Bank Fraud and How it Affects the Banking Industry.

Bank Fraud and How it Affects the Banking Industry (A Nigeria Case Study)

Bank Fraud in Nigeria  – In verifying Bank Fraud, its effects on banking industry performances the researcher reviewed the related literature under the following sub-headings.
•    Origin of banking
•    Bank fraud
•    Banking problem in early 2000s

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•    Types of bank frauds
•    Cause of bank frauds
•    Summary of literature review.
Bank Fraud in Nigeria  – Origin of Banking
    The word banking is derived from the Italian word “Banes” meaning bench, the jews in bombarding the early bankers conducted their business at benches in the market place.

A bank could mean an organization or financial institution that has the regular parties of accepting deposits of valued commodities that is cash, pervious metal, among others from the general public, which it returns on demand for which it interest in its rudimentary nature has been in existence even in ancient times, it was observed that in the bible, reference was made in the new testament to money charged in the temple of Jerusalem. In the parable of ten talents, Jesus explained how the master of a lazy servant, rebuked his servant for not banking his money. He specially asked the servant “then why didn’t you deposit the money in bank so, the this refers to who” could at least get some interest on it? (Luke 19:23).

From the statement of Jesus whom we can establish that the statement was made thousands years ago. The facts below are true:
•    Banks were equally using deposit for loans which attracted interest.
•    Banks, during ancient period were already paying interest on deposits.
•    Money sp (New banks) in the temple of Jerusalem exchanged money.
That was the rudimentary form of foreign exchange services of banks.
The foregoing truths about the origin of banking business notwithstanding, many authors the origin of banking originate from the ancient goldsmiths of London (1944).

According to the London Goldsmith version (1944) modern banking began when gold was being used as money. In those days goldsmith had strong vaults because of the nature of their business. People therefore, observed if safe to deposit their money with the goldsmith. They were initially paid for such services; they issued gold receipts to their depositors, which are used to reclaim their money.

As  period went on, people found it conducive to transfer  that gold receipt by ending it as means of payments, with time Goldsmith began to issue receipt without specifying the owner’s name and in various denominations. This led to lending out and receiving in for safekeeping of gold.interest were paid to depositors as an incentive to encourage them to continue depositing with them, that was the way modern banking came into existence.

Bank Fraud in NigeriaBanking Problem in Early 2000s
Rapid development has taken place in Nigeria economy over the decades. All these changes were caused by some external factors such as statutory problem, recessive economy deregulations, high underperforming lending technological development, among others, indeed, the banking industry as a  whole  has observed structural changes. All these are in fulfillment of its obligation of being socially responsible financial system, which will stimulate growth and creativity within they economy. The institutions serve as an agent for the mobilization of resources of the society (Oladapo, 1998).

Based on foregoing analysis, a proper grasp of banking problem in the Late 1990s can be appreciated with the establishment of the structural adjustment programme some decades ago, it  necessitated the banking system opening up the flood gate to move banks, apparently than the supervisory  captivity of regulated authorizes. Interest and exchange rate was deregulated leaving loopholes which SAP induced bank exploited for huge profit. Banking in late 1990s had a lot of problem especially with downturn of the economy, which had made borrowers of whatever persuasions unable to repay the loan culmination in banks for asset-port folio which has been the main case of recent banking distress Ode (1998). Other problems includes insufficient internal audit resulting in various collating irregularities coupled with unabated act of indiscipline. To compound all these constraint is the issue of persuasive fraudulent practices.

It is based on these fraudulent acts, that many banks went distressed. On the other hand, we see distress as the state of being in danger or difficulty. One can equally say that a bank is distressed  or failed, it has not succeeded in achieving any of the obligation for which it was established such as inability to meet depositors cash requirements, inability to  meet long term debts, obligation eroded capital base and the total liabilities become greater than total assists.
Thus, a bank is considered failure when the above mentioned delegation to customers, shareholder and the economy at large cannot achieved.

According to the passed governor of central bank of Nigeria Oguluma (1998) some of the effected below.
Tables 2.1 Distressed Merchant Bank
S/N Merchant Bank distressed
1.     ABC Merchant Bank LTD
2.     Continental Merchant Bank
3.     Crow Merchant Bank LTD
4.     Create Merchant Bank LTD
5.     ICON LTD (Merchant Bank)
6.     Merchant Bank of African
7.     Nigeria Merchant Bank
8.     Royal Merchant Bank
9.     Prime Merchant Bank
10.     Victory Merchant Bank
Source: Central bank News Vol 25 No. 43-44, 1998

Some selected indices of distressed bank in Nigeria (Table)

S/N Designation 2001 2002 2003
1 Number of banks 89 90 90
2 Number of distressed bank 40 50 45
3 Ratio of non-performing loans and advances of distress 1% 65 70 75
4 Sum required for recapitalization of distressed bank  190 (billion Naira) 190 210 210
5 Total deposit of distressed bank (in billon Naira). 380 420 420

Sources: The business news of (4th March 2002)
As shown above, the number of distress banks fluctuated yearly between 2002 and 2003 increase in rate of non-performing loans and advances to the total loans and advances to the further revealed that already developed fact  the this fact in one of the cause of the failure of banks.

