MANAGEMENT OF FRAUDS IN NIGERIAN COMMERCIAL BANKS: AN

INVESTIGATION OF THE ROLE OF CBN

ABSTRACT

Fraud in Nigerian commercial banks poses a significant threat to the financial

system and public confidence. This study investigates the role of the Central

Bank of Nigeria (CBN) in managing this challenge. The research explores the

causes of fraud in Nigerian banks, which can include weaknesses in internal

controls, inadequate staff training, and emerging technologies like e-banking. It

examines the CBN's regulatory framework and supervisory practices aimed at

preventing and detecting fraud. The analysis considers the effectiveness of the

CBN's efforts and explores potential areas for improvement. This may involve

stricter regulations, enhanced collaboration with law enforcement, and

promoting a culture of ethical conduct within the banking sector. Through

investigating the CBN's role, the study aims to identify ways to strengthen the

fight against fraud in Nigerian commercial banks, ultimately protecting

depositors' funds and fostering a more secure financial environment.

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 CHAPTER ONE

GENERAL INTRODUCTION

1.1 Background to the Study

In Nigeria, Bank fraud has assumed a frightening scale and sophistication. The

levels in the present day have also grown into epidemic dimension. It has eaten

deep into every nerve aspect of our life to the extent that a three years old

child talks about 419, (the new discovered sobriquet for an advanced fee fraud)

that is shunting us has a nation. The fear is now rife that the increasing wave of

fraud in the commercial bank in recent years, if not the commercial banks in

recent years, if not arrested, might pose certain threats to the stability and

survival of individual, financial institution and the performance of the industry

as whole. For one thing, a fraud result in life financial loses to commercial

banks and their customers deposition of shareholder funds and capital base as

well as loss of confidence in financial houses. For another, the incidence of

fraud could in the extreme cases lead to the closure of some badly affected

banks as have happened in some parts of the world.

Many of the distressed banks in Nigeria today suffer from fraud and other

fraud relates problem, inside credit abuse and indiscipline.

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The extent of fraud in commercial banks rather than that abate has continued

to escalate. It is therefore necessary now than ever before that attention is

paid to this nefarious international phenomenon as fraudsters become more

sophisticated and daring in their approach. Management of fraud is likened to

the management of an ailment. Before a patient is treated, diagnosis is carried

out, the essence of the diagnosis is to define the ailment, thus given the direct

or insight towards the root cause, prescription and medication is embarked on

latter. Given this reason, the definitions of what actually constitutes fraud for

all practical purpose define precision. This is so because there are multifarious

forms, styles, and manifestation in the commercial banks.

Similarly, we are aware that fraud cut cross all sectors of the economy and that

the size of an enterprise usually determines the volume of fraud takes different

dimensions, which amongst others include the following

(a) Cheating by market women/men on scale measurement.

(b) Failure to pay correct import duties/tax evasion.

(c) Over invoicing and inflating contracts.

(d) Payment for services not rendered.

(e) Stealing and other 419 activities

(f) Political fraud

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However, the list is in exhaustive, new methods are devised with all

sophistication by fraudsters. Many writers define fraud “as an act or course

deception deliberately practiced to gain unlawful or unfair advantages such

deception is directed to the detriment of another”. In all designs directly or

indirectly, covertly or overtly omission or commission, it implies that fraud

result in an unfavourable event which occur such that the financial position or

cash flow stream of an organization, individual or institution is adversely

affected. For sure, cash is the ultimate in all fraud cases,. Thieves so because it

is the most valuable asset of a commercial bank and because of its very nature

and the difficulty of identification once it has been stolen, it is the highest risk

asset most desire it and other criminally minded individual.

The reasons for these are obvious. The first is that it is difficult to prove

ownership or determine the second is that it is not difficult to deal with cash or

to convert it to other good or chattels, thus making it difficult of the culprit to

be apprehended. Quits often, large amounts of cash have mysteriously

disappeared from commercial bank without trace and this risk will continue to

exist as long as the present monetary system remains a fraud unabated.

In any premeditated act of criminal deceit trick key, or falsification by a person

or group of persons with the intention of altering facts in order to obtain

4
undue personal monetary advantage is fraud Chizea whichever way or manner

fraud is described, there is always that element of dishonestly, cheating,

embezzlement, falsification, exception etc. resultant in loss of frauds .

Fraud is a hydra headed monster in the commercial banks, and banks in general

it is not knew that rather it is as old as the industry itself. How even like in

greater societies, they have become one of the most intractable problems of

modern day banking.

While the concern of the banking community is growing by the day and

management vigilance is improving with the help of computerization amongst

others. it is on records that millions of naira are still being lost in fraud on a

daily basis (CBN)

While some of the fraud are the hand work of outsiders, others are

perpetrated by the staff and sometimes management of the bank concerned.

The most significant percentage of fraud is done by fraudstars in collaboration

with banks staff. As a result of this very source of serious economic crime,

some staffs in the industry have either been dismissed or have their

opportunities terminated or prematurely retired. This implies that some

experienced hands in the sector are lost due to involvement in fraud according

to the (NDIC)

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Similarly, the involvement of some executives in large-scale fraud is now a

serious concern in the industry. Frequent fraud cases have also created grossly

awareness to the generality of the public to the level that even the Nigerian

union of Banks, Insurance and financial institutions employees (NUBIFIE)

affiliate of Nigeria labour congress (NLC) in 1996 Launched aggressive anti-

fraud champion. They realized the damages posed by fraud to their numbers,

the economy and the publication warns.

