IMPACT OF FRAUD ON THE PERFORMANCE OF THE NIGERIAN BANKING SECTOR
ABSTRACT
    The study empirically examines the relationship between frauds and bank performance in Nigeria for a period of 23 years (1993 to 2015).It is a general consensus in the extant literature among financial experts that frauds have significant impact on the overall performance of banks. Hence, in the Nigerian context, using the correlation coefficient and the ordinary least squared econometric technique, the results from the empirical analysis reveal that total amount involved in frauds does not have significant positive relationship with bank performance; total number of staff involved in fraud has significant negative relationship with bank performance; the number of reported fraud cases has significant positive relationship with bank performance while actual/expected losses to fraud does not have any significant negative relationship with bank performance in Nigeria in the period under investigation.
    The study however recommends among others that accurate and timely reportage of cases of frauds and forgeries activities in the banking sector should be vigorously pursued by bank’s management and regulatory body in Nigeria. The reason being that the result from the analysis indicated a significant positive relationship between number of reported frauds and forgeries cases and bank performance.
TABLE OF CONTENT
CHAPTER ONE: INTRODUCTION
Background to the Study                    
Statement of the Research Problem        
Research Questions                    
Objectives of the Study                    
Hypotheses of the Study                    
Scope of the Study                
Significant of the Study                
Limitation of the Study                
CHAPTER TWO: LITERATURE REVIEW
2.1    Introduction                            
2.2     Conceptual Review                    
2.2.1 Concept of Frauds                      
2.2.2    Causes of Fraud                             
2.2.3 Categories of Bank Fraud                 
2.2.4 Types of Fraud                             
2.2.5 Fraud Prevention and Control                 
2.2.6 Bank Internal Control System for Fraud                 
2.2.7 Concept of Bank Performance                 
2.2.8 Traditional Measures of Performance                     
2.2.9 Economic Measures of Performance             
2.2.10 Market-Based Measures of Performance         
2.2.11 Number of Reported Fraud Cases and Bank
Performance                         
2.2.12 Total Amount Involved in Frauds and Bank
Performance                         
2.2.13 Actual/Expected Loss to Frauds and Bank
      Performance                         
2.2.14 Total Number of Staff Involved in Frauds and Bank
       Performance                         
2.2.15 Brief Overview of Frauds in the Nigerian Banking
      Industry                             
2.3     Theoretical Review                     
2.3.1 Theory of Bank Performance                 
2.3.2 Theory of Frauds                         
2.4     Empirical Literature                     
CHAPTER THREE: METHODOLOGY
3.1     Introduction                         
3.2     Research Design                     
3.3     Population and Sample Size                
3.4     Source and Type of Data                    
3.5     Model Specification                    
3.6     Operationalisation of Variables               
3.7     Method of Data Analysis                     
CHAPTER FOUR: EMPIRICAL ANALYSIS
4.1    Introduction                            
4.2    Correlation Analysis                    
4.3    Regression Analysis                    
CHAPTER FIVE: SUMMARYOF FINDINGS,
RECOMMENDATIONS AND CONCLUSION
5.1     Summary of Findings                
5.2     Recommendations                        
Conclusion                        
Bibliography                            
Appendix                        
CHAPTER ONE
  INTRODUCTION
1.1     BACKGROUND TO THE STUDY
        The entire world has become increasingly aware of the destructive effect of a lack of accountability and transparency in public and private life. This awareness is so pervasive throughout the world that governments, business organisations and non-governmental organisations alike are involved in crusades to promote accountability and transparency and prevent corrupt practices in all its ramifications (Chukwu, 2011). 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 fatherland which we hope to give to our children as a legacy has repeatedly won the former rather than the latter 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).
         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. The banking sector has become one of the most critical sectors in the economy, with wide effects on the level and direction of economic growth and transformation, and on such economic variables as the rate of unemployment and inflation which directly affect the lives of our people. Today, the very integrity and survivability of these functions of Nigerian banks have been deteriorating in view of incessant frauds and accounting scandals (Onwujiuba, 2013).
         Banks all over the world have through their unique position in an economy, contributed immensely to the economic growth and development of a nation. Therefore any problem that tends to hinder their operation such as fraudulent practices is often viewed with seriousness. For long, the Nigerian financial system has suffered from fraudulent practices perpetrated by bank employees, people outside the banks as well as cooperative bodies. The issues of banking frauds, thefts, defalcation and forgeries have assumed unprecedented proportions and dimensions in the banking industry fraud in the Nigerian banking industry is endemic and intractable. Fraud has its root firmly entrenched in the social setting and the extent of growth depends on our wrong sense of value we choose to cultivate in terms of acquisition of wealth. Therefore, the high propensity to defraud an average Nigerian is the direct product of our materialistic society. The banks are merely a reflection of the society in which they operate (Umaru, 2005).
