Fraud in the banking sector isn’t a new phenomenon neither is it peculiar to any nation. It affects all nations in all the continents of the world. Nigeria’s banking sector has faced a lot of crises and failures, which can be traced back to the 1930s. During this time, all indigenous banks, except the National Bank, collapsed.
Also, in the late 1940s, the problem occurred again during the boom and crash period when all but four indigenous banks were liquidated. In the late 1990s, while 26 banks collapsed, others went through the processes of renaming, restructuring, acquiring, and selling to new investors. The major factor responsible for these problems was fraud. Strong anti-fraud controls have proven to be effective. The EFCC, for instance, has served as a notable deterrent to fraudsters in all sectors and levels in the country.
The most recent case of fraud is the 27 billion naira theft committed by the former Managing Director of Bank PHB, Francis Atuche, and former Chief Financial Officer, Ugo Anyanwu, of the defunct Bank PHB between 2007 and 2008. Atuche was convicted for stealing from the bank while Anyanwu was convicted of conspiracy. Both were convicted of 21out of 27-count charges against them. The duo abused their powers in the bank and bypassed established regulations to commit fraud. The convicts stole the huge sum on the pretext of providing loans to some nebulous companies.
The Economic and Financial Crimes Commission (EFCC) proved that about 11 billion naira of the acclaimed loans were used by the duo to purchase the bank’s shares worth about 984,375,000 units for themselves. According to the judge who presided over the case, Justice Lateefat Okunnu, this act was not professional negligence, but a criminal offense. This act, the judge declared, had put the bank and its depositors’ funds at risk, while the bank was later bailed out using taxpayers’ money. This is predicted to have a great implication on the nation’s economy.
The financial industry, especially the banking system, is an integral part of the nation’s economy. For any nation’s economy to soar, the financial industry must be healthy, vibrant, effective, and efficient. The financial sector contributes immensely to economic growth through its role in intermediating funds from the surplus areas to the deficit areas. This function helps to enhance economic growth, investment, employment opportunities, international trade, and payment. Therefore, any dent in it will translate into a degenerating economy.
Some banks today are still inflicted with the menace of fraud. Fraud in the banking sector comes in various dimensions. It can be syndicated fraud, corporate fraud, executive fraud, internal fraud, external fraud, computer fraud, or electricity failure aided fraud. Fraud is committed through theft and embezzlement, forgeries, defalcation, suppression, fraudulent substitution, unauthorised lending, payment against uncleared effects, lending to ghost borrowers, kite flying and cross-firing, unofficial borrowing, impersonation, foreign exchange malpractices, over-invoicing, manipulation of voucher, fictitious accounts, fictitious contracts, over valuation/undervaluation of properties, false declaration of cash shortages, fraudulent use of bank documents, falsification of status report, misuse of suspense account, duplication of cheque books, interception of clearing cheques, drafts, mail transfers, interception and switching of telex messages, inflation of statistical data, laundering, computer frauds, false proceeds of collection, robberies, teeming and lading, fake payment, and double pledging.
Fraud in the banking industry has led to financial crisis that enraged the sector, the results of which include an aggravated depletion of the solvency, depletion of banks’ capital base, evaporation of customers’ confidence, reduction in the banks’ assets, increase in liabilities, and decline in asset prices. These in turn erode banks’ equity base and ignite liquidity crisis in the banks in Nigeria.
The rate of fraud today in the Nigerian banking industry has assumed the status of an epidemic. The effects of fraud are not only limited to the financial system; it also affects the Nigerian economy as a whole. Bank frauds generally bring hardship, not only to the bank owners, but to the staff also. The staff of banks are laid off whenever the system suffers an irredeemable loss. Also, customers of a failed bank are grossly affected; a lot of people’s life savings and investments go down the drain, and poverty becomes deepened. This greatly affects the economy of the nation, as the more banks close down, the more the country loses sources of national income.
Furthermore, crisis in the banking sector tend to force the nation’s economy into deep recession and sharp account deficits. In the face of crisis, banks cut back on lending. This means they would be unwilling to lend to investors, firms and consumers. This leads to more difficulty for business owners. Consequently, investments level falls, lowering the growth of economies and employment opportunities. Furthermore, fraud in the banking industry somewhat influences the level of the performances of banks at the micro and macro levels of the nation’s economy. The integrity and strength of banks have significantly deteriorated due to incessant fraudulent crimes and scandals.
In an attempt to solidify the banking industry, several reforms in search of an efficient and effective financial system have been initiated. In 2005 a consolidation programme was instituted by the Central Bank of Nigeria (CBN). Owing to this initiative, banks witnessed positive changes in areas like the deposit base, size and ownership, funds from shareholders, and branch network. The aggregate capital base increased geometrically from 311 billion naira to 932 billion naira, and it also attracted direct foreign investment worth 652 million U.S dollars.
Good corporate governance will always be an effective antidote to fraud. This will lead to a reduction in investors’ risk and attract investment capital. It embodies an organisation’s performance and accountability and ensures transparency in the management of its affairs.
In the banking sector, corporate governance will promote judicious and prudent management of assets. It requires ensuring that ethical and professional standards are upheld, corporate objectives are aligned with behaviours, market discipline is maintained, and information flow effectively internally and to the public. It also seeks to ensure that customers are satisfied; employee morale is enhanced through incentives and good remuneration system.
Good corporate governance, especially in the banking sector, should be based on the principles of transparency, accountability, independence, and fairness. The financial system should be encouraged and educated to comply with the code of corporate governance. Also, banks need to perform a periodic self-assessment and reports of how the corporate governance has been implemented. This will provide room for corrective actions necessary in cases of inadequacies or deficiencies.
All of these will strengthen, stabilise and promote a diversified and reliable banking system. When corporate governance is effective, the problem of fraud and failure of banks in Nigeria will be curtailed.