1.2 Statement of the Problem

Fraud in the Nigerian commercial Banks has remained an unavoidable problem

and also resisted all practicable treatment the incident has not only become

incessant but also been on the increase in the recent past. Study by Aderinkola

(2014) point towards a pervasive issue by characterizing fraud in the Nigerian

banking sector as having reached "epidemic dimension." This not only erodes

public trust, as highlighted by Adebisi (2017), but also disrupts financial stability

and hinders economic growth. Current management practices, while existent,

often fall short in effectively combating fraud. The focus on internal controls,

though crucial, can be hindered by factors like weak communication systems

and unreliable power supply, as identified by Owolabi (2016). Additionally,

societal values glorifying wealth without regard to its source can create an
6
environment conducive to fraudulent behavior (Akinyomi, 2014). These

limitations necessitate a more comprehensive approach to managing fraud in

Nigerian commercial banks.

Fraud in Nigerian commercial banks remains a persistent challenge. Despite

efforts by banks and regulators, the incidence of fraud continues to pose a

threat to financial stability and customer trust. This research investigates the

role of the Central Bank of Nigeria (CBN) in managing fraud within the Nigerian

commercial banking sector.

1.3 Objectives of the Study

The primary objective of this study is to investigate the role of the CBN in

managing fraud within Nigerian commercial banks. Specific objectives include:

 To examine the various types of fraud prevalent in Nigerian commercial

banks.

 To assess the factors that contribute to the incidence of fraud in Nigerian

commercial banks.

 To evaluate the regulatory framework established by the CBN for

managing fraud in the banking sector.

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  To analyze the effectiveness of the CBN's initiatives in mitigating fraud

within Nigerian commercial banks.

 To identify potential areas for improvement in the CBN's approach to

fraud management.

1.4 Significance of the Study

The findings of this study will be of significance to various stakeholders in the

Nigerian banking sector:

 Central Bank of Nigeria (CBN): The study will provide insights into the

effectiveness of existing anti-fraud regulations and suggest potential

areas for improvement.

 Commercial Banks: The research will offer valuable recommendations for

strengthening internal controls and Fraud detection by the CBN

mechanisms within banks.

 Law Enforcement Agencies: The study will highlight the need for

enhanced collaboration between the CBN, banks, and law enforcement

agencies to combat fraud effectively.

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  Bank Customers: By understanding the types of fraud and the role of the

CBN in managing them, customers can be better equipped to protect

themselves and their financial information.

1.5 Scope and Limitations of the Study

This study focuses on the role of the CBN in managing fraud within Nigerian

commercial banks. The study is aimed at ascertaining the role of fraud

management in fraud control, fraud prevention, Fraud detection by the CBN ,

fraud remediation and their effects on the Profitability of Nigerian banks with

special reference to First Bank Nigeria Plc, Agbani Road Branch, Enugu.

A limitation of the study may be the availability of data on specific fraud

incidents due to confidentiality concerns. The research will rely on publicly

available data from the CBN, banking industry reports, and academic journals.

9
 CHAPTER TWO

REVIEW OF RELATED LITERATURE

The failure of banks to adequately fulfill their 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 incessant frauds and accounting scandals. The major problems

confronting the financial institution today is “fraud”, which has sent many of

them out of business and is making the industry customers to lose confidence

in them since they have not been able to curb the ugly event called “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

10
escape detection thus encouraging many others to join in perpetuating fraud

(Onibudo, 2007).

Idolor (2010) stressed that the spate of fraud in the banking industry has lately

become an embarrassment to the nation as apparent in the seeming inability

of the law enforcement agents to successfully track down culprits. Whereas

the activities of armed robbers are given widespread reviews in the pages of

newspapers, especially during major thefts, it is an irony that what they cart

away from banks is only a slice of what fraudsters remove from bank tills.

Corroborating the view of Idolor, Oseni (2006), stated that the incessant frauds

in the banking industry are getting to a level at which many stakeholders in the

industry are losing their trust and confidence in the industry .Fraud may take

the form of; theft of inventory assets, misuse of expense account, secret

commission and bribery, false invoicing, electronic and telecommunication

fraud, unauthorized use of information, cheque forgery, cheque clone, false

financial statements, and so on, but whichever form it takes, the fundamental

point is that the banking industry falls victim to fraudulent acts suffers and

bears the brunt.

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Statistics the activities of fraudsters in the industry have been both amazing

and confounding. In 2001, 943 fraud cases involving 11.2 billion were recorded.

Ogbu (2000)stated that frauds in Nigerian banks continued to rise in2002 with

77 banks of the 90 in operation, recording cases involving the sum of N12.9

billion. Onyeogocha (2001) attributed it to insider abuses and even board

tussles. The NDIC 1996/7 Annual report and Statement of Accounts that the

number of frauds reached a magnitude of N1,006 million in 127 cases reported

in commercial banks and 587 cases involving N1,543 million. Also the number of

insiders (staff) who connive with outsiders to perpetuate the act is alarming.

Equally worrisome is the rise in the number of top management staff that have

either been indicted or accused of engaging in bank fraud.

As a result of the involvement of staffs and top management staffs in

fraudulent activities in the banking industry, Fraud control is becoming an issue

that the regulators and top banking executives who are in saddle when

fraudulent activities takes place or more succinctly when someone commit an

act of fraud in the financial institutions under their management. Owing to the

fact that fraud affects the profitability and reputations of banking institutions,

to minimize or control the alarming rate of fraud in the banking industry, there

ought to be need for the players in the industry to set up and implement an
12
effective and efficient control system that will adequately monitor the daily

activities of the industry without leaving any gap, (Anyanwu,1993).

