FRAUD IN THE NIGERIAN BANKING SYSTEMS, PROBLEMS AND PROSPECTS (A CASE STUDY OF FIRST BANK OF NIGERIA PLC, AND OCEANIC BANK PLC,ABAKALIKI BRANCH OFFICES)

ABSTRACT

This  project,  “fraud  in  the  Nigeria  Banking  Systems  problem  and  prospect  a case study of First Banking of Nigeria plc Abakaliki and Oceanic Bank Plc Abakaliki branches”, was carried out to examine the various types of fraud as well as the causes and sources. It was also meant to explore significant effects of fraud on banks. Finally, the study was equally embarked upon to proffer possible remedies, detection measures, prevention and control of the subject matter in the Nigeria Banking system. Data was collected through the questionnaire (Primary) and interviews as secondary data thus serving the inductive  research  method.  Statistical  analysis  techniques  such  as  the  chi- square distribution test- analysis techniques and percentages were adopted to analyze  the  data  collected  after  which  several  findings  were  made,  which included: the desire to get rich quick  accounts greatly for persistent bank fraud and  that  the  internal  control  system  in  the  Nigerian  banks  is  weak  and ineffective   .After   which   it   was   concluded   that,   the   money   laundering (prohibition)  Act  is  the   best  strategy  to  combating  fraud  in  the   banking industry.

CHAPTER ONE

1.1     BACKGROUND OF THE STUDY

The entire world has become increasingly aware of the destructive effect of a lack of accountability and transparency in both public and private life. This awareness is so pervasive throughout the world that governments,  business  organizations  and  non-  governmental organizations  alike  are  involved  in  crusades  to  promote  accountability and transparency and prevent corrupt practices in all its ramifications. These crusades have gathered so much steam that international award for the “Most corrupt” and least corrupt country” in the world now exist. It  is  very  unfortunate,  and  a  national  embarrassment  that  our  father land which we hope to give to our children as a legacy has repeatedly won the former rather than the later price.

The fraudulence for which our nation was given a price is not located in the  sky  over  our  land;  it  is  the  aggregation  and  multiplication  of  little acts   of   fraudulence   in   our   interactions   with   one   another   (Ezeogu 2007:10).

The  dark  days  of    tyranny,  military  rule  and  social  enslavement were   thought to be  the period in which corruption festered in Nigeria and fraud became common place, but have you ever thought of the role some  fraud  stars  played  in  the  inability  of  some  commercial  banks  to meet their obligations to its customers, owners, stake holder and the economy?

Has it ever occurred to you to search out how a sizable proportion of financial institutions had liabilities exceeding the market value of their asset, which may lead to ruins and other portfolio shifts and eventually, collapse of the financial system?

Society  has  long  adopted  to  plunder  the  noble  Nigerian  identity and from military to civilian regimes, pubic office holders had followed strictly  the  unwritten  constitution  to  live  up  to  societal  expectations. Values were waded off in exchange for graft and pecuniary benefits, millions were defrauded of their rights to good education, basic health, good roads and electricity, housing has become the preserve of the rich and professionals have lost chunk of their respectability.

The entire world has become increasingly aware of the destructive effect of a lack of accountability and transparency in both public and private life. This awareness is so pervasive throughout the world that governments, business organizations alike are involved in crusades to promote accountability and transparency and prevent corrupt practices in all its ramifications.

Fraud  and  errors  are  occurrences  and  like  winds,  they  blow  no good to any firm, industry, association, business organization and government.   Instead   they   bring   regrets,   reduced   patronage,   losses, distress and failure to such business and organizations as mentioned above.

It is not also interesting to know that like the ‘canker worm’, they have eaten deep into the fabrics of the Nigerian financial institutions especially the banks.

It   is   not   uncommon   to   day   to   hear   of   fraudulent   acts   like uninsured  deposits,  theft  of  identity,  forged  or  fraudulent  documents, wire fraud, cover of losses by rogue traders, demand draft fraud, and payment card fraud, cheque kitting, management fraud, Automated teller machine fraud etcetera in our banks.