        Fraud and errors are occurrences and like winds, they do no good to any firm, industry, association, business organisation and government. Instead they bring regrets, reduced patronage, losses, distress and failure to such business and organizations. It is not also interesting to know that like the "cankerworm", they have eaten deep into the fabrics of the Nigerian financial institutions especially in the banking sector.  It is not uncommon today 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(Chukwu,2011).
        In July 2004, central bank of Nigeria (CBN) unveiled new banking guidelines designed to consolidate and restructure the industry through mergers and acquisition. Banks and other financial institutions Act (BOFIA) 1991, section 15, was also designed to prevent fraud and to make Nigeria banks more competitive and able to play in the global market. The Nigeria Deposit Insurance Corporation (NDIC) 2015 annual report highlights that cases of attempted frauds and forgeries in insured deposit money banks as at 2015 exceeded what was recorded in the year 2014. For instance, the NDIC report for 2015 disclosed that a total of 12,279 fraud cases were reported representing an increase of 15.71% over the 10,612 fraud cases reported in 2014. However, the amount involved decreased significantly by #7.59 billion or 29.63% from #25.608 billion in 2014 to #18.021 billion in 2015. Out of the 12,279 fraud cases reported by the DMBs, 425 cases were attributed to staff. The number of fraud cases perpetrated by staff had decreased from 465 in 2014 to 425 in 2015. Similarly, losses arising there from substantially decreased by 70% from #3.165 billion in 2014 to #0.979 billion in 2015. The highest percentage of frauds and forgeries cases of 38.59% was perpetrated by temporary staff.
        Today, banks cannot withstand the growing pressure of competition among various banks due to the monster called bank frauds. If this act of fraud is not arrested, it might reduce our resources because foreign investors might not find it wise to transact business with Nigerian banks. One of the best ways of combating frauds is to mount an aggressive enlightenment campaign on the dangers posed by fraud to the economy and the banking industry in particular. This study therefore attempts to empirically examine the impact of frauds on the performance of the Nigerian banking sector.
1.2     STATEMENT OF THE RESEARCH PROBLEM
            Banks generally have been experiencing fraud since its evolution. This has affected their performance and the profitability and hence distress. The inability to identify the immediate and remote causes of continuous cases of bank frauds, in virtually all banks in Nigeria is one of the problems brought to bear. Fraud is a major challenge to the entire banking industry (Olorunsegun, 2010). The banking public expects accountability, fairness, transparency in their daily operation for effective intermediation.
         The threat posed by frauds are of great concern to shareholders, bank customers, the public and private investors, creditors, government agencies and the entire citizenry. Though there were known cases of fraud in the sector, one major question still remain unanswered which is the nature and different ways through which fraud can be perpetuated in banks. It is asserted by Adeyemo (2012) that fraud in the bank is possible with corroboration of an insider. The banks are expected to ensure that they carry out their responsibilities with sincerity of purpose which is devoid of fraudulent practices. This is relevant if the banking sector is to gain public trust and goodwill.
         The inability of a bank to meet its obligations to its customers, owners, stakeholders 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 systems. Others say that so many banks are inadequately computerised and that this has prevented the management from detecting fraud early enough. More so, as the ultimate motive of most business are to maximise profit, but financial embezzlement, capital flight and other fraudulent practices result in low profit which in turn could lead to bank distress (Chukwu, 2011).
           Yego (2016) examines the impact of fraud in the Kenyan banking industry (A Case of Standard Chartered bank) using a sample of fraud, audit, security and other managers involved in fraud prevention to conduct a mixture of quantitative and qualitative study. The research found that fraud is considered to be a major problem within the bank. Bhasin (2015) investigates the rapidly growing banking industry in India using a questionnaire-based survey among bank employees "to know their perception towards bank frauds and evaluate the factors that influence the degree of their compliance level". The study revealed that "there are poor employment practices and lack of effective training, over-burdened staff, weak internal control systems and low compliance levels on the part of bank managers, officers and clerks".
