Project Abstract

Abstract
Clearing systems play a crucial role in the banking industry by facilitating the transfer of funds between financial institutions. The efficiency and security of these systems are essential for maintaining the trust and stability of the financial sector. This research project aims to explore how enhancing clearing processes can contribute to sustaining banks and suppressing fraud. The study will investigate the current clearing mechanisms in place and identify potential vulnerabilities that could be exploited by fraudsters. By analyzing historical data and case studies, the research will examine common fraud schemes that target the clearing process and assess their impact on banks and customers. Understanding these threats is crucial for developing effective countermeasures to mitigate risks. Furthermore, the project will delve into technological advancements that can be leveraged to improve the security of clearing systems. The integration of blockchain technology, biometric authentication, and artificial intelligence could enhance the verification and validation processes, making it more challenging for fraudsters to manipulate transactions. By incorporating these innovative solutions, banks can strengthen their defenses against fraudulent activities. In addition to technological enhancements, the research will also explore the importance of regulatory frameworks in deterring fraud in clearing systems. Compliance with anti-money laundering (AML) and know your customer (KYC) regulations is vital for preventing illicit activities within the banking sector. By promoting transparency and accountability, regulatory guidelines can help safeguard the integrity of clearing processes. Moreover, the study will assess the cost-benefit analysis of implementing robust security measures in clearing systems. While enhancing security incurs additional expenses for banks, the long-term benefits of preventing fraud and maintaining customer trust outweigh the initial investments. By quantifying the potential savings and risks associated with different security measures, banks can make informed decisions on prioritizing security enhancements. Overall, this research project seeks to provide valuable insights into the role of clearing systems in sustaining banks and suppressing fraud. By addressing vulnerabilities, leveraging technological innovations, complying with regulatory requirements, and conducting cost-benefit analyses, banks can fortify their clearing processes and safeguard the financial ecosystem. The findings of this study aim to guide policymakers, regulators, and financial institutions in enhancing the security and efficiency of clearing systems for a more resilient banking sector.

Project Overview

INTRODUCTION

1.1       BACKGROUND OF THE STUDY

One of the functions of the commercial banks in Nigeria is clearing of cheques through Central Bank of Nigeria.

Clearing of cheque could be defined as the process by which the validity of cheque is confirmed before the collecting banker gave value to the value.

According to Nwabufor (1998:12): cheque clearing is necessary because some unscrupulous persons do issue cheques when they have no money in their accounts to back-up the cheque. He opined that due to this fact, banks need to device a means by which they will use to verify whether a cheque is actually backed up by deposits in the account of the person issuing out the cheque, and also that the cheques is properly drawn before they credit the account of the person depositing the cheques (drawee), this process means that the cheque when deposited, must get the drawer bank where the drawer has an account for verification. It is only the bank that can confirm if there is enough money to carry the cheque by looking into the customers ledger account. They will also make sure that the cheque is properly drawn. He argued that if that bank is satisfied that there is enough money in the bank account of the drawer before the bank can get the value of the cheque.

1.2              STATEMENT OF THE PROBLEM

This function of cheque clearing is mainly carried out by clearing section of the current account department of funds transfer unit as many bank my name their own. Every commercial bank that issues and receives cheque must carry out this function of cheque clearing. Apart from the use of notes and coins, debts are settled between parties by other means order, bill of exchange, travelers cheque, dividend warrant, promissory note, cheque issue, and bank draft. All these are negotiable instruments and when such instruments mentioned above are deposited into bank accounts the clearing department of the receiving bank has is as a duty to compile those instruments according to specification and passes them into the channel of the purpose of obtaining payment.

According to Anyanwaokoro (2001: 75) the processes involved in cheque clearing using single terms thus at the early stage of banking history, inter bank settlement were done directly between banks. He said that if the customer of one bank receives a cheque from the customer of another bank and pays the cheque into his account in his bank, his bank will take the cheque directly to the banks of the customer directly to the bank of the customer who issued the cheque or the drawer of the cheque. The drawer’s bank will confirm whether or not that drawer has enough money in his account to carry the cheque. If these is money in he drawer’s account, they will credit the account of the presenters of the cheques bank or the drawee’s bank and drawee’s bank will in turn credit the drawee’s account; this process is too cumbersome and difficult, if for example, there are up to thirty commercial banks operating within a locality and several cheques were received by one of the banks, it will cost that bank too much time and money to go to all these banks one after the other to clear the cheques.

1.3              OBJECTIVE OF THE STUDY

For this difficulty, the central bank came to relieve from them such difficulty by introducing a clearing house where all the banks come together to clear their cheques in each working day. Each bank presents to the central bank the cheques of their banks paid into it by their customer to the payee bank.