Ojaide (2000:18) posits, “Frauds are acts of dishonesty, deceit, falsifications  and  manipulations  perpetuated  to  gain  undue  monetary and  non-  monetary  benefits”.  He  further  states  that  accounting,  fraud and fraudulent practices are illegal acts involving misappropriation of assets (cash, stocks, book debts, fixed assets) manipulation and falsification of accounting books and records etcetera. In his opinion, the get rich quick attitude of many Nigerians, greed, poverty and the falling standard of living are some of the reasons for the increase in the rate of fraud and fraudulent practices in Nigeria.

Although, frauds, errors and forgeries in banks are global phenomena, their growth Nigeria have been astounding. Bank frauds and errors in general  inflict  untold  hardship  on  bank  owners,  staff,  customers  and their family members, as most bank failures are always associated with larger scale frauds.

Frauds  and  errors  and  their  effects  on  banks  in  Nigeria  today created room for doubt on the reliability of financial record and reports kept by management except perhaps on the very small scale business. The financial report user is not in a position to process and produce financial accounting information personally, nor has he the day to day knowledge of company affairs with which he can use as a base for his judgment.

Modern day banking in Nigeria can be traced to the period 1892 when the first commercial bank- African Banking corporation- was established.  The  bank  was  the  first  to  open  its  branch  in  lagos.  The founder was mess’s Elder Dempster and Co; a shipping firm based in Liverpool.

On  account  of  difficulties  experienced  in  the  area  of  management,  the bank decided   to transfer its interest to Elder Dempster and Co. in 1893. In response to the changes through management restructuring, the bank metamorphosed to form a new bank known as the British Bank of West Africa (BBWA) in 1894, with an initial capital of £10,000. Okoro S. A (2001:17) affirms that: “The Bank of British West Africa was the first surviving bank in Nigeria and registered in London a limited liability company in March 1894 with first Lagos branch being opened the same year.

Following the establishment of this Lagos Branch, other branches sprang  up  in  other  countries  of  West  Africa  like  Ghana,  free  town  to mention but a few. The BBWA later opened its second Nigerian branch in old  calabar  in  1900  that  is,  six  years  later.  During  this  period  of dynamism, there was complete absence of legislations governing the banking operations in Nigeria. This culminated in the banking distress experienced in the 1930s. At least about 21 banks failure were recorded between 1930 and 1952. In reaction to this ugly development that was ravaging the banking, the then colonial government set up a commission of enquiry under sir, patron to investigate the cause and proffer remedies/solutions. Consequent upon their report, the first banking legislation was passed in 1952. At this time foreign dominance of the industrial sector was intense even till after independence. This made the government to launch the indigenization policy in 1972 which conferred on   the   Nigerian   Government   40%   equity   share   in   all   companies registered in Nigeria. As a result of this enterprise promotion decree (i.e. indigenization  decree),  the  federal  government  acquired  huge  equity share in the BBWA. Similarly following the decree demand, the BBWA changed its name to First Bank of Nigeria limited in 1973.

Oceanic Bank Plc is one Nigerians foremost financial services institution. The Bank was incorporated on March 26 1990 under the Companies and Allied Matters Act (CAMA) 1990 of Nigeria as a private limited liability company and was granted a commercial banking license on April 10 1990. It commenced business on June 12, 1990.

Fourteen  years  later,  on  June  4  2004,  oceanic  Bank  converted  to  a public liability company. Its shares were listed on the Nigeria’s stock exchange on June 25, 2004. Over the years, Oceanic Bank has built its success on excellent service, delivered in a friendly environment through professional staff, leveraging on world class technology.

Today oceanic Bank services customers spread across tiers of Government, corporate organizations small and medium enterprises and individuals. The Bank’s commitment to value creation for all its stakeholders has earned it a solid reputation as a responsible corporate citizen and employer of choice.

Recently (in 2010), the Central Bank of Nigeria rescued some nine banks referred to as “troubled banks” who had been hit by bank and security fraud to the tune of N620 billion ($ 4.1 billion).

Commercial   banks   occupy   an   indispensable   position   in   the Nigerian Economy. They are the pivot upon which other business firms and activities revolve and a “circuit Pipe’’ through which all financial transaction pass. Given the current travails of banking sub- sector the need to plug all areas of wastages, more than ever before, becomes compelling.

No where is fraud more serious than in banking, it is the biggest single cause of bank failure (Nwankwo 1991: 162).

