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
Title page i
Table of Contents vi
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
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
CHAPTER THREE: RESEARCH METHODOLOGY
3.1 Introduction 62
3.2 Restatement of Research Questions and
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
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
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:
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.
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.