Consequently, appropriate personnel policies and practices should be put in

place since fraud is committed by people of moral decadence. Therefore,

qualified auditors should be employed to ensure effective and efficient

detection and prevention of fraud and financial reporting in Nigerian

Commercial banks. Against these backgrounds, the main purpose of this study

is to thus, ascertain the role of fraud management in the profitability of Nigeria

banking system.

The larger society expects greater accountability, fairness, transparency and

effective intermediation from banks, ensuring that they carry out their

responsibilities with sincerity of purpose and unquestionable integrity with

respect to their operations as a means towards earning public trust and

goodwill. The banking business has become more complex with the

development in the field of Information and Communication Technology (ICT)

which has changed the nature of bank fraud and fraudulent practices.

Berney(2008) observes that customers rely heavily on the web for their

banking business which leads to an increase in the number of online

transactions. Gates, Jacob and Malphrus(2009) assert that the internet

13
provides fraudsters with more opportunities to attack customers who are not

physically present on the web to authenticate transactions. In Nigeria, in spite

of the banking regulation and bank examination by the Central Bank of Nigeria

(CBN), the supervisory role of the Nigeria Deposit Insurance Corporation

(NDIC), and The Chartered Institute of Bankers of Nigeria (CIBN), there is still a

growing concern about fraud and other unethical practices in the banking

industry. Evidence from the NDIC Report (2008) revealed that the report of the

examinations and special investigations from the banks were still bedeviled

with problems of fraud, weak board and management oversight; inaccurate

financial reporting; poor book-keeping practices; non-performing insider-

related credits; declining asset quality and attendant large provisioning

requirements; inadequate debt recovery; non-compliance with banking laws,

rules and regulations; and significant exposure to the capital market through

share and margin loans. This is a problem which makes the activities of the

fraud management difficult or impossible and affects the profitability of the

banking system and the economy at large.

This chapter reviews the available literature on the role of the Central Bank of

Nigeria (CBN) in managing fraud within the Nigerian commercial banking

14
sector. as well as related theories and previous studies related to this research

topic.

2.1 Conceptual framework

2.1.1 Concept of Fraud

The Concise Oxford Dictionary of current English (2015) defines fraud as

deceitfulness; criminal deception and use of false representations. Fraud is also

defined as intentional deception in order to persuade another person to part

with something of value.

Fraud takes place when a person deliberately practices deception in order to

gain something unlawfully or unfairly. In most states, the act of fraud can be

classified as either a civil or a criminal wrong. While fraud is most commonly

committed to obtain benefits of value, it sometimes occurs solely for the

purpose of deceiving another person or entity. For instance, if a person makes

false statements, it may be considered fraud, depending on the circumstances.

2.1.2 Types of Fraud

As naturally expected, fraud is perpetrated in many forms and guises, and

usually have insiders (staff) and outsiders conniving together to successfully

15
implement the act. The following types which are not in any way completely

exhaustive are the most common types of bank frauds in Nigeria identified by

Ovuakporie (2014):

Theft and Embezzlement: This is a form of fraud which involves the unlawful

collection of monetary items such as cash, travelers’ cheque and foreign

currencies. It could also involve the deceitful collection of bank assets such as

motor vehicles, computers, stationeries, equipments, and different types of

electronics owned by the bank.

Defalcation: This involves the embezzlement of money that is held in trust by

bankers on behalf of their customers. Defalcation of customers deposits either

by conversion or fraudulent alteration of deposit vouchers by either the bank

teller or customer is a common form of bank fraud. Where the bank teller and

customer collude to defalcate, such fraud is usually neatly perpetrated and

takes longer time to uncover. They can only easily be discovered during

reconciliation of customers‟ bank account. Other forms of defalcation involves

colluding with a customer’s agent when he/she pays into the customer’s

account and when tellers steal some notes from the money which are billed to

be paid to unsuspecting customers/clients.

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Forgeries: Forgeries involve the fraudulent copying and use of customer’s

signature to draw huge amounts of money from the customer’s account

without prior consent of the customer. Such forgeries may be targeted at

savings accounts, deposit accounts, current accounts or transfer instruments

such as drafts. Experience has shown that most of such forgeries are

perpetrated by internal staff or by outsiders who act in collusion with

employees of the bank who usually are the ones who release the specimen

signatures being forged (Onibudo, 2014).

Impersonation: Impersonation involves assuming the role of another person

with the intent of deceitfully committing fraud. Impersonation by third parties

to fraudulently obtain new cheque books which are consequently utilized to

commit fraud is another popular dimension of bank fraud. Cases of

impersonation have been known to be particularly successful when done with

conniving bank employees, who can readily make available, the specimen

signatures and passport photograph of the unsuspecting customers.

Manipulation of Vouchers: This type of fraud involves the substitution or

conversion of entries of one account to another account being used to commit

the fraud. This account would naturally be a fictitious account into which the

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funds of unsuspecting clients of the banks are transferred. The amounts taken

are usually in small sums so that it will not easily be noticed by top

management or other unsuspecting staff of the bank. Manipulation of

vouchers can thrive in a banking system saddled with inadequate checks and

balances such as poor job segregation and lack of detailed daily examination of

vouchers and all bank records.

Money Laundering This involves the deceitful act of legitimizing money

obtained from criminal activity by saving them in the bank for the criminals or

helping them transfer it to foreign banks, or investing it in legitimate

businesses. In the recent political dispensation (in Nigeria), money laundering

by con men, politicians and fraudulent bank staff have assumed alarming

dimension.

Fake Payments: A common type of fraud in the banking sector is fake

payments, which involves the teller introducing a spurious cheque into his/her

cage. It is done with or without the collaboration of other members of staff or

bank customers. This type of fraud is however easy to detect if the bank has a

policy of thoroughly examining all vouchers, checks, withdrawal slips and

payments on a daily basis.