‘‘One of the best ways of combating fraud is to mount an aggressive enlightenment campaign on the dangers posed by fraud to the economy and the banking industry, in particular”.

This  research  work  is  therefore  done/carried  out  to  give  an  in- depth and unique evaluation of the current state of fraudulent practices in the commercial banks in Nigeria with special reference to First Bank plc  and  Oceanic  Bank  plc,  Abakaliki  Branch  offices.  Hence,  in  this project work, the researchers’ attempt is geared towards drawing reader’s attention to the menace in the industry with a view to assisting bankers/customers in tackling the dreaded monster in their day to day transactions.

1.2     STATEMENT OF PROBLEM

The threat posed by the existence of fraud and errors are of great concern   to   shareholders,   bank   customers,   the   pubic   and   private investors,  creditors, government agencies and the entire citizenry.

The     inability of a bank to meet its obligations to its customers, owners, stalk holders and the economy occasioned by felt weakness in its operations which has rendered it either illiquid or insolvent have been ascribed by many to fraud.

Some argue that the rate of financial impropriety in the Nigerian financial system is so alarming and is evidenced or caused by poor, weak and inefficient accounting system. Others say that so many banks are inadequately computerized and that this has prevented the management from detecting fraud early enough.

More so, as the ultimate motive of most business are to maximize profit, but financial embezzlement, capital      flight, and other fraudulent practices result in low profit which in turn could lead to bank distresses.

Equally, non compliance to with the existing laws and legislations like Banks and Other Financial Institutions Decree(BOFID), money laundering(prohibition) Act, to mention but a few makes crime detection cumbersome for the Nigerian commercial Banks. It is on these aforementioned   problems   that   this   research   study   is   built.   The researcher will delve deeply into these matters to enable him establish a link between fraud and commercial bank performance in Nigeria.

1.3     OBJECTIVE OF STUDY

The  study  will  investigate  and  identify  the  root  causes  and  the effects of fraud on banks operation with a focus on the oceanic Bank Plc and first Bank of Nigeria Plc Abakaliki Branches. The following objectives will guide this research.

1.  To identify the causes of fraud in the Nigerian banking system.

2.   To examine the concept, ‘fraud’, bringing out its various types.

3.    To    find    out    the    reasons    people    indulge    in    fraudulent practices in Banks and other financial institutions.

4. To determine the dangers or consequences of bank fraud.

5.  To  identify  the  existing  laws  relating  to  banking  and the legal process for prosecuting fraudsters in banks

1.4     RESEARCH QUESTIONS

The following research questions, which the study will attempt to answer, have been asked:

What are the causes of fraud in our banks?

To  what  extent  has  the  management  been  able  to  detect  fraud  and fraudsters?

Why do people indulge in bank fraud?

What are the dangers of fraudulent acts in banks?

Are there laws and legislation put in place by the government on bank fraud?

1.5     RESEARCH HYPOTHESIS

In carrying out this research, the following hypotheses have been formulated.

HYPOTHESIS 1

Ho:      The desire to get rich quick does not account for persistent bank fraud.

H1:     the desire to get rich quick accounts for persistent bank fraud

HYPOTHESIS 2

Ho:      Anti-money laundering law is not the  best strategy to combating fraud in the banking industry.

H1:     Anti-money laundering law is the best strategy to combating fraud in the banking industry.

HYPOTHESIS 3

Ho:      The internal control system in the Nigerian banks is not weak and in effective

H1:     The internal control system in the Nigerian banks is weak and in effective

1.6     SIGNIFICACNE OF THE STUDY

Everyone needs information so as to be empowered. These include, the financial system participants, owners of banks and other institutions and  the  general  public.  At  the  completion  of  this  research,  which  is carried out, as a partial fulfillment of the award of Master of Business Administration (MBA) degree in accountancy, the study is significant in the following ways and to the following persons as enumerated below.

It is to enable the student/researcher, bank customers and staff including management to have a thorough idea of fraud.

To  empower  private  and  public  investors  of  commercial  banks,  other banks and the financial institution in general.

To help students and other researchers get information on their study for the award of various degrees.

To  increase  the  volume  of  literature  in  the  various  library  for  library users.

To help the banks solve of their fraud related problem, if they will have time to read the recommendations made in this study.

