ABSTRACT
Microfinance
Banks in Nigeria are subject to fraud risks. Corprate fraud and miscounduct
remain a constant threat to the public trust and confidence in microfinance
banks. Inability of the microfinance banks to strive to achive compliance with
an array of antifraud laws and regulations has resulted to lack of willingness
to pay loans coupled with diversion of funds by borrowers, wilful negligence
and improper appraisal by credit officers. Poor supervision and undue
government intervention with the operations of government sponsored credit
programmes due to the management failure. The weak internal control which have relatively
affected the strong management and staff, and adequate systems to control the
microfinance bank. The
aimed investigating the corporate fraud risk as an insight from the Nigerian
financial institution. The study adopted descriptive research
design. Simple Random
sampling and purposive sampling were used. The sample size for the was 262. The
statistical tool used were Correlation and Regression. The findings revealed
that improper supervisory and regulatory systems could lead
staff and clients to commit fraudulent act in the microfinance institutions. The results also show that poor supervision and undue government
intervention in microfinance bank has contributed to the incidence of fraud in
the microfinance institutions.The study recommended that
lack of knowledge of the
forms and ways of dealing with fraudulent practices in microfinance banks
should be given to the staff to reduce the risk of fraud.
TABLE
OF CONTENTS
Page
Title page i
Certification ii
Dedication iii
Acknowledgements iv
Abstract v
Table of Contents vi
CHAPTER
ONE
1.1 Background
to the Study 1
1.2 Statement
of Research Problem 3
1.3 Aims
and Objectives of the Study 5
1.4 Research
Questions 5
1.5 Research
Hypothesis 6
1.6 Significance
of the Study 6
1.7 Scope
of the Study 7
1.8 Operational
Definition of Terms 7
REFERENCES 10
CHAPTER
TWO: LITERATURE REVIEW
2.0 Introduction 11
2.1 Theoretical
Framework 11
2.1.1 Bank
Run Theory 11
2.1.2 The
Commercial Loan Theory 12
2.1.3 The
Fraud Triangle Theory 13
2.2 Conceptual
Framework 25
2.2.1 Concept
Framework of Corporate Fraud Risk 29
2.3
Empirical Review
of the Study 50
REFERENCES 60
CHAPTER THREE: RESEARCH METHODOLOGY
3.1 Introduction 62
3.2 Restatement of Research Questions
and
Hypotheses 50
3.3 Research Design 52
3.4 Population of the Study 53
3.5 Sampling Design and Technique 53
3.6 Method of Data Collection 54
3.7 Instrumentation 55
3.8 Validity and Reliability of
Research Instrument 55
3.9 Method of Data Analysis 56
3.10 Limitations of the Methodology 56
REFERENCES
CHAPTER FOUR: DATA ANALYSIS AND INTERPRETATION
4.1 Introduction 58
4.2 Presentation of the Biography of
all respondents
and
their Classifications 58
4.3 Presentation and Analysis of Data
According to
Research Question 61
4.4 Test of Hypotheses 73
CHAPTER FIVE: SUMMARY, DISCUSSIONS AND CONCLUSIONS
5.1 Introduction 79
5.2 Summary of Findings 79
5.3 Discussion of Findings 80
5.4 Implication of Findings 82
5.5 Limitation of the Study and
Suggestion
for
further Research 83
5.5.1 Limitation of the Study 83
5.5.2 Suggestion for further Research 84
5.6 Conclusion 85
CHAPTER
ONE
INTRODUCTION
1.1 Background to the Study
All organizations are subject to fraud
risks. Large frauds have led to the downfall of entire organizations, massive
investment losses, significant legal costs, incarceration of key individuals,
and erosion of confidence in capital markets. Publicized fraudulent behavior by
key executives has negatively impacted the reputations, brands, and images of
many organizations around the globe. Fraud is a significant threat facing
entities everywhere.
Fraud is one of the most deadly evils in
any business organization. In the case of bank, it can easily reverse its
fortunes by wiping away the bank’s liquidity overnight, eating off the current
profit and completely eroding its capital fund. Fraud is widely known to be the
greatest single cause of bank failure the world over (Ituwe, 1996 cited in
Adeoye and Adeoye, 2014).
The failure of banks to adequately fulfill
its role arises from the several risks that they are exposed to; many of which
are not properly managed. One of such risks which is increasingly becoming a
source of worry is, the banking risk associated with fraud. Fraud, which
literarily means a conscious and deliberate action by a person or group of
persons with the intention of altering the truth or fact for selfish personal
gain, is now by far the single most veritable threat to the entire banking
industry. It is indeed worrisome that while banks are constantly trying to
grapple with the demands of monetary authorities to recapitalize up to the stipulated
minimum standards, fraudsters are always at work threatening and decimating
their financial base. Also more worrying is the rise in the number of employees
who are involved in the act as well as the ease with which many escape
detection thus encouraging many others to join in perpetuating fraud (Onibudo,
2007). The crisis of fraud is common in the financial institution (Banking
Industry) which has negatively affected the growth of Banks in Nigeria. Bank
frauds seriously threaten the financial institution growth and leads to bank
distress. This is because fraud decreases the deposit of depositors and
eventually leads to the erosion of the capital base of banks (Asukwo, 1999).