As a matter of fact, the non-performing risk assets of distress bank are always higher than amount requires recapitalizing them.

Bank staff nowadays carefully colludes with outside to defraud the bank and directors or managers collude with some management staff for that purpose. Management staff lend large sum of money to unviable companies and individuals which directors have interest irrespective of their in capabilities and shore coming. Financial engineering where banks management opens accounts with spurious credit with millions of naira without actually finding out the pay off creditors related loan accounts which are performing Ode (2001).

According to Ajayi (2003) another challenge is in the area of international financial market. By its appropriate that development in the external sector such as the growth in the global economy, in particular the growth of the industrialize economy would floating exchange rate rising real interest rate and increase in protection trade cannot but have insignificant effect on the operation of the financial sector. The latter is based on the fact that regardless of the market structure of the regulator of the financial system, the tendency, toward regulation is similarly based the experience that financial market is similarly based the experience that financial market can be prone to instability and harmful to fraud.

Bank Fraud
    Fraud is a conscious international notion of a person or a group of persons in the form of forgery, falsification of document, un-authorizing signature and outright theft. if involves the use of deceit, tricks and cunning, sometimes, highly intelligent know how. The said action by a person or a group of person as early stated is intended to after the truth and/or fact for selfish personal monetary gain Adeukun (1986).

Though a common phenomenon however, of all the various problem  ms confronting the  Nigerian banking industry today, fraud is the most enterable due to the damaging result of the act on the health and  existence of banking institutions especially in a area where banking habit is being encourage.

Grouse and Hemps (1993) included borrowing a little sum of money returned overtime. This increase and ability to repay declines with time.
Other bank frauds include: Forgery of customer’s signature, granting of loan and overdrafts to dishonest borrowers/customer, transfer of customers’ accounts to collaborate and so on. The high tendency to defraud of the average Nigerian is the direct product of our material tic society  this was opinion of Ogwuma (1995).

According to Musa (1998) fraud includes negligence due to improper entry of transactions, inadequate control management, lack of training or orientation, absence of operational rules and regulations, irregular balances of accounts, absence of audit exercise.

Fullewa (1989) has this to say “Bank fraud exists as a result of mode of employment which is principally based (f and t) favoritism and familiarity and poor security essential document”.
Nwosu (1986) reported that the Nigerian government was defrauded of over N6billion by the London based Johnson Matthew Bank (JMB) in collaboration with well-placed Nigerian and foreign businessmen.

According to the Nigeria Deposit Insurance Corporations (NDIC) Report; N7. 2b was defrauded of commercial banks.

In all nut shell, most of the frauds were causes by banks staff through the applications of house policy by being unwilling to supply information in the account of an identified fraudster to another bank on request, claiming that it runs counter to the ethics of banking in protecting the interest of the customers under this method, many frauds are carried out by bank staff in collaboration with customers.

Bank Fraud in Nigeria -Types of Bank Fraud
    Since fraud means deceit or trick deliberately practiced in order to gain some advantage dishonestly, it becomes obvious that there must be a dishonest intention and the action per say must always being intended to benefit the perpetrator at the detriment of another. It therefore, follows that assumes many forms, inside or outside perpetrators.
i.    Forgeries: The could be forgeries of customer’s signature to draw fraudulently from customer’s accounts or forgeries of other funds from one account to another or withdrawal of funds from one account to another through the use of ATM Automatic Teller Machine according to Ebe (2006). The forgery may be targeted on saving accounts, deposit accounts, currents accounts and transfer instruments such as draft, mail transfers etc.
ii.    Fictitious Accounts: This type of fraud is in respect of opening and operation of fictitious accounts by branch staff. Usually such accounts are opened with fraudulent motives. They could be used perpetrate frauds such as diversion of foreign exchange, kite flying, manipulation of voucher, un-authorized lending by the directors and management staff etc.
iii.     Suppression of cheques: Suppression of cash lodgment, cheques (especially clearing cheque and other document of values such as direct debt, standing order etc. This is another common type of fraud. It is used among fraudulent staff to supply third parties cheques drawn on their account when have no sufficient fund to accommodation such drawings. S
iv.    Theft and embezzlement: The could be in terms of bank items such as cash, travelers, cheques and foreign currency or in form of other bank assets such as refrigerators, electrical equipment, air conditioner, motor vehicle, motor vehicles parts, computer  equipment, beverages, toiletries, stationeries etc.
v.    Cross Flying and kite flying:  Cross flying and kite flying of cheques by the customer with or without the collaboration of the branch manager is a fraudulent act. Kiting cheques is a term used to demote a method sometimes used by customers to make use of fictitious balances by drawing against uncollected funds kiting takes advantage of the time needed for cheques to be cleared and permits the kilter the use of funds that are not his. It is usually practiced by a customer having two bank accounts. By depositing a cheque drawn on bank “A” to credit to his account “B” and vice versa, a person may drawn against fictitious balance this credited expecting to “cover up” before the cheque and presented.
vi.    Lending to ghost Borrowers: Granting of loan and overdraft whether such loan are being repaid by the “ghost” borrowers or not experience have revealed that some unscrupulous bank managers grant fictitious loans by themselves using fake names (non-existing). Signature and non-customers as fronts.
vii.    Fraudulent use of bank document: Fraudulent use of valid bank document such as statement  sheet belonging to different customers, bank letter head paper, bank rubber stamps, bank seal etc, are act of frauds.
viii.    Computer fraud: Fraudulent manipulation of the computer either of the data collection stage is referred to as computer fraud.
ix.    Double pledging: This type of fraud involves using false of non existing collateral to obtain banking facilities. The same security may be falsified and pledged in supported to several facilities with the same bank or with different bank.
x.    Fake payment: These types of fraud involved the cashiers introducing spurious cheques into his/her cage with or without the collaboration of other members of staff or non-customer and subsequently pay out cash. This type of fraud is easy to detect at the end of the day’s work where through examination of voucher and daily reconciliation of account are in place.

