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.
This material content is developed to serve as a GUIDE for students to conduct academic research
NATURE AND EFFECTS OF BANKING INDUSTRY FRAUDS IN NIGERIA1990-2008>
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