Fraud is any
intentional act or omission designed to deceive others, resulting in the victim
suffering a loss and/or the perpetrator achieving a gain.
The cost of fraud is also ordinarily problematic to estimate because not all
frauds are exposed or even reported since most banks have a proclivity to cover
up the frauds originating from their banks all in a bid to continue to gain
customers goodwill and stimulate their customers’ confidence all the time.
Among the consequences of fraud, loss of revenue and loss of customers’
confidence top the list (Akinyomi, 2012).
Millions
of Nigerian Naira lost in bank fraud annually in Nigeria. Fraud results in financial
losses to both the banks and their clients. The end product is insolvency and
the loss of public confidence in the banking industry as a whole. The
microfinance industry is not immune to the challenges of fraud in the banking
system. Fraud is perhaps the most lethal of all risk confronting Microfinance
Institutions (MFIs), because it is in this area that a Microfinance
Institutions (MFIs) stands to lose most (Okaro, 2009). Fraud risk has been the
least publicly addressed risk in microfinance to date. The importance of fraud
risk management in Microfinance Institutions (MFIs) in Nigeria can therefore
not be overemphasized.
According to
Omachonu (2009) Statistics on the
activities of fraudsters in the industry is both amazing and confounding.
Ogwuma (1981) cited in Eseoghene (2010)estimated
that on the average, banks in Nigeria were at a risk of losing one million
naira every working day due to the incidence of frauds which come in different
guise or forms. In recent times, this estimate is low going by the NDIC 2001
report where banks recorded cases of frauds and forgeries totaling N11.244
billion (Kazeem and Ogbu, 2002 cited in Eseoghene,
2010). Such an amount would have been enough to set up a least eleven
micro finance banks in the current period. Forgeries currently constitute the
greatest challenge facing the industry. Also the number of insiders (staff) who
connive with outsiders to perpetuate the act is alarming.
According to an
NDIC publication, about 1,914 bank staff of various banks was involved in bank
frauds between 1994 and 1996. The report also established that frauds
contributed immensely to the failure of most banks in the 1990s, the amount
involved representing as much as 32.1% of shareholders funds in 1998
(Udegbunam, 1998 cited in Eseoghene,
2010). Equally worrisome is the rise in the number of top management
staff that have either been indicted or accused of engaging in bank fraud.
Against these background, the main purpose of this study is to ascertain the
nature and causes of bank frauds; as well as proffer solutions that it is
hoped, would help reduce the spate of bank frauds in the country (Eseoghene, 2010).
1.2 Statement of
the Problem
Microfinance banks
in Nigeria were introduced to grow small businesses, provide credit facilities
to micro-businesses, cooperative societies and individuals who ordinarily
cannot obtain loans from the Deposit Money Banks (DMBs) due to stringent
collateral requirements. The sustainability of microfinance institutions
depends largely on their ability to collect their loans as efficiently and
effectively as possible. In other words to be financially viable or
sustainable, microfinance institutions must ensure high portfolio quality based
on 100% repayment ,or at worst low delinquency/default, cost recovery and
efficient lending.
However, there
have been complains by the microfinance institutions regarding high rate of
default/delinquency by their clients; which presupposes that most microfinance
institutions are not achieving the internationally accepted standard portfolio
at risk of 3%, which is a cause for concern because of its consequences on
businesses, individuals, and the economy of Nigeria.
Corprate fraud and
miscounduct remain a constant threat to the public trust and confidence in
microfinance banks. Inability of the microfinance banks to strive to achive
compliance with an array of antifraud laws and regulations has resulted to lack
of willingness to pay loans coupled with diversion of funds by borrowers,
wilful negligence and improper appraisal by credit officers. Also, poor
supervision and undue government intervention with the operations of government
sponsored credit programmes due to the management failure.
The weak internal
control environments which have relatively affected the
strong management and staff, and adequate systems and controls of the
microfinance banks, the term of the loan, interest rate on the loan, poor
credit history, borrowers’ income and
transaction cost of the loans and lack of management has affected the lending
activities and the subsequent ability to monitor the status of the debt
service. The microfinance bank also witness inadequate financial analysis which
occur when the loans department do not take a careful study of the applicants
to ensure that clients has a sound financial record to reduce the risk of loss
in the case of default. Less control over asset and liability
risk, inefficiency risk and system integrity risk by the MFI management and
board directors has makes the microfinance banks expose to external risks.
1.3 Aim and
Objectives of the Study
The aim of this
study is to investigate corporate fraud risk as an insight from the Nigerian
financial institution. The specific objectives however are the following;
i.
To examine the causes and control of loan default/delinquency in Microfinance Institutions in
Nigeria.
ii.
To examine the extent to which poor supervision and undue
government intervention in microfinance bank has contributed to the incidence
of fraud.
iii.
