br>with a view to finding solutions.<br>Fraud in its effect reduces organizational assets and increases its liabilities. With regards to<br>banking industry, it may engender crises of confidence among the banking public, impede the<br>going concern status of the bank and ultimately lead to bank failure (Adeyemo, 2012).<br>3<br>According to kimani (2011) `A way of making money is to stop losing it. The level of fraud in<br>the present day Nigeria has assumed an epidemic dimension. It has eaten deep into every aspect<br>of our life to the extent that a three years old child talks about 419, the name give to the newly<br>discovered advanced fee fraud that is hunting our nation.<br>In July 2004, central bank of Nigeria (CBN) unveiled new banking guidelines designed to<br>consolidate and restructure the industry through mergers and acquisition. Banks and Other<br>Financial Institutions Act (BOFIA) 1991, section 15, was also designed to prevent fraud and to<br>make Nigeria banks more competitive and able to play in the global market.<br>The Nigeria Deposit Insurance Corporation (NDIC) 2007 annual report and statement of<br>accounts report that cases of attempted frauds and forgeries in insured banks, as at 2007<br>exceeded what was recorded in the year 2006. For instance, the NDIC report for 2007 disclosed<br>that a total of 1,553 reported cases of attempted frauds and forgeries involving over symbols ₦ 10<br>billion compare with 1,193 reported cases of fraud and forgeries involving ₦ 4,832.17 billion in<br>the year 2006. The foregoing statistics clearly unfolds the extent to which fraud had had eaten<br>deep into the financial strength benefit the perpetrators to the department of another person.<br>Today, banks cannot withstand the growing pressure of competition among various banks due to<br>the monster called bank frauds. If this act of fraud is not arrested, it might delete our resources<br>because foreign investors might not find it wise to transact business via our banks.<br>1.2: STATEMENT OF THE PROBLEM<br>Banks generally have been experiencing fraud since its evolution. This affects the performance<br>and the profitability of banks and may possibly lead to distress. The inability to identify the<br>4<br>immediate and remote causes of continuous cases of bank frauds in virtually all banks in Nigeria<br>is one of the problems brought to bare.<br>Fraud is a major challenge to the entire banking industry; no bank is immune to it and in all<br>facets of life (Olorunsegun, 2010). The banking public expects accountability, fairness,<br>transparency in their day operation for effective intermediation.<br>Though there were known cases of fraud in the sector, one major question still remain<br>unanswered which is what is the nature and different ways through which fraud can be<br>perpetuated in banks. It is asserted by Adeyemo (2012) that fraud in the bank is possible with<br>corroboration of an insider. The banks are expected to ensure that they carry out their<br>responsibilities with sincerity of purpose which is devoid of fraudulent practices. This is relevant<br>if the banking sector is to gain public trust and goodwill.<br>Another problem is that the government and its agencies have not put enough effort in the<br>prevention and control of bank fraud in Nigeria; otherwise the level of bank fraud would have<br>reduced to a bearable level. Agencies like money laundering Act which helps to place<br>surveillance on any account through which such excess cash deposits or withdrawals are made,<br>Nigeria Deposit Insurance Corporation which is involved in managing bank distress, failed banks<br>and financial malpractices in banks Act which was vested with powers to recover the debts of<br>failed banks, dishonored cheques Act which affects banks in their collection and payment of<br>cheques on behalf of their customers and Bill of Exchange Act which helps to collect the<br>proceeds of trade bills of exchange and cheques are not putting enough effort in the prevention<br>and control of bank fraud that is the reason why bank fraud is increasing day by day in Nigeria.<br>However, environmental or social factors pose a problem in the activities of banking industry as<br>they contribute to bank fraud in Nigeria. Environmental factors are those that can be trace to the<br>5<br>immediate and remote environment of the bank these factors are manifest in the following<br>manner; the desire to get rich quick slow and complex legal process, poverty and the widening<br>gap between the rich and the poor, competition among bank staff, the desire to belong to any<br>social class, job insecurity, peer group pressure and societal expectations. <br></p>