To help the participants and operators- the Central Bank, commercial Banks, Securities  and Exchange Commission (SEC), the Stock Exchange etcetera access their performance and the efficiency of their banks and then develop polices that will benefit the generality of the  people.

To increase the reliance of the share holders on the best strategy of combating fraud, that would be recommended in this research.

To stare up research students into carrying out further research studies on areas not covered by the study.

1.7     SCOPE OF THE STUDY

The   study   concentrates   on   Banks   as   part   of   the   financial institutions  and  more  specifically,  on  banks  within  the  Ebonyi  state capital Abakaliki from the period of inception till date (2010/2011); the banks being first bank of Nigeria plc.

Oceanic Bank plc

The choices were made, from a sample of fourteen Banks within the state capital.  They  are,  First  Bank  of  Nigeria  Plc,  standard  Trust  Bank  Plc, Union Bank Plc, Hallmark Bank plc, Diamond Bank Plc, platinum Habib Bank, Plc, Guarantee Trust Bank plc, Zenith Bank plc, Afex Bank Plc, Guidance express bank plc, oceanic Bank plc, intercontinental Bank Plc, First inland Bank plc.

1.8     LIMITATIONS OF THE STUDY

The  limitations  of  this  research  includes,  the  reluctances  of  the staff of the banks met to release the information needed for this study which was partly due to their busy schedules and the quest to protect their good will.

Also, the research is limited to the publications of institutions like the CBN, ICAN, the Banks involved, and the Acts in use, text books, and Browsed materials from the internet and of course my lecture notes.

Equally, another limitation is the lack of sufficient fund (money), which relatively affected the mobility of the researcher, the frequency of interviews discussions, the acquisition of the materials used and the general delay in the time used to carry out this study.

More so, since the research was carried out within the academic session, the availability of time was another limitation to this study. This was made much complex by the tight academic calendar and schedule of the  researcher,  who  had  to  also,  meet  up  with  his  numerous  courses within the same session.

1.9     DEFINITIONS OF TERMS

The following terms as operational in this study are hereby defined.

(I)        COMMERCIAL  BANKS:  They  are  banks  that  function  to  accept deposit from their customers; provide credit facilities like overdrafts loan and   other   advances,   cheque   transactions,   provide   agency   services, foreign exchange transactions, investment and portfolio management, consultancy, save-keeping of assets and other services.

(ii)       INDIGENOUS  BANKS: These are banks owned and controlled by either the government or the private citizen’s or both.

(iii)      NEW  GENERATION  BANKS:  These  are  banks  established  in  the after math of Nigerian independence following the government deregulation and liberalization of the financial sector in 1986.

(iv)      BANK  CUSTOMERS:  In  this study,  bank  customers  refer to  any one who either keeps or maintains an  account with the bank or has any other thing to do with the bank that makes him/her stay within the bank premises during hours of operation.

(v)       BANK  DISTRESS:  This  is  the  inability  of  a  bank  to  meet  its obligations   to   its   customers,   owners,   stalk   holders   and   the economy, occasioned by felt weakness in its operation which has rendered it either illiquid or insolvent.

(vi)      Money   laundering:   Simply   defined;   money   laundering   implies hiding, moving and investing the proceeds of criminal conduct/activities,   in   series   of   multiple   transactions   used   to deceive government authorities as to the origin, existence and application of illicit /illegal sources of income   and the eventual processing of such income to give it a  tog of legitimacy

(vii)     EXPATRIATE   BANK:  This  is  banks  owned  and  controlled  by foreign investors with profit maximization as their major objectives.

(viii)   BANK  LEGISLATIONS:  these  are  rules,  customs,  conventions  or regulations of the bank for observance by its members.

(ix)    FINANCIAL SYSTEM: A financial system is a composition of various institutions, markets, instruments and operators, collectives  segregated  into,  primary  system  participants, financial  intermediaries,  financial  markets,  financial instruments   and   financial   system   regulators;   that   interact within an economy to provide financial services.

INTERNAL CONTROL

Control is not only internal check and internal audit but the whole system of controls, financial and otherwise, established by the management in order  to carry on the business of the bank in an orderly manner, safeguard its assets and  secure as far as possible the accuracy and reliability of its records.

BANK TELLER

Bank Teller is an employee of the banks studied who deal directly with most customers. In some places, this employee is known as cashier.

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