AHAM NZENWATA
ABSTRACT
This paper investigated the linkages between bank fraud and economic
development in Nigeria. To achieve the aim of the paper, an extensive review of
literature was carried out. With the use of descriptive research methods and
bank fraud data published by Nigeria Deposit Insurance Corporation (NDIC), we
explore the trend and occurrence of bank fraud and how it affect the economy.
From the data, we find that in the past couple of years, bank fraud has been on
the decline as banks implement new internal control systems. The findings also
show that fraud by bank staff as well as internet fraud have reduced
considerably in the past one year. Based on the findings, we conclude that even
though the incidence of bank fraud is on the decrease, it still has an effect
on economic growth by causing unemployment and reducing confidence in the
banking system. Considering the above, it is recommended that commercial banks
must partner with regulatory authorities embodied in Nigeria Deposit Insurance
Corporation (NDIC), Central Bank of Nigeria (CBN), bank customers both
corporate bodies and individuals to finding ways to reduce the occurrence of
bank fraud to the barest minimum. The proffered solutions may include the
following: Marshalling new and better security measures for the protection of
the accounts of corporate bodies and individuals. Procurement of better
equipment with higher security ratings and endorsements. Ensuring that bank
staff are better trained and equipped and trained to detect and prevent the
occurrence of fraud in the banks.
1. INTRODUCTION
Fraud according to Adeniji
(2004) and Asuquo (2005) is an intentional act by one or more individuals among
management, employees or third parties which results in a misrepresentation of
financial statement. Fraud has been defined as a deception deliberately
practiced in order to secure unfair or unlawful gain. It is a deceit, trickery,
sharp practice, or breach of confidence, perpetrated for profit or to gain some
unfair or dishonest advantage.
Fraud is the intentional
misrepresentation, concealment or omission of the truth for the purpose of
deception/manipulation to the financial detriment of an individual or an
organization (such as a bank) which also includes embezzlement, theft or any
attempt to steal or unlawfully obtain, misuse or harm the asset of the bank.
Fraud consists of both the use of deception to obtain illegal financial
advantage and intentional misrepresentation, affecting the financial statements
by the one or more individuals among management, employees or third parties.
Fraud in its effects reduces the assets and increases 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 in the long run end up
in a possible failed bank situation.
The issue of insecurity and
fraud in the banking sector is an interruption to the roles banks play towards
economic development of the country. The financial sector in Nigeria is faced
with deep security challenges, institutional and environmental frauds which
threaten greatly the business growth, and the confidence of the public in the
banking sector. It is good to mention here that banks have no other asset to
offer to customers except confidence, and the problem of fraud has affected the
confidence negatively- resulting in poor performance (Kanu & Idume 2002).
The increasing frauds affect
the already tenuos survival and viability of the banking sector. Fraud is not
unique to the banking sector but due to the product which the banks deal on
(cash) and the fact that Nigeria is a cash based economy, no area of banking
system is immune to fraudsters, not even the operational security. The
characteristic of this economy is that the cash will be physically held and
touched. In Nigeria, studies indicate that more than 90% of funds are outside
the banking sector as against the developed world where the money in
circulation is 4% and 9% in the UK and US respectively.
This explains the reason for
the fragile nature of our banking system. Transacting with physical cash is
prone to fraud and other security threats. Numerous banks have had very bad
experience with fraud, especially those masterminded from within the bank. This
has marred the operations of the banks. Some bank and customers lost fortunes
to such nefarious activities.
The increasing rate of
insecurity and fraud in the banking system, if not arrested might pose serious
threats to the stability and the survival of individual banks and the
performance of the industry as a whole (Nwankwo, 2013). Okoro (2003) state that
fraud has left untold hardship on the lives of bank owners, staff, customers
and family members as most bank failures are always associated with large scale
of frauds. Fraud in bank shakes the foundation and credibility of the affected
banks in Nigeria resulting in some of the banks being distressed thus impacting
negatively on the nation economy.
Considering that banks play
a vital role in determining and influencing the course of economic development
of the country. Thus, as financial institutions that serve as intermediaries
between surplus units and deficit units in the economy, the extent to which
banks successfully and efficiently perform the intermediation function
profoundly determines not only the level of public trust in the banking system
but also the performance of the banks themselves as well as the general economy
(Kanu & Idume 2002).
The purpose of this paper is
to evaluate the challenges that fraud pose in the banking sector and their
implication on the banks performance and by extension on the economy.
2.1 CONCEPTUAL FRAMEWORK
CONCEPT AND CLASSIFICATION OF BANK
FRAUD
Fraud
is described as any premeditated act of criminal deceit, trickery or
falsification by a person or group of persons with the intention of altering
facts in order to obtain undue personal monetary advantage (Idowu, 2009).
