NATURE AND EFFECTS OF BANKING INDUSTRY FRAUDS IN NIGERIA, 1990-2008

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NATURE AND EFFECTS OF BANKING INDUSTRY FRAUDS IN NIGERIA, 1990-2008

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.

TABLE OF CONTENTS

Title page – – – – – – – – i

Certification- – – – – – – – ii

Dedication- – – – – – – – iii

Acknowledgments- – – – – – – iv

Abstract- – – – – – – – – vi

CHAPTER ONE:

1.1 Introduction- – – – – – – 1

1.2 Statement of Problem- – – – – 4

1.3 Research Questions- – – – – – 4

1.4 Statement of Hypotheses- – – – – 5

1.5 Objective of the Study- – – – – 6

1.6 Scope of the Study- – – – – – 6

1.7 Significance of the Study- – – – – 7

1.8 Definition of Terms- – – – – – 8

1.9 Assumptions and Limitation of the Study- – 10

CHAPTER TWO: LITERATURE REVIEW

2.1 Problem of Frauds in Banks- – – – 11

2.2 Universality Fraud- – – – – – 12

2.3 Causes of Banking Fraud in Nigeria- – – 13

2.4 Nature and Types of Fraud- – – – 21

2.5 Internal Control- – – – – – 31

2.6 Nigeria Deposit Insurance Corporation

(NDIC) – – – – – – – – 34

2.7 The Measure of Distress- – – – – 38

2.8 Measure of Solvency- – – – – 39

2.9 Management of Bank Distress- – – – 40

2.9.1 Policy Consideration in Management of

Distressed Bank- – – – – – 42

2.9.2 Operational Consideration- – – – 44

2.10 Bank Rehabilitation- – – – – – 48

References- – – – – – – 56

CHAPTER THREE: RESEARCH METHODOLOGY

3.1 Research Design

3.2 Nature and Sources of Data- – – – 57

3.3 Data Collection Techniques/Sources- – 58

3.4 Specification of the Model- – – – 59

3.5 Description of Variables in the Model- – 61

3.6 Data Analysis- – – – – – – 61

CHAPTER FOUR: ANALYSIS OF DATA AND PRESENTATION OF RESULTS

4.1 Introduction- – – – – – – 62

4.2 Diagnostic Tests of the Model- – – – 67

4.3 Analysis of Research Questions- – – 70

4.4 Testing of the Hypothesis of the Model- – 72

4.5 Nature of Banking Fraud in Nigeria- – – 73

CHAPTER FIVE: SUMMARY OF FINDINGS RECOMMENDATIONS AND CONCLUSION

5.1 Summary of Findings- – – – – 84

5.2 Recommendations- – – – – – 90

5.3 Conclusion- – – – – – – 94

Bibliography- – – – – – – 96

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.

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