NATURE AND EFFECTS OF BANKING INDUSTRY FRAUDS IN NIGERIA1990-2008

ABSTRACT

This study on “The Nature of Banking Fraud in Nigeria” (1990 to 2008) covered the period Nigeria Deposit Insurance Corporation (NDIC) took over the management and control of 24 distressed banks, liquidation of

26 Banks in 1998 and the re-capitalization of banks in 2005 by the Central Bank of Nigeria (CBN). These were designed to analyse the financial history of fraud in Nigeria. The technique of ordinary least square (OLS) was used to analyse the data on the relationship between Returns on fraud by insured banks in Nigeria between 1990 to 2008 and Deposit liabilities of insured banks within the period (1990-2008). The model was measured and analysed to determine the shift of the function overtime. The Regression result of  the  model showed  that Fraud Intercept was positive during the period of the study (1990-

2008), which revealed that in absence of the level of Deposit liabilities

of insured banks, fraud must still persist in the financial system. The study,   therefore,   recommended   among   other   things   that,   the prevention, control and detection of frauds should be a collaborative effort  of  banks,  their  customers,  the  public  and  the  government including relevant agencies. Moreover, fraud in the financial system, should as much as possible, be minimized as it kills the institutions and destroys the economy of a nation.

CHAPTER ONE

INTRODUCTION

Banking business has always been associated with some degree of fraud. This is, obviously due to the fact that money and near monies are the stocks-in-trade of Bank. Banks frauds are becoming more  worrisome to  bankers and the larger society because fraud perpetuation is not only on the increase; it has continued to  acquire greater  sophistication. Frauds not  only weaken the financial strength of a bank, it dents the reputation of  the  bank  defrauded and reduces the  confidence level the banking public has on the banking system. Fraud in banks is therefore,  a  matter  of  great  concern  to  bankers  and  it  has become a formidable issue for everyone concerned with the growth and development of banks in the country.

Fraud,  generally,  refers  to  an  act  o  misrepresentation, which causes another person to suffer damages, usually monetary losses. Fraud is not easily proven in court of law and laws  concerning fraud may  vary  from  state  to  state,  but  in general several different conditions must be met. One of the must important things to prove is a deliberate misrepresentation of  the  facts.  Many fraud cases  involve complicated financial transactions conducted by white collar criminals’, business professional with specialized knowledge and criminal intent. It therefore, suggests unfair dealing and could be against the bank and its customers or by third parties against the customers by the banks officers, or against the bank by its officers etc. In the sense,  it  could  take  the  form  of  falsification  of  entries  in accounts of customers with a view to take benefits of the excess proceeds or the shortfalls. It could be through forgery of signature of account holders and unlawful withdrawals of money from their accounts or involving cash theft by bank officials as well as customers. Bank fraud in Nigeria is also perpetrated through forged cheques, cross firing cheques, or kitting which involve using bank funds  without proper authority, where a customer usually has two or more accounts at two or more different banks or branches. He draws a cheque on his account and deposits the cheque into his account with bank B. Another kind is telex frauds which occur when test keys are manipulated usually with the collusion of NITEL officials, the messages, after being duly tested are transmitted abroad through a correspondent bank and later cashed by the overseas collaborators. Perpetuators also print bank stationery and carve bank rubberstamps. They also use spurious letters of  credit accompanied with spurious bank drafts.

It has therefore become necessary to reconsider the great consequences of banking fraud to Nigerian economy. Availability of financial capital is a prerequisite for rapid development and transformation of any Nation’s economy. Economic development involves growth of output of goods and services, which requires real resources devoted to production of capital goods, and this can be limited by the amount of savings available due to banking frauds.

1.2  STATEMENT OF PROBLEM

Rehabilitation of  ailing  banks  has  cost  the  government billions of Naira. Much of the loss may have been due to delays in  addressing  insolvencies  and/or  inappropriate  resolution

strategies. There is therefore a pressing need to evaluate the nature of banking fraud in Nigeria. Specifically, on January 16th

1998, the authorities liquidated 26 banks (13 commercial and

13 merchant banks) bringing the total number 50 so affected to

31  from  1994.  From  1998  to  2006  other  banks  have  been liquidated.

1.3  RESEARCH QUESTIONS

Considering the vest amount of depositors money that are lost in fraud related cases and billions of depositors’ funds lost or trapped in liquidated banks, the questions on the minds of the public and financial analysts are:

i.      To what extent did deposit liabilities of insured banks influence returns of insured banks on fraud in Nigeria and  what  is  the  general  nature  of  banking fraud  in Nigeria?

ii.     How far does banking fraud and it’s causes affect the

Nigerian economy?