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2.1.3 Causes of Fraud

There are various causes of fraud. According to Asukwo (2018), the immediate

and remote causes of frauds in general include the following:

Poor Book Keeping: Inability to maintain proper books of accounts coupled

with failure to reconcile the various accounts of the bank on daily, weekly or

monthly basis usually will attract fraud. This loophole can very easily be

exploited by bank employees who are fraudulent.

Inadequate Training and Re-Training: Lack of adequate training and retraining

of employees both on the technical and theoretical aspects of banking

activities and operations usually lead to poor performance. Such inefficient

performance creates a loophole which can very easily be exploited by

fraudsters.

Inadequate Staffing: A poorly staffed bank will usually have a problem of work

planning and assignment of duties. The bank that is flooded with unqualified

and inexperienced staff will of a necessity have to grapple with the problem of

training and supervision of its officers. This situation can very easily be

capitalized upon by the teeming fraudsters that the bank has to contend with

in its day to day transactions.

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Poor Internal Control: Inadequate internal control and checks usually creates a

loophole for fraudulent staff, customers and non-customers to perpetrate

frauds. Therefore to reduce or eliminate frauds, there is a need to always have

effective audits, security systems and ever observant surveillance staff at all

times during and after bank official operating hours.

Greed: Greed refers to an inner drive by individuals to acquire financial gains far

beyond their income and immediate or long-term needs. It is usually driven by a

morbid desire to get rich quick in order to live a life of opulence and

extravagant splendor. Greed has in many cases been regarded as the single

most important cause of fraud in the banking sector.

Fraud control is becoming an issue that the regulators and top banking

executives who are in saddle when fraudulent activities takes place or more

succinctly when someone commit an act of fraud in the financial institutions

under their management. It is quite clear that the installation of internal

controls cannot be sufficient to eliminate dishonest activities, constantly

rejigging of the controls already put in place to ensure that they are effective in

reducing fraudulent activities in financial institutions from becoming successful

should become important. Fraudulent activities are rampant in every

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organization but more rampant in financial institutions and perhaps more

common in Deposit Money Banks (DMBs) because of the instruments of their

trade. Banks are most prone to financial fraud as a result of money and near

money instruments used in the process of their operations.

The acts of financial fraud has persisted in DMBs in spite of strong internal

controls put in place to forestall and control any planned intention to steal the

bank’s money. Strong controls that at times are antithetical to the efficient

operations of the bank having been put in place in certain cases but have not

succeeded in reducing drastically the amount of funds lost. Thus all internal

control measures have become preventive and protective of the banks

financial resources sometimes to the detriment of the bank’s primary

operations. Most banks are litigation-shy as judicial officers often do not find it

interesting that that the process (internal controls) put in place by the bank

was compromised by the employee. In addition, where the bank is litigious,

courts often sympathize with customers whose infractions led to large losses

of funds irrespective of whether collusion with an employee had existed The

scenarios are not funny outside the banking halls when financial fraud

happened and parties have to prove their innocence. Whatever the case is, the

bank losses money and reputation, the staff members’ lose jobs.
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One of the reasons for the use and continuous revision of internal control

systems in the bank is to ensure that losses occasioned by fraudulent activities

are minimal if they occur, and attempts are discovered very early before losses

can occur. The triumvirate of fraud prevention, fraud control and detection are

coalesced into the effective internal control system that the bank employs

(Adetiloye 2016).

2.1.4 Effect of Bank Fraud in Nigeria Banking System

The effects of fraud in banking industry are felt by all if not as a customer, then,

as a citizen of nation. The effect of fraud has a chain reaction on the community

as a whole because this industry constitutes a vital position in a community.

Every part of the economy, especially the banking sector is punctuated with

fraud. Thus, its success or failure goes a long way to determine the success of

the community. Fraud is a major cause of bank failure. The number of fraud

that occurs in Nigeria banks is so alarming with the overall effect on poor bank

performance. The amount of money lost to fraudsters is large; so amount

taken out of the coffers of banks do not generate any income for banks, but

rather result to bank solvency and liquidity problem.

The following are various effects of fraud in Nigeria

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a. Fraud reduces bank’s profitability

Fraud leads to loss of money belonging either to the banks or customers. Such

losses may be absorbed by the profits of the affects trading period and

consequently reduces the amount of profit which would have been available

for distribution to shareholders. Losses from fraud, which are absorbed by the

equity capital of the bank, impair the bank’s financial health and constrain its

ability to extend loans and advances for profitable operations. In extreme

cases, rampant and large incidences of fraud could lead to a bank’s failure.

Fraud can increase the operating cost of a bank because of the added cost of

installing the necessary machinery for its detection, prevention and protection

of assets.

Moreover, devoting valuable time to safeguarding its asset from fraudulent

men distracts management. This unproductive diversion of resources reduces

output and how profits which in turn could retard the growth of the bank.

b. Fraud discourage banking habit among the banking public

Fraud as witnessed in recent times has resulted in the collapse of many banks,

this raises the question of how reliable are banks to trust one’s money with

23
them, the ethics of banking profession, which is honesty, reliability and

competence are fast fading away. It is disheartening to note that the successful

prevention of a particular fraud give rise to a more complex and sophisticated

one by the perpetrators and the category of staff involved are increasingly

those of higher rank. This brings a great concern to the society.

c. It places emotional and psychological burdens on the fraud victims. There is a

perception among some members of the public that fraud is a victimless crime

or has little impact. The impact of fraud can also lead to a range of health

problems, both physical and mental. During my research, I found out that

victims of pension fraud and that ‘anger’ was a common emotional impact of

the fraud. I also found they suffered stress, anxiety and fear as a result of their

loss.

