Saturday, 9 April 2016

An Appraisal Of The Effects Of Fraud On Bank’s Profitability

This research work is focused on the effects of frauds on bank’s profitability in Nigerian banking industry, a case study of Guaranty Trust Bank Ilorin. The study examines the effects of frauds on bank’s profitability and also to examine the causes and level of control of fraud prevention among banks in Nigeria.

In the course of conducting this research, some information were obtained through annual reports of Guaranty Trust Bank, NDIC/FITC reports of fraud cases, journals and past related books on fraud in banks. Three research hypotheses were proposed for the study while multiple regression analysis was adopted to analyse the data obtained.

Findings shows that fraud has significant effect on bank’s profitability and insiders and outsiders involvement affect bank’s performance. Contingent on the above, recommendations, centred mainly on the case study were made as follows:-

  • Authorisation in bank operation should be decentralized so that effort of fraudsters will be frustrated when they plan to defraud the bank.
  • It is recommended that there should be installation of close circuit television (surveillance camera) to monitor areas of cash and cheque is been handled.

  •                                                         CHAPTER ONE
    The word banking has no clear cut definition which is wide enough to embrace the diverse activities carried out by all types of bankers, thus the complex activities of the merchant bank have little in common with the services offered by the savings banks.

    Bank can be defined as a corporate body duly incorporated and has the power to open an account either savings account, current account, fixed account and saving of valuable document.

    Among the Nigerian industrial sectors today, one can say that the banking industry is the most visible and arouses the most public interest. The importance of banking sector in any economy stems from its role of financial intermediation, provision of an efficient payment system and facilitation of the implementation of monetary policies.

    Banks and Other Financial Institution jointly constitute the financial industry of any economy however; the banking system comprises the major cornerstone of an economy. For any economy to develop and grow, the financial sector must be strong, solid, effective and efficient. The existence of an effective banking industry is a panacea to growing any economy. The pivot of any economy development is the banking sector through its role in intermediating funds from surplus units to deficit units.

    According to Nigel (2006), he defines Fraud as an intentional act by one or more individuals among management(management fraud), those charged with governance, employees(employee fraud) or third parties, involving the use of deception to obtain an unjust or illegal advantage.

    Today, the very integrity and survivability of these laudable functions of Nigerian banks have been called into question in view of incessant frauds and accounting scandals. 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. 

    Much of what we do is “cutting leaves” instead of dealing with the root problem. Generally, fraud takes it roots from the human heart. It is an axiom that the heart is deceitful above all things and desperately wicked.

    Fraud is the number one enemy of the business world, no company is immune to it and it is in all works of life, Nwkakwo (1991). It has eaten deep into every aspect of life to the extent that even a 3 year old child talks about 419, the newly discovered sobriquet for Advance Fee Fraud which is haunting us as a nation. The bane of society is greed and the philosophy to get rich or die trying is the order of the day.

    It is a known fact that no area of banking system is immune to fraudsters, not even the security system designed to prevent it. Fraud is a global phenomenon; it is not unique to the banking industry or for that matter, peculiar to only Nigeria. With the crash of multi-national corporation like Enron in 2001(Bratton 2002); fraud in its effect reduces organizational assets and increase its liabilities with regards to banking industry. It may engender crises of confidence among the banking public, impede going concern status of the bank and ultimately lead to bank failure. 

    The central Bank of Nigeria (CBN) reported the cases of attempted fraud and forgery as at 2007 half year what was recorded in the whole of 2006. For example the CBN half year report for 2007 disclosed a total of 741 cases of attempted fraud and forgeries involving N5.4billion ($34.8miilion), whereas in 2006 the entire case of fraud reported were 1,193 involving the sum of N4.8billion ($30.97million). The aforementioned statistics clearly unfolds the extent to which fraud had eaten deep into the financial strength of Nigerian banks.

    All banks in the country including CBN seem to be under siege by men of the underworld with or without insider collision.

    There is therefore a great need to study the changes and consequent of fraud perpetrators in the banking industry and to look for ways of preventing fraud having realized that it is possible to have a fraud free banking industry in Nigeria.

    Several legislation were put in place to reduce, alleviate and if possible eliminate the occurrence and incidence of fraud in the industry.
    • Company and Allied Matters Act (CAMA 1990)
    • Banks Employee, etc (Declaration of asset)
    • National Drug and Law Enforcement Agency (NDLEA) Act 1990
    • Special Tribunal Act 1990
    • Central Bank of Nigeria (CBN) Decree No. 24 of 1995
    • Nigeria Deposit Insurance Corporation Decree 22 of 1998
    • Bank and Other Financial Institution Decree (BOFID) 1999
    • Economic and Financial Crime Commission Act 2004

    The existence of fraud in our banks is not a new thing to the nation. It has been a rampant issue that needs to be tackled.


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