           Nwankwo (2013) seeks to ascertain the relationship between bank ATM fraud, forged cheque, clearing cheque fraud and bank performance. The outcome of the research revealed that there is a significant impact of fraud on the performance of deposit money banks in Nigeria. Lucky and Emmanuel (2016) examines the social impact of fraud on the Nigerian banking industry using fraud, actual/expected loss and Return on Equity. The findings showed that there is a negative social impact of fraud on the Nigerian banking industry. Lyndon and Lucky (2016) investigates the relationship between bank fraud and the performance of deposit money banks in Nigeria, using expected loss from fraud, number of fraud cases, number of staff involved and volume of fraud involved against earnings before tax. The outcome revealed that bank fraud has a significant inverse relationship with bank performance. Taiwo, Agwu, Babajide, Okafor and Isibor (2016) employed an econometric model in determining the impact and consequences of fraud on bank profitability in Nigeria, using Return on Assets (ROA), Total Amount Involved (TAI), Number of fraud cases (NOC), and Number of Staff Involved(NSI).It was shown from the study that fraud inflicts severe financial difficulty on banks and their customers. It also leads to depletion of shareholder's funds and bank's capital base as well as loss of customer's money and confidence in banks.
        Nwankwo (2013) opines that fraud shakes the foundation and credibility of most banks in Nigeria resulting to some of the bank being distressed. The study is faced with challenges to uncover the problem of how frauds affect the performance of the Nigerian banking industry. Hence, it is against this background that this study seeks to investigate the implication of frauds on deposit money bank performance in Nigeria, using such variables as reported frauds cases, total amount involved in frauds, actual/expected losses to frauds and total number of staff involved in frauds.
1.3     RESEARCH QUESTIONS
i. Is there a relationship between number of reported fraud cases and the performance of the Nigerian banking industry?
ii. Is there a significant relationship between total amount involved in frauds and the performance of the Nigerian banking industry?
iii. Does actual/expected losses to frauds affect the performance of the Nigerian banking industry?
iv. Does total number of staff involved in frauds affect the performance of the Nigerian banking industry?
1.4     OBJECTIVES OF THE STUDY
             The objectives of the study are to;
(i)     Examine the relationship between number of reported fraud cases and the performance of the Nigerian banking industry.
(ii)     Determine whether there is a significant relationship between total amount involved in frauds and the performance of the Nigerian banking industry.
(iii)     Ascertain if there is a relationship between actual/expected losses to frauds and the performance of the Nigerian banking industry.
(iv)     Examine the relationship between the total number of staff involved in frauds and the performance of the Nigerian banking industry.
1.5     HYPOTHESES OF THE STUDY
         The following null hypotheses will be tested in the study;
(i)     There is no significant relationship between number of reported fraud cases and the performance of the Nigerian banking industry.
(ii)     Total amount involved in frauds does not have significant relationship with the performance of the Nigerian banking industry.
(iii)     There is no significant relationship between actual/expected losses to frauds and the performance of the Nigerian banking industry.
(iv)     Total number of staff involved in frauds does not have significant relationship with the performance of the Nigerian banking industry.
1.6     SCOPE OF THE STUDY
         This study is limited to insured deposit money banks in Nigeria. It covers the period 1993 to 2015. Relevant data shall be sourced from Central Bank of Nigeria statistical bulletin (2016). The choice of this period is based on the fact that it covered the period of major bank's re-consolidation and reported high profile Bank frauds in Nigeria. Hence, it will enable us to have a fair and robust evaluation of the impact on banks performance in Nigeria within the period.
1.7     SIGNIFICANCE OF THE STUDY
         The outcome of this study will be significant in the following ways:
(i) To banks and other financial institutions
        It will enable relevant authorities in the industry to identify the various means (theft, embezzlement, forgeries etc) employed in defrauding banks and to identify the cause of frauds in Nigerian banks, and then find ways of combating it.
(ii) To government
         The government will find this work relevant for future policy and decision making with particular reference to restructuring its agencies for better performance in detecting frauds in Nigerian banks.
(iii) To general public
        This study will be useful to the general public because the banking industry touches the life of everyone in the country. Banks Contribute immensely to the economic growth and development of nations. As such, problems such as fraud which can hinder the smooth operation of the banking industry should be viewed with all seriousness so as to ensure rapid socio-economic growth and development of the country.
  (iv) To academia
        It will enable them carry out further studies in this area or similar areas.
1.8     LIMITATIONS OF THE STUDY
         The accuracy of the measurement of the data collected from various sources is a major limitation of the study. However, we will ensure that appropriate measure is taken in order to minimise errors.
        More so, since the research was carried out within the academic session, the availability of time was another limitation to the study. This was made much complex by the tight academic calendar and schedule of the researcher, who has to also, meet up with his numerous courses within the same session.