2.1.5. History of CBN

The period 1892 – 1952, there was an enquiry by the then colonial

administration to investigate banking practice in Nigeria. The G. D. Paton

Report which emanated from the enquiry was the basis of the first Banking

Ordinance of 1952. The ordinance was designed to ensure orderly commercial

banking and to prevent the establishment unviable banks. A draft legislation

24
for the establishment of Central Bank of Nigeria was presented to the House of

Representatives in March, 1958. The Act was fully implemented on 1 July, 1959

when the Central Bank Act, 1958

The Central Bank Act, 1958 (as amended) and the Banking Decree 1969 (as

amended) constituted the legal framework within which the CBN operates and

regulates banks. The wide range of economic liberalization and deregulation

measures following the adoption, in 1986, of a Structural Adjustment

Programme (SAP) resulted in the emergence of more banks and other financial

intermediaries. The Banks and Other Financial Institutions (BOFI) Decrees 24

and 25 of 1991, which repealed the Banking Decree 1969 and all its

amendments, were, therefore, enacted to strengthen and extend the powers

of CBN to cover the new institutions in order to enhance the effectiveness of

monetary policy, regulation and supervision of banks as well as non-banking

financial institutions. Unfortunately in 1997, the Federal Government of Nigeria

enacted the CBN (Amendment Decree No. 3 and BOFI (Amended)] Decree No.

4 in 1997 to remove completely the limited autonomy which the Bank enjoyed

since 1991.

The 1997 amendments

25
The 1997 amendments brought the CBN back under the supervision of the

Ministry of Finance. The Decree made CBN directly responsible to the Minister

of Finance with respect to the supervision and control of bank and other

financial institutions, while extending the supervisory role of the bank to other

specialized Banks and Financial Institutions. The amendment placed enormous

powers on the Ministry of Finance while leaving the CBN with a subjugated role

in the monitoring of the financial institutions with little room for the Bank to

exercise discretionary powers.

The 1998 amendments

The CBN (Amendment) Decree No. 37 of 1998 which repealed the CBN

(Amended) Decree No. 3 of 1997. The Decree provided a measure of

operational autonomy for the CBN to carry out its traditional functions and

enhances its versatility.

The CBN Act, 2007

The current legal framework within which the CBN operates is the CBN Act of

2007 which repealed the CBN Act of 1991 and all its amendments. The Act

provides that the CBN shall be a fully autonomous body in the discharge of its

functions under the Act and the Banks and Other Financial Institutions Act with

the objective of promoting stability and continuity in economic management.

26
In line with this, the Act widened the objects of the CBN to include ensuring

monetary and price stability as well as rendering economic advice to the

Federal Government.

The BOFI (Amendment) Decree, 1998

Furthermore, the regulatory powers of the CBN were strengthened by the

Banks and other Financial Institutions (Amendment) Decree No. 38 of 1998

which repealed BOFI (Amendments) Decree No. 4 of 1997. Through the

amendments, the CBN may vary or revoke any condition subject to which a

license was granted or may impose fresh or additional condition to the

granting of a license to transact banking business in the country. By the

Decree, the CBN's powers on banks, specifically those relating to withdrawal of

licenses of distressed banks and appointment of liquidators of these banks,

including the NDIC was restored.

The 1999 amendment

The BOFI (Amendment) Decree No. 40 of 1999 makes the provisions relating to

failing banks applicable to other financial institution. It also empowers the

Governor of the CBN to remove any manager or officer of a failing bank or

other financial institution.

The Money and Capital markets

27
The CBN has also taken responsibility for nurturing the money and capital

markets. In furtherance of this, the CBN introduced treasury bills in 1960,

treasury certificate in 1968, and facilitated the establishment of Lagos Stock

Exchange in 1961 and the capital issue committee now known as the Securities

& Exchange Committee in the early 1970s. Central Bank of Nigeria came into

full operation.

2.1.5.1 Organization Structure and Functions of CBN

A Central bank is usually a government owned bank charged with the

responsibility to supervise, regulate, direct, assist and co-ordinate the

operations of other financial institutions in its capacity as the Apex Bank in the

country. The Central Bank also doubles as the government’s bankers and are

always interested in monitoring the performance of the economy. However,

their functions may different from country to country but they are generally

run by a Board of Directors chaired by a Governor in most countries. Most

Central Banks are also involved in managing the expansion and contraction of

the volume, cost and availability of money in the interest of the economy. They

are also generally responsible for monetary policy and credit guidelines

formulation. The Central Bank of Nigeria performs the following functions:-

28
(a) Bank Note Issues: The Central Bank has the sole authority to print

currencies and mint coins and ensure their circulation in the economy through

the banking system.

(b) Banker to the government: The C.B.N. serves as a banker and financial

adviser to the federal and state governments.

(c) Banker’s Bank: Being the apex and controlling bank, the C.B.N. acts as a

banker to the commercial banks in the sense that it keeps part of their

deposits, make short term advances available to the commercial banks as a

lender of last resort and provides a clearing system for the clearing settlements

of cheques among banks.

(d) Maintenance of External Reserves: The C.B.N. maintains the country’s

external reserve in order to preserve the country’s currencies against other

international currencies.

(e) Regulation of the Economy: The C.B.N. does this through liquidity

management approach. If it feels that there is excess liquidity in the system, it

sells treasury bills, treasury certificates and other money market instruments in

order to mop up excess liquidity in the system and vice-versa. The C.B.N. is also

at liberty to take other measures like exchange rate devaluation in order to

promote monetary stability and a sound financial system in Nigeria.