To examine the extent to which weak internal control
environments and lack of management has affected the lending activities and the
subsequent ability to monitor the status of the debt service in microfinance
bank.
iv.
To recommend measure to control corporate fraud in
microfinance bank.
1.4 Research Questions
The major research
questions are:
i.
What are the causes and control of loan default/delinquency in Microfinance Institutions in
Nigeria?
ii.
To what extent has poor supervision and undue government
intervention in microfinance bank contributed to the incidence of fraud?
iii.
To what extent has weak internal control environments and
lack of management affected the lending activities and the subsequent ability
to monitor the status of the debt service in microfinance bank?
iv.
What measures can be employed to control corporate fraud in
microfinance bank?
1.5 Research Hypotheses
To provide answers
to the research questions, the following hypotheses are tested in this study:
Hypothesis One
H0: Poor supervision
and undue government intervention in the microfinance bank does not contribute
to the incidence of fraud.
H1: Poor supervision
and undue government intervention in the microfinance bank contribute to the
incidence of fraud.
Hypothesis Two
H0: Weak internal
control environments and lack of management does not affect lending activities
and the subsequent ability to monitor the status of the debt service in
microfinance bank.
H1: Weak internal
control environments and lack of management affect lending activities and the
subsequent ability to monitor the status of the debt service in microfinance
bank.
1.6 Significance of the Study
The study would benefit the individuals and financial institutions in Nigeria to understand corporate fraud risk. To the
individual, fraud risk management in
micro finance institutions in nigeria would be reviewed and it would
enlighten them on how microfinance banks use their policies and procedures to
manage corporate fraud risks. It would
explain how fraud risk management practices were
apply in the battle for survival, financial sustainability and
self-sufficiency. It would be of invaluable benefits and usefulness to all microfinance
bank managers, financial information users such as existing and potential
shareholders, creditors and fund providers and the relevant government agencies
on why there is need for microfinace banks
management and board of directors should have assess to the external risks to
which they are exposed to. Besides, researchers and students in the field of banking and
finance, insurance and risk management who want to know more about frauds risk,
its causes and possible ways of preventing it would also find the study beneficial. The study
would makes microfinance bank’s management to consider its size and complexity
when determining what type of formal documentation is most appropriate for
fraud and fraud risk management program such as the roles and responsibilities,
commitment, fraud awareness, affirmation process, conflict disclosure, fraud risk
assessment, reporting procedures and
whistleblower protection, investigation process, corrective action, quality assurance and continuous monitoring. The study would also help the microfinance banks in
Nigeria to protect itself and its stakeholders effectively and
efficiently from fraud, it would helps the organization to understand fraud
risk and the specific risks that directly or indirectly apply to them
1.7
Scope of the Study
This research focused on corporate Fraud
Risk: an insight from the Nigerian Financial Institution and limited to five
(5) selected microfinance banks in Somulu and Ikeja Local Government Council
Areas, Lagos state. The selected micro finance banks are chosen from the total
microfinance banks operating across Lagos State.
1.8
Operational Definition of Terms
Bank
fraud: bank fraud as whenever a person
knowingly executes, or attempts to execute, a scheme or artifice (i) to defraud
a financial institution; or (ii) to obtain any of the moneys, funds, credits,
assets, securities, or other property owned by or under the custody or control
of, a financial institution, by means of false or fraudulent subterfuges,
representations, or promises.
Fraud risk management: refers to activities designed at
identifying and developing actions for the business to reduce risks arising
from the actual and potential cases of corporate fraud. It includes prevention,
detection and response.
Fraud:
is described as an act of deliberate
deception with the intention of gaining some benefit, in other words it is the
act of dishonestly pretending to be something that one is not or is the deliberate falsification, camouflage, orexclusion of the
truth for the purpose of dishonesty/stage management to the financial damage of
an individual or an organisation.
Microfinance success: is defined as an independent
organisation providing financial services to large numbers of low-income
households over the long-term.
Monitoring: The entirety of
enterprise risk management is monitored and modifications made as necessary.
Monitoring is accomplished through ongoing management activities, separate
evaluations, or both.
Operational risks: are the vulnerabilities that your MFI
faces in its daily operations, including concerns over portfolio quality, fraud
and theft, all of which can erode the institution’s capital and undermine its
financial position.
Risk Assessment: Risks are
analyzed, considering likelihood and impact, as a basis for determining how
they should be managed. Risks are assessed on an inherent and a residual basis.
Risk management: Risk management refers to a systematic
process of identifying and analyzing of risks and selecting the most
appropriate method to treat the risk has been acknowledged to minimize losses
and at the same time increased profitability or Risk management is defined as
the process intended to safeguard the assets of the company against losses that
may hit it in the exercise of its activities, through the use of instruments of
various kinds (prevention, retention, insurance, etc.) and in the best cost
conditions.
Risk: risk is defined as “the effect of
uncertainty on (achievement of) objectives or risk is the potential that current and
future events, expected or unanticipated may have an adverse or harmful impact
on the institution’s capital, earnings or achievement of its objectives.
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