ABSTRACT: This paper investigates on Bank Fraud and its Effects on Nigeria’s Economy in First Bank Nigeria PLC. Base on the findings of this study, it could be concluded that there is a great level of interaction between bank fraud and economic development of Nigeria. This research work has attempted to highlight the incidence and magnitude of fraud and some of its negative impact on the Nigeria economy. Fraud inflicts severe financial difficulty on banks and their customers. It also leads to the depletion of shareholders funds and banks capital base as well as loss of customer’s money and confidence in banks. Such losses may be absorbed by the profits for the affected trading period and this consequently reduces the dividend available to shareholders. Losses from fraud which are absorbed by the equity capital of the bank impair the banks financial health and constrain its ability to extend loans and advances for profitable operations. In extreme cases, rampant and large incidents of fraud could lead to a bank’s failure or distress.
The loss in funds affected the economy and it reduced the amount of money available to small or medium scale firms for developing the economy in which will increase level of unemployment rate, reduction in GDP and per capital income of the country. The costs of fraud are always passed on to the society in the form of increased customer inconvenience, opportunity costs, unnecessary high prices of goods and services and lack of infrastructure facilities that will aid the economy. Fraud can increase the operating cost of a bank because of the added cost of installing the necessary machinery for its provision, detection and protection of assets. Moreover, devoting valuable time to safeguarding its assets from fraudulent men distracts management. This unproductive diversion of resources always reduces output and low profits which in turn could retard the growth of the bank and economy. It also leads to a diminishing effect on the asset quality of banks.
Bank Fraud and its Effects on Nigeria’s Economy in First Bank Nigeria PLC
1.1 Background to the Study
The banking industry is one of the most important financial institutions in Nigeria, and a central nervous system to the economy with special emphasis on its roles and challenges (Dennis, 2013). The Nigerian banking sub-sector is a mainstay of the nation’s economy as it is involved in the administration and marshaling of financial resources to various sectors of the economy which allow the economy to grow and expand. The banking subsector, at times venture into project financing in the real sector of the Nigerian economy, this therefore, support the process of economic growth and development of nation (CBN, 2009). Any tension therefore in this sub sector will cause serious distortion in the nation’s economy.
The significance of the banking sector in any country stems from its role of financial mobilization from surplus to deficit unit, provision of a competent payment system and facilitation of the implementation of monetary policies. In intermediation, banks mobilize savings from the surplus units of the economy and channel these funds to the deficit unit, particularly private business enterprises, for the purposes of expanding their productive capacity.
Fraud is defined as “deceit or tricking deliberately practiced in order to gain some advantages therefore there must be a dishonest intention and action must be intended to benefit the perpetration to the detriment of other person. Fraud according to Akindele (2014) and ICAN (2006) is a deliberate act by one or more individuals among management, employees or third parties which results in a misrepresentation of financial statement. To Olufidipe (1994) fraud is a trick deliberately practiced in order to gain some advantage. To Rose, (1999) fraud is described as any premeditate a person or group of persons with the intention of altering facts in order to obtain undue personal monetary advantage.
Another scholar Idowu (1998) defined fraud as camouflage, or exclusion of the truth for the purpose of dishonesty/stage management to the financial damage of an individual or an organization. Going by the definition of the chambers universal learners dictionary Kirkpatrick (1985) define fraud as any person who pretends to be something that he is not is a fraud, a snare, a deceptive, trick, cheat and a swindler. By extension, fraud will include embezzlement, theft or any attempt to steal or unlawful obtain, misuse or harm the assets of bank (Nweze, 2008). Moreover, bank fraud is the use of fraudulent means to obtain money, assets, or other property owned or held by a financial institution, or to obtain money from depositors by fraudulently representing to be a bank or financial institution. For an action to constitute fraud there must be a dishonest intention and the action must be intended to benefit the perpetrators to the detriment of another person.
Fraud in the banking sector is a global phenomenon and its geometric growth in the Nigerian banking sector has been astounding which has had its toll on the economy generally since the banking sector plays a critical role in every economy, Nigeria inclusive.
In the banking industry and other financial institutions, fraud ranges from account-opening, money transfer fraud, cheque kiting, telex fraud, money laundering fraud, computer fraud, loans fraud and the likes. 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. Corroborating the view of Oseni, Idolor (2010), stressed that the spate of fraud in Nigerian banking sector has lately become a source of embarrassment to the nation as apparent in the seeming attempts of the law enforcement agencies to successfully track down culprits. Although the incidence of frauds is neither limited to the banking industry nor peculiar to Nigeria economy, however the high rate of fraud within the banking industry, calls for urgent attention with a view to finding solutions.
This was experienced in the late 2007 till the end of year 2010 when the nation had a bitter experience of financial turmoil due to the financial recklessness of Banks’ top management (CBN, 2010). Prior to this period of financial turmoil in the banking sub-sector in the country, Nigerian bank is notable among other things for high recruitment of labour force (Okpara, 2009) and in a bid to ensure an efficient and effective performance, banks get the best hands to handle daily transactions and activities. Huge amount are expended to carry out their recruitment exercise, and most often this may be outsourced to other human resources consulting firms, also when the recruitment and selection exercise had been done, they also commit fortunes towards training and retraining of staff member all of which is to improve the technicality and dexterity of each employee so that he/she could contribute immensely towards achieving the corporate goal of the bank. This has also enhanced the employment rate of the country and the contribution of the banking sector to marketing capitalization was also immense and remarkable (CBN, 2009).