29
(f) Another function of the C.B.N. is to promote the development of the money

and capital markets in Nigeria by issuing instruments like treasury certificates,

government bonds which are traded in the markets.

(g) The C.B.N. owes it a duty to facilitate compliance with government’s

monetary and credit policy guidelines and to help government achieve

monetary and fiscal policy objectives.

(h) It is the duty of the C.B.N. to safeguard the international value of the

nation’s currency. It also manages the nation’s external debt, control the

nation’s foreign exchange market and transact business on behalf of Nigeria.

(i) Publishing of Financial Information: The C.B.N. through its quarterly and

annual journal reports and publishes financial information on the

operation/performance of financial institutions and the various sectors of the

economy. The reports are diligently prepared after thorough researches have

been carried out and they now serve as ready reference materials authentic

source of financial information to scholars, intellectuals and other users of

financial information.

2.1.5.2 Strategies used by CBN to combat bank fraud by fraud management

Fraud detection by the CBN and prevention is at the heart of every of fraud

management system. Detection of fraud is highly complex, and a large

30
percentage of fraud cases are actually detected externally (such as by the

media or external auditors) or by accident.

However, approaches such as lifecycle monitoring and verification can be used

to reduce the incidence of fraud overall.

There are various ways or factors which are crucially important in detection of

fraud. There also ways of preventing fraud

1. Auditing

Often a strong system of internal control is the frontline defense that an

organization can employ to prevent and detect fraud. The absence of internal

controls does not always preclude the occurrence of fraud but it does leave

potentially an open door for it to happen. Poor internal controls manifest

themselves through: poor inventory control, lack of proper documentation and

support for cash payments, lack of segregation of duties, ineffective or

obsolete accounting software and the absence of independent verification

(Porter, 2013; Doyle et al., 2014).

To prevent these failures, banks should conduct periodic risk assessment,

lead by either internal or external auditing staff. The assessment should

31
 focus on high-risk areas, such as physical controls relating to high dollar

fixed assets, cash, marketable securities, payroll and inventory.

2. Whistle blowers and regulatory requirements

Whistle blowing is traditionally a voluntary practice of individuals who observe

something incorrect about a given auditing or accounting situation and bring it

to the attention of auditors (Schmidt, 2014). However, there has been a

movement in recent years to introduce a regulatory requirement for whistle

blowers or to include some regulatory compensation or incentive to blow the

whistle (Schmidt, 2014). There are also structural impediments to whistle

blowing, such as elements of the African Union convention on preventing and

combating corruption, which promotes a presumption of guilt that whistle-

blowers must overcome (Schroth, 2014).

3. World Bank Fraud detection by the CBN and prevention rules

A major factor in the modernization of the Nigeria banking system has the

imposition of World Bank rules for development lending (McGee, 2012; Muhoro

and McGee, 2012). Thus, World Bank rules are likely to be highly relevant for the

development of Fraud detection by the CBN systems in the First Bank. The

World Bank has its own series of rules for fraud and corruption prevention and
32
detection in World Bank projects. They include specific anti-corruption policies

intended to address corruption in the bidding and loan process in general bank

operation and case studies that highlight where and when fraud may be found

(Aguilar et al., 2011). The guidelines include a specific ethical guidance for bank

staff intended to address problems of ethical practice by bank employees.

4. Restriction of Business

Although banks may not detect initial fraud, they will have much stronger

reactions following disclosed fraud by customers (Graham et al., 2012).

Specifically, companies that are forced to restate their earnings face higher

spreads and interest rates and more demand for securing of loans than those

that do not, as well as higher fees, those that have restated due to fraud are

even further penalized. Thus, the bank can use contract terms to protect

themselves from information asymmetries identified through these

restatements (Graham et al., 2012). However, it is uncertain how often this

happens in Africa.

5. Human Resources Strategies (Recruitment and selection)

One major individual response that bank may use in order to reduce fraud is to

use recruitment and selection strategies to limit the exposure to those

33
believed to be untrustworthy. However, this has not been very effective in the

African context for a variety of reasons. Human resources management

practices, including recruitment and selection, are seen as a means of

controlling for risk management (Meyer et al., 2011).

2.2 Theoretical Framework

There are quite a number of relevant theories on fraud that are relevant to this

study:

2.2.1 The Fraud Triangle Theory

Originally developed in 1973 by Donald Cressey, a criminologist. He established

that for fraud to occur there must be a reason. He related to three factors

(pressure, opportunity, and rationalization) that must be present for an offense

to take place. He ascertained that the perpetrator must formulate some

morally acceptable idea to them before engaging in unethical behavior and if

fraud perpetrators are given the opportunity they are most likely to commit

fraud. Lister (2007) in furtherance of this study stated that pressure is a

significant factor to commit fraud. He determined three types of pressure

which are personal, employment stress, and external pressure. He defined the

pressure to commit fraud as “the source of heat for the fire.”

34
2.2.2 The Fraud Diamond Theory

The FDT was first presented by Wolfe and Hermanson in the Certified Public

Accountant (CPA) Journal in December 2004.In this theory, an element named

capability has been added to the three initial fraud components of the Financial

Transaction Tax (FTT). Wolfe and Hermanson (2004) argued that although

perceived pressure might coexist with an opportunity and a rationalization, it is

unlikely for fraud to take place unless the fourth element (i.e., capability) is also

present. Mackevicius and Giriunas (2013), not every person who possessed

motivation, opportunities, and realization may commit fraud due to the lack of

the capability to carry it out or to conceal it. Albrecht, Williams, and Wernz

(1995) opine that this element is of particular importance when it concerns a

large-scale or long-term fraud. Furthermore, Albrecht et al. (1995) believe that

only the person who has an extremely high capacity will be able to understand

the existing internal control, to identify its weaknesses and to use them in

planning the implementation of fraud.