Frauds usually involve the perpetration of some forgery or falsification of
documents or illegal authorization of signature (Ojo, 2008).
It
can be surmised from the foregoing definitions that fraud arises when a person
in a position of trust and responsibility digresses from agreed standards,
breaks the rules to advance his personal interest at the expense of the
interest of the public. Fraud has been classified in various ways and using
various parameters. These include:
Cheque Fraud: According
to Anyanwaokoro (2008), cheque fraud can come in the form of cheque fiddling,
cheque kiting and cheque forgery. Cheque fraud remains the most prevalent type
of bank fraud. In all, cheque involves tampering with the rules of Checking
account transactions for illegitimate reasons and uses.
This may
involve altering the amount on the cheque, forging the signature of the
rightful owner of the cheque and/or issuing cheques on accounts with knowledge
of the fact that there is no sufficient funds in the account etc.
Credit Fraud: Credit
fraud involves a bank officer granting loan/credit to a customer even though he
or she knows that going by the rules of the bank, such a credit should not be
granted. This may include insufficient documentation, non-existent collaterals,
non-existent and fraudulent guarantors, use of fictitious or inadequate cash
flow documents etc.
Advance fee fraud: According
to Adeyemo (2012), this type of fraud may involve an agent approaching a bank,
a company or individual with another to access large funds at below market
interest rates often for long term. This purported source of funds is not
specifically identified as the only way to have access to it is through the
agent who must receive a commission “in advance”.
As
soon as the agent collects the fee, he disappears and the facility never comes
through. Any bank desperate for fund especially distressed banks and banks
needing large funds to bid for foreign exchange can easily fall victim of this
type of fraud. When the deal fails and the fees paid in advance are lost, these
victims are not likely to report the losses to the police or to the
authorities.
Electronic and wire transfer
frauds: Electronic and wire transfer frauds involve the use of
computers and other electronic and communication devices to defraud individuals
and organisations. Wikipedia (200) states that advance fee wire transfer fraud
which is perpetrated through wire transfer networks and international SWIFT
fund transfer systems is especially tempting for fraudsters as targets because
a transfer, once made, is difficult or impossible to reverse and difficult to
trace. This type of fraud may involve
fraudsters collecting confidential information about their victims and using
such information to make withdrawals on the victim’s bank account(s).
Embezzlement fraud: According
to Anyanwaokoro (2008), embezzlement fraud involves outright stealing and
misappropriation of and tampering with bank funds. This also involves staff of
banks transfer funds from a customer or the bank’s account to a designated
account from which the funds are later disbursed fraudulently.
Money laundry fraud: Wikipedia
(2009) states that money laundering is the process by which large amounts of
illegally obtained money (from drug trafficking, terrorist activity or other
serious crimes) is given the appearance of having originated from a legitimate
source.
In
addition to those detailed above, bank fraud will also include counterfeit securities fraud, account
opening fraud, letter of credit fraud etc.
2.2 CAUSES OF BANK FRAUD
Like
we mentioned earlier, fraud pervades virtually every facet of society and consequently,
the causes of fraud can be attributed broadly to institutional, social and
personal causes. Below we shall provide insight into the causes of fraud in
line with this broad classification of the causes of bank fraud.
Institutional Causes
Institutional
causes of fraud are those that can be attributed directly to the failure of the
bank as an institution to provide adequately for its staff to perform their
duties optimally. This may be in the form of:
· Lack
or inadequate physical infrastructure
· Defective
processes and procedures,
· Inadequate
internal control systems and supervision
· Inadequate
staff training, remuneration/compensation etc.
Any
one or combination of any of the above factors may create weak points that
fraudulent individuals can capitalize on to commit fraud.
Societal/Personal Causes
Idowu
(2009) in Adeyemo (2012) listed the following as some of the factors that can
be attributed to social and environmental factors why people commit fraud.
·
The penchant to get
rich quick;
·
Slow and tortuous legal process;
·
Poverty and the
widening gap between the rich and the poor;
·
Job insecurity;
·
Peer group pressure;
·
Societal expectations;
·
Increased financial
burden on individuals and finally,
·
Stiff competition in
the banking industry which saw many banks engaging in fraud so as to meet up in
terms of liquidity and profitability.
In
addition to the above, Anyanwaokoro (2008) lists the following as causes of
fraud:
·
Inadequate punishment
·
Slow and distorted
legal processes
·
High level of bribery
and corruption
·
Laxity in statutory
supervision.
2.3 ECONOMIC DEVELOPMENT
Economic Growth is a
narrower concept than economic development. It is an increase in a country's
real level of national output which can be caused by an increase in the quality
of resources (by education etc.), increase in the quantity of resources &
improvements in technology or in another way an increase in the value of goods
and services produced by every sector of the economy. Economic Growth can be
measured by an increase in a country's GDP (gross domestic product).