The financial crisis that rocked this sector few years back led to depletion of the solvency and capital base of some banks, evaporation of customers’ confidence, decline in asset prices and reduction in the banks’ assets which in turn eroded the equity base of these banks and also ignited the a new liquidity crisis and so on (CBN, 2009). All banking crisis are different even if they share a common features, but the generally follow a period of significant credit expansion and a sharp rise in stock market in a largely self- sustained mechanism (CBN Publication, 2010). Notable among the causes that led to banking crisis in Nigeria are fraud, misappropriation of assets and insiders’ abuse among other reasons which during this period made banks to be characterized by macroeconomic instability, slow growth in real economic activities, corruption and risk of fraud CBN Publication (2009).
Cases of fraud are on the increase in the Nigerian banking sector today, despite the clamp down on fraudulent bank executives by the Central Bank of Nigeria in 2010 (CBN, 2010). Till date no effective measure can be said to have been put in place to prevent fraud in its entirety anywhere in the World Wikipedia, (2017). Many Nigerian commercial banks continue to accumulate high financial deposit base without actually effectively lending in a commensurate way to investors and business organizations in the real sector.
Many a times the rules for lending are very stringent making the lending process very cumbersome for private businesses genuinely in need of access to capital for further production purposes. In the last quarter of the last decade bank regulation in Nigeria became so lapse that bank officials were able to accumulate private wealth of unthinkable proportions and commercial banks often found it difficult to distinguish between its assets and those of major shareholders who incidentally became the CEO of such banks leading to a high spate of banking irregularities particularly at the management levels in banks (Paul, Ikpefan & Deborah, 2014).
The banking sector has become one of the most critical sectors and commanding heights of the economy with wide implications on the level and direction of economic growth and transformation and on such sensitive issues as the rate of unemployment and inflation which directly affect the lives of people (CBN, 2010). 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. 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 Oseni, (2006). Also, the wave of fraud in Nigerian banking sector has lately become a source of discomfiture to the nation as apparent in the seeming attempts of the law enforcement agencies to successfully track down culprits Oseni, (2006).
Fraud is the number one enemy of the business world. No entity or work is immune from it Nwankwo, (1991). The fear is now widespread that the increasing wave of fraud in the recent years, if not prevented might pose certain threats to economy and political stability and the survival of financial institution and the performance of the industry as a whole. It is therefore pertinent to research on Banks Frauds and its effect on Nigeria’s Economy.
1.2 Statement of the Problem
Frauds in any system have lots of consequences that bear directly on the system and indirectly the environment, so also is fraud in the banking industry. The effects of fraud and forgeries in the banking industry are felt by all. If not as a customer then as a citizen of the nation. The effect of fraud in banks has a chain reaction on the economy as a whole.
The impact of fraudulent activities on banks is felt in the area of depleting the capital base of the bank. Frauds are aimed at benefiting the perpetrators at the expense of the other persons being defrauded, and in the case of banks, which main dealings are in money, irrespective of the magnitude of the fraud committed it has the effect of reducing the capital of the bank. Simply, fraud erodes the capital of any organizations and no organization can survive with an eroding capital Fraud is one of the major causes of bank failure being experienced in the country now. The amount of money lost to fraudster is large, such money is taken out of the coffers of the bank and does not generate any sort of income for the bank. It then implies that the bank’s capital is being diminished which eventually will cause liquidity problem.
Loss of confidence in banking sub-sector is a consequence of frauds and forgeries in banks. The public serves as the bank’s customer and it is their deposit (funds) that the banks uses for business and the public have the confidence in banks to be a safe keeper of their valuables. In the situation where these banks are turned to avenues for fraudsters to practice all sorts of tricks and forgeries, then these confidence would be lost by the banks as the customers will resort to other means of keeping their money without going to banks. In this situation banks will find it difficult to mobilize funds from saving sector to investing sector and as such investment reduces, production reduces and unemployment rate increase.
These effects have a negative impact on the banking industry. This is because when a bank is been reported to have cases of fraud the public (i.e. customer) does not see it as a peculiar case to the specific bank but rather the banking industry is viewed as been open to fraudulent practices. This is not healthy to the industry as it tends to disrupt business because of the reactions of customers to such fraud cases. It is therefore on this background that this study is drawn to assess the level of fraudulent activities in the bank as it effects the economic development of Nigeria.
1.3 Objectives of the Study
The general purpose of this study is to assess on bank fraud and its effects on Nigeria’s Economy. Specifically, the study seeks to:
- Carry out the survey and investigation on the major types of bank fraud and malpractices as it affect the economic development of Nigeria
- Determine the causes and the basic factors encouraging bank fraud and malpractice and examine the various forms and area of occurrence.
- To look into the possible effects or consequences of bank frauds and malpractice in the operation of banks in Nigerian Economic development.
- Recommend solutions for reducing bank fraud or malpractice for Nigerian Economic development.
1.4 Research Questions
The following research questions are raised to aid the study:
- What are the various categories of bank frauds being perpetrated in the Nigerian banking sector?
- To what extent does fraudulent activities in the bank affects the economic development of Nigeria?
- What are the existence measures in Banks that can be used to check such fraudulent acts?
- What are the measures for prevention and control fraud practices in Banks?
Bank Fraud and its Effects on Nigeria’s Economy in First Bank Nigeria PLC
1.5 Research Hypotheses
To guide this research work and to accomplish the above outline objectives the following null hypotheses will be subject to testing.
- There is no significance effect of fraudulent activities on banks in Nigeria.
- There is no significance effect of Bank fraud and Nigerian Economy.
Bank Fraud and its Effects on Nigeria’s Economy in First Bank Nigeria PLC
1.6 Scope of the Study
The study covers all the banks in Nigeria listed on the Nigerian Stock Exchange. However, due to time and financial constraint, the researcher limited the study only to First Bank Nigeria Plc, Oil mill, Port Harcourt-Rivers State. Therefore this study seeks to empirically investigate bank fraud and its effect on Nigeria’s economy using chi-square method of analysis on primary data obtained from banks staff.