2.2.3 The Anomie Theory on Fraud

The Anomie Theory on Fraud was popularized by French Sociologist, Emille

Durkheim in his influential book “suicide” in the year 1897. According to the

35
Anomie theory on fraud, in every competitive capitalist society, the other

members of the society who are excluded from access to legitimate means to

success and stardom will experience a sense of relative deprivation which they

try to relieve by way of social vices like

(1) Aggressive criminal behaviors, like bank frauds, and armed robbery attacks,

(2)Aggressive revolutionary behaviors like Coup de tat in the military and

(3) A retreat into psychosomatic illnesses like drug addiction, alcoholism, etc.

Of all theories explained above, this study therefore, is anchored on the Fraud

Diamond Theory. This is so because it is more linked to the topic of concern as

opposed to other theories reviewed above.

36
 CHAPTER THREE

METHODOLOGY

3.1 Research Design

The research design used for this research work is descriptive design. A

descriptive design consist of a set of gathered data or information analyzed,

summarized and/or interpreted along certain line of thought for the pursuit of

specific purpose or study.

3.2 Area of the Study

This research work covers the First Bank of Nigeria Plc, Agbani Road, Enugu.

Most of the data used in this work were gathered from First Bank of Nigeria

Plc, Agbani Road, Enugu.

3.3 Population of the Study

Population means the whole body of items, objects, materials or people that

fall within a geographical location in which the researcher intends to

investigate for his or her study. That is the whole participant of the study.

Therefore the target population for this research includes the staff of First

Bank of Nigeria Plc, Agbani Road, Enugu. The population comprises of 55 staff

First Bank of Nigeria Plc, Agbani Road, Enugu.

37
3.4 Sampling Method

In the views of Ujo (2003) sampling technique specifies how elements will be

drawn from the population. Since the population is less than 100, the sample

size for the study is 55.

3.5 Research instrumentation

The study is based on both primary and secondary data. The primary data

involves the use of questionnaires, oral interview, telephone conservation,

observations etc. The secondary data involves the use of textbooks, journals,

magazines, newspaper etc.

3.6 Validity and reliability of instrument

In order to ensure the validity of a research instrument, proper ensuring of

questionnaire and a conduct of a pretest of all the questions contained in the

questionnaire were carried out. The design of the questionnaire was also made

for respondents to tick their preferred choice from the options provided.

Reliability refers to the stability of the measurement used to study the

relationships between variables. The questions in the questionnaire were

designed taking into consideration the research questions on the subject. Thus

38
the constructed questionnaire was distributed by the researcher to the group

of people different from the pilot sample group but with the same

characteristic, and after sometime the copies of questionnaire were collected

from the respondents and scored them. Thus, the correct scoring was obtained

again and again thereby proving the reliability of the instrument.

3.7 Method of Data Collection

The research instrument for this study which was the questionnaire was self-

administered (person-to-person) by the researcher to 55 respondents. In

effect, the completed copies of the questionnaire were duly collected by the

researcher. This helped to avoid the loss of any copy of the questionnaire.

Therefore, the total number of questionnaire given out was the same

retrieved. This method was considered appropriate because it really enhanced

the exercise, as it provided a platform for the researcher to interact and

provide further information about the study to the respondents within the

confines of research.

3.8 Method of Data Analysis

39
This research will make use of frequency table/percentages to analyze the

descriptive characteristics of the respondents.

40
 CHAPTER FOUR

DATA PRESENTATION AND ANALYSIS

The responses of the sample surveyed from the questionnaire used, and trust

of observation made from this study are summarized in tables as we progress.

This refers to the segregation of data into parts with relevant comments and

best of judgments. In other words, it means breaking down and putting in

order, the qualitative information gathered through the research exercise. It

also involves comparing and contrasting the events, patterns and relationships.

As earlier stated in chapter three, the data collected for this study are carefully

analyzed in simple percentage and tables. A total of 55 copies of questionnaire

were issued to the respondents and 50 copies were retrieved.

4.1 Analysis of Demographic Variables

The researcher analyzed the gender, marital status, age and educational

qualification of the respondents.

Table 4.1: Analysis of respondent’s gender

Sex Responses Percentage (%)

41
Male 19 38.0
Female 31 62.0
Total 50 100
Source: Field Survey

From table 4.1 above, 19 respondents representing 38.0% were male, while 31

respondents representing 62.0% were female. It is obvious here that the

greater percentage of the respondents were female.

Table 4.2: Responses as to Marital Status

Marital Status Responses Percentage (%)

Single 13 26.0

Married 37 74.0

Total 50 100

Source: Field Survey

From table 4.2 above, 13 respondents representing 26.0% were single, while 37

respondents representing 74.0% were married.

Table 4.3: Analysis of respondent’s age

Age Responses Percentage (%)

21 – 30 years 33 66.0

42
31 – 40 years 11 22.0
41 and above 6 12.0
Total 50 100
Source: Field Survey

From table 4.3 above, 33(66.0%) of respondents represent those at the age of

21 – 30 years, 11(22.0%) of respondents represent those at the age of 31 – 40

years, while 6(12.0%) of respondents represent those at the age of 41 and

above.