The definition of economic
development given by Michael Todaro is an increase in living standards,
improvement in self-esteem needs and freedom from oppression as well as a
greater choice. The most accurate method of measuring development is the Human
Development Index which takes into account the literacy rates & life
expectancy which affect productivity and could lead to Economic Growth. It also
leads to the creation of more opportunities in the sectors of education,
healthcare, employment and the conservation of the environment. It implies an
increase in the per capita income of every citizen.
Economic Growth does not
take into account the size of the informal economy. The informal economy is
also known as the black economy which is unrecorded economic activity.
Development alleviates people from low standards of living into proper
employment with suitable shelter. Economic Growth does not take into account
the depletion of natural resources which might lead to pollution, congestion
& disease. Development however is concerned with sustainability which means
meeting the needs of the present without compromising future needs. These
environmental effects are becoming more of a problem for Governments now that
the pressure has increased on them due to Global warming. Economic growth is a
necessary but not sufficient condition of economic development.
2.4 EFFECTS OF BANK FRAUD ON THE ECONOMY
In
Nigeria, fraudulent practice particularly in our banking institutions has
really been a source of worry and concern, going by its increasing rate. Bank
fraud has been linked up with our banks in Nigeria years back and yet it is
still an ongoing problem with our banks. According to Ogidefa (2008), certain
effects of fraud have been identified and these include: Fraud leads to
bankruptcy; Fraud affects the economic system of a country; Fraud leads to
increase in crime; Fraud leads to unemployment; Fraud encourages a reduction of
income per head of a country.
The
above-stated effects of fraud show that fraud cannot be good for any nation’s
economy. For example, on the issue of bankruptcy, this is very evident in
Nigeria, where a number of companies including financial institutions have
folded up due to the fraud perpetrated by some dishonest members of staff
against the companies, which eventually led to their inability to survive again
and hence they had to wind-up. This has been an ongoing problem in Nigeria
(Nipion 2015).
In another
vein, fraud affects the economic system of a country. it is very much real with
us there in Nigeria the harm fraud has had on the total economic system of the
country. It can be said that fraudulent practices such as that of bank fraud
can undermine economic development by encouraging and promoting distortions and
inefficiency. For example, fraud undermines confidence in the banking system
which is central to the financial system. Thus, any problem facing the
financial has its first touch-down on the economy.
In the private
sector, fraud has been found to increase the cost of business through the price
of illicit payment themselves, the management cost of negotiating with
officials, and the risk of breached agreement or detection (Nipion 2015).
Similarly, based on the fact that fraud encourages criminal activities, it
cannot be under-emphasized. Fraudulent practices make some people rich while
others are made poor. With this dichotomy, the individual so made poor would
want to survive.
Fraud has been
found to lead to unemployment. The reality is that anywhere fraud particularly
bank fraud exists, distress and liquidity difficulties persists. Fraudulent
practices usually lead to the diversion of the financial or even non-financial
resources meant for a large group of people to be siphoned into the private
pockets of only a very few individuals. Millions or Billions of Naira that
could have been used to develop people through the provision of employment
opportunities, social amenities and many other opportunities are diverted into
the hands of corrupt individuals, thereby leaving millions of Nigeria to be
unemployed and then suffer (Nipion 2015).
Fraud like
corruption encourages economic distortions in the public sector by diverting
public investments into capital projects, particularly where bribes and
kickbacks have been shown to thrive too much. On this note, it is revealed
accordingly that officials may be involved in increasing the technical
complexity of public sector projects to conceal or pave way for such dealings
therefore distorting investment.
3. METHODOLOGY
Considering the
lack of collected or well documented body of data on bank fraud in Nigeria,
this research adopts the descriptive research design. Descriptive research is used
to describe characteristics of a population or phenomenon being studied. It
does not answer questions about how/when/why the characteristics occurred.
Rather it addresses the "what" question. Descriptive research can be
explained as a statement of affairs as they are at present with the researcher
having no control over variable. Moreover, “descriptive research may be
characterized as simply the attempt to determine, describe or identify what is,
while analytical research attempts to establish why it is that way or how it
came to be.
For the Purpose
of the paper, data relating to bank as presented by Nigeria Deposit Insurance
Corporation (NDIC) is described and some salient conclusions drawn from it.
4 DISCUSSION OF FINDINGS
AND CONCLUSIONS
According to the NDIC
(2016), a total of 12,279 fraud cases were reported in 2015, representing an
increase of 15.71% over the 10,612 fraud cases reported in 2014. However, the
amount involved decreased significantly by N7.59 billion or 29.63% from N25.608
billion in 2014 to N18.021 billion in 2015. Similarly, the actual loss suffered
by the insured banks decreased by N3.02 billion or 48.79% from N6.19 billion in
2014 to N3.17 billion in 2015.