1.4  STATEMENT OF HYPOTHESES

Against the above research questions (1.3) we formulated the following hypothesis to help find the relationship (nature) between deposit liabilities of insured banks and returns of insured banks on frauds.

Hypothesis Tested are

Null hypothesis (Ho) and alternative hypothesis (Hn).

H0:   There   is   no   significant  relationship  between   deposit liabilities of insured banks and insured banks returns on fraud. Symbolically:

H0      =      bi = O

H0:   Banking fraud has no effect on the economy of nigeria

1.5  OBJECTIVES OF THE STUDY

This study was embarked upon to achieve the following objectives;

a.     To determine the relationship between fraud and deposit liabilities of insured banks and identify the types and techniques of banking fraud

b.     To establish the economic cost and social consequences of bank fraud and examine the bank detection control and prevention mechanisms against fraud.

1.6  SCOPE OF THE STUDY

Although fraud and resultant distress in the history of the Nigerian banking sector is not an entirely new phenomenon, the manifestation of the current problem become discernible with some policy shocks starting in 1998 and reaching its climax in

2005 when banks are mandated to comply with N25  billion minimum capitalization requirement. This study is limited to sixteen years (1991-2006), which covered the takeover of management and control of 24 distressed banks by NDIC between 1991 and 1996; it also captured the liquidation of 26 banks in 1998 and the re-capitalization of commercial banks

(consolidation)  exercise  in  2005  by  CBN  professor  Charles

Soludo.

The fraud and distress syndrome have affected almost all aspects of the financial system. While in general, reference will be made to all financial institutions so affected, attention will be focused on commercial and merchant banks which notably dominant banking transactions in Nigeria.

1.7  SIGNIFICANCE OF THE STUDY

The  finding  of  this  study  would  prove  useful  in  the following ways.

i.    The  findings  would  equip  regulatory/supervisory authorities with information on the nature, types and techniques of banking fraud in Nigeria.

ii.     The result of the study would provide useful guide to financial institutions in assessing their internal measures.

iii.    On the basis of the result of this study, the central Bank of Nigeria (CBN) NDIC would evolve a new strategy to

component  fraud  related  ailing   banks  before  they degenerate in insolvency.

1.8  DEFINITION OF TERMS

The  following terms  constitute the  major  points of  this study:

a).    Banks fraud: Oxford Advanced Learner’s Dictionary defines fraud as the crime of deceiving somebody in order to get money or goods illegally. Fraud is also said to be a conscious or premeditated action of a person or group of persons with the intention of altering the truth and/or facts, for selfish pecuniary gains.

b).    Deposit: Deposit in this context means monies hedged by the general public with any insured bank or financial institution whether  or  not,  it  is  for  safe-keeping or  for  the  purpose  of earning interest or dividend, whether or not such monies are repayable upon demand or upon a given period of notice or upon a fixed date.

c).    Nigeria   Deposit   Insurance   Corporation   (NDIC):   NDIC resulted from a committee set up in 1983 by the board of central Bank of Nigeria (CBN) to examine the operation of the banking system in Nigeria

d).  Banks Distress: This occurs when a fairly reasonable proportion of banks in the system are unable to meet their obligations to their customers.

c).    Bank rehabilitation: This means the processes of restoring solvency in a hitherto insolvent bank.

f).     Goodwill: This is a bank that has strong deposit base and loyal customers.

g).    Bank liquidation: This is the termination or winding up of a bank by conversion of its assets into cash and distribution of proceeds, first to the creditors in their order of preference and the remainder if any to the owners in proportion to their holding.

1.9  ASSUMPTIONS AND LIMITATION OF THE STUDY

In  a  research work like this, there are always a  lot  of assumptions that are usually made to enable an efficient and

effective use of the methodology, statistics and econometrics to make use of assumptions about population and variables. This study no doubt adopted those, statistical methods of arriving at averages.

The limitations countered in this work include; All the data used for this study are secondary data. The problems associated with secondary data collection in Nigeria and its reliability is other limitations.

Secondary data has been defined as the location and examination of available (usually) published data of relevance to the research project. According to Barridan (1990, P.261), “Existing documents play a significant role in all types of research and it is often possible to prepare statistical tabulation from them that can serve as a meaningful, valid and reliable data far a study.

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