4.2 Data Presentation and Analysis

Table 4.4: Fraud detection by the CBN enhances the profitability of

Commercial banks in Nigeria

Category Distribution Percentage (%)

Yes 39 78.0
No 11 22.0
Total 50 100
Source: Field Survey

From the table above, 39 respondents representing 78.0% believed that Fraud

detection by the CBN enhances the profitability of Commercial banks in

Nigeria, while 11 respondents representing 22.0% disagreed.

43
Table 4.5 Fraud detection by the CBN reduces the risk of financial loss to

fraud

Category Distribution Percentage (%)

Yes 37 74.0
No 13 26.0
Total 50 100
Source: Field Survey

From the above question, 37 respondents representing 74.0% believed that

Fraud detection by the CBN reduces the risk of financial loss to fraud, while 13

respondents representing 26.0% disagreed.

Table 4.7: Fraud investigation has contributed significantly to the profitability

of Commercial banks in Nigeria?

Category Distribution Percentage (%)

Strongly Agree 25 50.0
Agree 21 42.0
Undecided 4 8.0
Disagree - -
Strongly Disagree - -
Total 50 100
Source: Field Survey

44
From the above responses, 25 respondents representing 50.0% strongly agreed

that fraud investigation has contributed significantly to the profitability of

Commercial banks in Nigeria, 21 respondents representing 42.0% agreed, while

4 respondents representing 8.0% were undecided.

4.2 Discussion of Findings

The research questions as regards this study have been examined and the

findings for research question one showed that a greater percentage of the

respondents (78.0%) were of the opinion that

enhances the profitability of Commercial banks in Nigeria. In the same research

question, a greater percentage of the respondents (74.0%) were of the opinion

that Fraud detection by the CBN reduces the risk of financial loss to fraud.

In the research question two as to the contribution of fraud investigation to

the profitability of Commercial banks in Nigeria, a greater percentage of the

respondents (50.0%) were of the opinion that fraud investigation has

contributed significantly to the profitability of Commercial banks in Nigeria.

45
 CHAPTER FIVE

SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS

5.1 Summary of Findings

From the responses gotten from the respondents, some interesting findings

were made.

Major findings revealed that:

1. Fraud detection by the CBN enhances the profitability of Commercial

banks in Nigeria

2. Fraud detection by the CBN reduces the risk of financial loss to fraud.

3. Fraud investigation has contributed significantly to the profitability of

Commercial banks in Nigeria

5.2 Conclusion

From the research carried out so far, the researcher was able to note that:

1. Fraud detection by the CBN enhances the profitability of banks in

Nigeria.

2. Fraud detection by the CBN reduces the risk of financial loss to fraud in

banks in Nigeria.

46
 3. Fraud investigation has contributed significantly to the profitability of

banks in Nigeria.

5.3 Recommendations

Based on the findings of this study, it was thus recommended that:

1. Since fraud investigation contributes to the profitability of the banking

system, the management should investigate as soon as the auditor

suspects any type of fraud.

2. Also haven seen that, Fraud detection by the CBN contributes

significantly to the profitability of the banking system, the management

should employ the services of an investigator so as to detect fraud in the

banking system which enhances the profitability of the system

47
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Idolor, E.J. (2010). Bank frauds in Nigeria: Underlying causes, effects and
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50
 APPENDIX
QUESTIONNAIRE
SECTION A
PERSONAL PROFILE
Please tick (√) in the box where appropriate.
1. Sex?
(a) Male [ ] (b) Female [ ]
2. Age?
(a) 20-30 years [ ] (b) 31-40 years [ ]
(c) 41-50 years [ ](d) 51-60 Years [ ]
3. Educational qualification.
(a) FSLC [ ](b) WAEC/GCE [ ] (c) HND, BSC [ ] (d) MSC, MBA,Ph.D [ ]
4. Marital Status.
(a) Single [ ] (b) Married [ ]

51
 (c) Widowed [ ] (d) Divorced [ ]

5. Number of years worked with your bank.

(a) 0-4 years [ ] (b) 5-9 years [ ] (c) 10-14 years [ ] (d) 15-19 years [ ]

6. Category of staff.
(a) Junior[ ] (b) Senior [ ]

SECTION B:
Please tick (√) in the box where appropriate.
7. To what extent is fraud in in your bank?
a. To large extent [ ]
b. To some extent [ ]
c. Not certain [ ]
d. Don’tknow [ ]
8. Do you agree that the desire to attain to social class level constitute staff
involvement in fraud?
a. Yes [ ]
b. No [ ]
9. To the best of your knowledge, what are the varieties of fraud that exist
in your bank?
a. Computer fraud [ ]
b. Clearing fraud [ ]
c. Account opening fraud [ ]

52
 d. Other [ ]
10.To what extent do you agree that inability of government agencies to
combat fraud results to persistent bank distress?
a. To large extent [ ]
b. To some extent [ ]
c. Not certain [ ]
d. Don’t know [ ]
11.To what extent do you believe that looting of fund by bank
managers/directors constitutes a major form of fraud in Nigerian banks?

a. To large extent [ ]
b. To some extent [ ]
c. Not certain [ ]
d. Don’t know [ ]
12.Commercial banks with poor management, record higher incidence of all
sorts of fraud than those with effective management?
(a) Agree [ ] (b) Strongly agree [ ]
(c) Disagree [ ] (d) Strongly Disagree [ ]

13.What are the causes of bank fraud?

a Poor security management [ ]
b Staff negligence [ ]
c Poor security arrangement [ ]
d All of the above [ ]
14. Fraud can be detected and controlled through.
a Personnel and administrative control [ ]

53
b Accounting and financial control [ ]
c Inventory and process control [ ]
d All of the above [ ]

54