The actual loss sustained in
respect of internet banking fraud was N857 million, representing 27% of total
actual loss of the industry. There was an increase in the frequency of
ATM/Card-Related Fraud cases from 7,181 in 2014 to 8,039 in 2015, an increase
of 11.95%. However, the loss suffered by the industry due to such frauds declined
significantly by 59.4% from previous year figure of ₦1.242 billion to ₦0.504
billion, representing 15.9% of total industry loss to frauds and forgeries.
Out of the 12,279 fraud
cases reported by the DMBs, 425 cases were attributed to staff. The number of
fraud cases perpetrated by staff had decreased from 465 in 2014 to 425 in 2015.
Similarly, losses arising therefrom substantially decreased by 70% from N3.165
billion in 2014 to ₦0.979 billion in 2015. The highest percentage of frauds and
forgeries cases of 38.59% was perpetrated by temporary staff.
From the foregoing, we can
draw several conclusions. First, the rate of fraud in Nigeria banks has
declined considerably from what used to be obtainable in the past. This is
likely as a result of more stringent internal controls put in place by the
banks.
Secondly, frauds perpetrated
by staff of banks are shown to constitute a negligible percentage (3.46%) of
the total fraud and it continues to decline. This buttresses the point that the
banks have in place better internal control systems when compared to the past
when fraud by sources internal to the bank were much higher in number and
amounts involved. With the right internal controls, those devastating frauds
perpetrated by employees of the banks will be the first to reduce which is
shown in the study to be the case.
We also conclude that
internet related frauds were quite substantial at about 27% of all bank frauds.
This is likely as a result of increase in ATM/Card-Related fraud cases which is
perpetrated on the bank account of individuals and corporate entities.
We conclude that bank fraud
affect the economy by fueling fear and lack of confidence in the banking system
and by extension on the financial system. This has the effect discouraging the
use of banking services especially in the unbanked public. It also helps to
ensure that economic activities in the informal sector continue to persist.
Finally, bank fraud causes
unemployment especially of employees in the banking system. This exacerbates
the already herculean problem of unemployment plaguing the economy.
5. RECOMMENDATIONS
Considering the findings of the study as
discussed above, we recommend that commercial banks must partner with
regulatory authorities embodied in Nigeria Deposit Insurance Corporation
(NDIC), Central Bank of Nigeria (CBN), bank customers both corporate bodies and
individuals to finding ways to reduce the occurrence of bank fraud to the
barest minimum. The proffered solutions may include the following:
·
Marshalling new and better security
measures for the protection of the accounts of corporate bodies and
individuals. This may involve setting up more stringent authentication
processes for accounts before internet based transactions are completed.
·
Procurement of better equipment
with higher security ratings and endorsements
·
Ensuring that bank staff are better
trained and equipped and trained to detect and prevent the occurrence of fraud
in the banks. This should be in addition to paying closer attention to their
remuneration to forestall the feeling of being under-appreciated which helps to
fuel fraud.
·
Finally, we recommend that the
system of deterrence through the security agencies and the judicial system be
empowered to effectively apprehend and prosecute fraudsters in order to deter
others from getting into the ugly trend in the future.
·
REFERENCES
Adeniji,
A. (2004). Auditing and investigation, Lagos: Value Analysis Publishers.
Adeyemo,
K. A. (2012): Frauds In Nigerian Banks:
Nature, Deep-Seated Causes, Aftermaths and Probable Remedies Mediterranean
Journal of Social Sciences Vol. 3 (2) May 2012, ISSN 2039‐2117
Anyanwaokoro,
M. (2008): Methods and Processes of Bank Management, Revised and Enlarged
Edition, Johnkens and Wiley, Enugu, Nigeria
Asuquo,
P. E. (2005). Bank fraud: A look at the Nigerian banking clearing system. ICAN
News, 14(January/March), 19-24.
Idowu,
A. (2009). An assessment of fraud and its management in Nigeria commercial
banks. European Journal of Social Sciences, 10(4), 628-640
Kanu
C.; Idume G. I. (2002) Security Challenge, Bank Fraud and Commercial Bank
Performance in Nigeria: An Evaluation, Journal of Business and Management,
Volume 5, No. 2.
Nipion
S.U.J. (2015) Bank Fraud and the Nigerian Economy: A Psycho-Economic Analysis,
Journal of Social Science and Humanities Volume 1 Issue 1.
Nwankwo,
O. (2013). Implications of fraud on commercial banks' performance in Nigeria.
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doi:10.5539/ijbm.v8n15p144
Ojo,
J. A. (2008). Effect of bank frauds on banking operations in Nigeria.
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G. (2003). An investigation of fraud in banks (Unpublished M.Sc. Thesis).
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Wikipedia
(2009): Bank Fraud, retrieved 13/09/2015 from https://en.wikipedia.org/wiki/Bank_fraud
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