The banks will thereby debit and credit each other’s account accordingly. With this process, payment by the use of negotiable instruments is made easy for the banks and cost is minimized.

Barley (1998: 62) reports that the banking institutions make money in clearing activities by charging commission on any cheque cleared. He made clear that the bank situated in an area where there is Central Bank branch do clear their cheques through his Central Bank Clearing System. This system enables cheques to be used for the settlement of debt between customers banking in different banks. He also made it known that for the banks’ cheque clearing system is a cheap and conveniented way of exchanging each other’s cheques. He opined also that there are some procedures, which is adopted by a bank which intends to clear cheques through the Central Clearing Houses.

1.4              SCOPE OF THE STUDY

 

This research study is concerned with the clearing departments of the banking organization in Nigeria and on their cheque clearing. It will be limited to the staff of (UBA) United Banks for Africa PLC Enugu main Brach precisely.

PROCEDURE FOR CLEARING CHEQUES THROUGH CENTRAL CLEARING HOUSES.

(i)                 The bank will first receive cheques drawn on other banks but paid in by its customer.

(ii)               The banks will list the cheques by maching them.

(iii)             The cheques will then be sent to the clearing department of bank.

(iv)             The following day after the cheques have been received and machined, the cheques are sent to the Central Bank for clearing by the banks representatives.

(v)               The cheques will be exchanged with those cheques presented by other banks representatives that is, bank A will collect from the banks that brought bank A’s cheques and bank A will present to them all the cheques belonging to them which they received from their customers.

(vi)             Presentation forms are completed and the respective debit and credit entries are made by the representative of every bank that comes for clearing at the Central Clearing House.

(vii)           These cheques brought from the bank’s clearing house are sorted and sent to the respective branches of the same bank on whom he cheques are drawn.

(viii)         The cheques are processed at the branch offices.

1.5              RESEARCH QUESTION

1.      Is clearing department necessary in banking industries?

2.      Do thy really waste time in the clearing house

1.6              HYPOTHESIS OF THE STUDY

HYPOTHESIS 1

Ho:       The clearing department does not generate sufficient profits to banking institutions.

HI:       The clearing department generates sufficient profit to the banking institution.

HYPOTHESIS II

H0:       Full computerization of the clearing department will not reduce the period if takes to clear cheques.

HI:       Full computerization of the clearing department will reduce the period it takes to clear cheques.

There are some basic assumptions of this research which include:

(1)        All the banking institution in the country have a clearing department.

(2)        All the banking institution in the country are victims of problem of delays of the clearing houses during cheque clearing.

The main purpose of carrying out this research as initially stated is to pin point and discuss the major functions of the clearing department in the banking institutions in Nigeria and to show their contribution to the profit of these institutions.

This research study aims also at suggesting the ways of improving the operations of clearing department in banking institutions in Nigeria.

1.7             SIGNIFICANCE OF THE STUDY

The findings of this study will be of immense benefit to the bakers their customers, the government and the countries economy in general with the improvement of the clearing system that will be suggested in this research, the delays and frustrations of the clearing exercise will be reduced. This will quicken the operations of the banks thereby generating more profits for the banks. In addition to this, the banks customers will be cleared and certified before collecting their money since these will be done as soon as the cheques are presented in clearing operations thereby increasing the capital base and profit of the banks.

The government will benefit from this increase in profit by taxing the increased profit of the banks and more revenue generated to the government. The government, when invested this revenue, there will be more money in the economy and more businesses thereby reducing unemployment.

In this write up, the researcher encountered a number of problems and constraints. The limited foreign literatures on the subject is the major problem among other problems encountered in this bank’s research study, other problems encountered are the cost of materials and transportation.

1.9              DEFINITION OF TERMS

(1)     Banking Institutions: These are all types of financial institutions that do banking works to the customers. These banks include Central Banks, merchant banks, development bank, agricultural banks.

(2)     Central Bank: This is the apex financial institution in Nigeria, which is responsible for printing and issuing Nigeria currency. They also do the work of clearing cheques for the commercial banks. Therefore, cheque clearing is done through the Central Bank of Nigeria

(3)     Commercial Loans: These are the banks that deal with accepting deposits from customers and give bank credits to them also. They receive cheques from customers and clear them through Central Bank of Nigeria.

(4)     Clearing Department: This is a department in the commercial banks where cheques are compiled, sorted and arranged for going to the clearing house where they are shared to the owners’ banks.

(5)     Cheques Clearing: This is process of confirming validity of cheque before the collecting banker gives value to the cheque.

(6)     Profit generating Department: This is any department in an organization that contributes to the profit of that organization.

(7)     Profit: Profit could be defined as the surplus which becomes due to the owner or owners of the business as a result of a successful period of trading.