Bank Fraud in Nigeria  – Major Causes of Bank Fraud
    The cause of bank fraud is dependent upon the nature of banking system. This is because about 80% of banking staff perpetrates frauds. On the other hand, the remaining 20% are customers to the banks who carefully or trickily conspire with themselves to cheat bank.

The following are of the causes of fraud in the banks.

•    Absence of detailed operation manual: Lack of operation guideline, mandates or hazard operational instruction is the root causes of fraud among the operating manual causes fraud in the banking system.

•    Bad management: Bad management in term of incompetence, inadequate supervision, poor judgment, mal equate control, poor planning, lack of coordination, corruption and misappropriation of adequate training on both the technical and theoretical aspect of the job leads t poor performance which breads frauds and failures by both management and staff undergo on the job training and even relevant outside courses also lead to unsatisfactory performance much include frauds.

•    Poor internal control: Inadequate internal control or infective applications of internal control measure create loopholes for fraudulently inclined staff, customers and non-customer to perpetrate frauds.   Ineffective audit and poor supervision and failure to duly cash control, security documents and bank asset cause frauds in the bank.

•    Poor bookkeeping: Inability to maintain proper books of necessary accounts and failure to  reconcile the related account on daily, weekly, monthly basis as appropriate leads to poor security of vouchers/ entries to ensure that they were correctly treated and posted, also absence of daily reconciliation of accounts to resolve differences between Dr and Cr balance given  room for frauds.

•    Fault personnel policies: Poor selection, recruitment, job placement, promotion.

Bank Fraud in Nigeria  – The Early Record of EcoBank Plc
    From all indications, the bank recorded giant stride in terms of financial fortunes from the early years which explain her ability to put them necessary structures and other assets she now poses. However, this changed following the introduction in 1986 of the structural adjustment programme. For as oruma (1994) observed that the issue of distress is a concomitant of the sharp increase in prices after the introduction of Structural Adjustment Programme in 1986 and financial  structure.

In the case of ECO bank Plc, Abakaliki, a proper assessment of its performance revealed that all was for a fairly long period of time see a chart below showing a three-year’s financial summary.

(Table) three- year financial summary

DESIGNATION 2001(NM) 2002(NM) 2003 (NM)
Cash in hand at bank 4.55 3.05 4.75
Investment 1.85 1.75 1.55
Loans and advances 22.15 20.25 24.25
Equipment on lease 2.95 1.65 2.85
Fixed assets 6.25 6.45 7.15
Total 36.75 33.15 40.55
Deposit current/saving account 25 22.15 18.85
Taxation -35 22 -13
Dividend -4 -5 -35
Interest (minority) -8 9.38 20.57
Miscellaneous 10.2 9.38 20.57
Total 36.75 33.15 40.55

Following the financial summary of account which covered a period of the year, if closely looked at, can observed the fluctuation of the sums. This is a result of frauds of irregularities in financial transaction due fraud done by the manager and the chief accounting officer where there is absence of internal control system.
The summary shows entries against “miscellaneou’s fraud.

Bank Fraud in Nigeria – Summary of the Literature

Various available literatures on bank fraud which from the base of the project have critically and analytically viewed to a large extent and to the   benefits of our society as a whole.
Definitely, the related literature has been rightly pointed out in the early part of this chapter. Frauds are either caused by domestic or external factors. The origin of banking is exposed in the literature. In addition, types of bank frauds prevent in the financial system have been identified as theft, forgery, computer frauds kiting double pledging etc.
In order to maintain a healthy and fraud free banking environment, statutory enactment must be in existence to guard against fraud, sharp practices and irregularities in banking operation. These statutes include criminal code etc.

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This article is a part of a Project work titled: “ The Effect of Fraud on the Performance of the Banking Industry in Nigeria (A Study Of Eco Bank Nigeria Plc, Abakaliki Branch)”


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