THE ROLE OF INFORMATION AND COMMUNICATION TECHNOLOGY (ICT) IN FRAUD DETECTION IN NIGERIAN BANKS

THE ROLE OF INFORMATION AND COMMUNICATION TECHNOLOGY (ICT) IN FRAUD DETECTION IN NIGERIAN BANKS

(A CASE STUDY OF FIRST BANK OF NIGERIA ENUGU)

ABSTRACT

This research work aims at determining the role of information and communication technology in detecting fraud in the Nigerian banking system. The banking institution which has integrity and trust as its hallmark has been exposed to various forms of fraud and various means employed in defrauding banks. Fraud derails the society’s integrity and value among the committee of nations and in effect, affects the level of trust. The banking sector has been the cornerstone of economic and financial mainstay of any nation, hence the need for study of the role and the effectiveness of information and communication technology in fraud detection in the banking industry. First Bank of Nigeria Pie, Enugu metropolis was used as a case study. The research work treated the causes of fraud in Nigerian banks, forms of bank frauds, Effects and consequences of fraud in first bank of Nigeria plc, the information and communication technology and fraud detection in banks and Fraud control measures in banks. The methodology adopted in this study is the survey research design there were interactions with bank staff of various cadres with structured questionnaire to know their own opinion. 400 questionnaires were administered of which 320 were duly completed and returned. Some of the findings from the research work reveal that lack of staff motivation has an effect on the incidence of fraud in Nigerian banks. It also reveals that the introduction of ICT into the banking industry has reduced the incidence of fraud in Nigerian banks. Further findings reveal that the Nigerian banking laws are not adequate for fraud control in banks. Based on the findings of this study, recommendations made are the adoption of computer aids as tool for fraud prevention and control; banks should employ highly sophisticated security gadgets in their banks, like surveillance TV systems, on —the-spot photographing of customers etc. Proper reviewing of laws relating to fraud should be encouraged and stern penalties that commensurate with any offence committed should be embarked on.

CHAPTER ONE

1.1       BACKGROUND OF STUDY

Historically, fraud has always existed with the nature and life of mankind. There is a general consensus amongst criminologist that fraud is caused by the elements called “WOE”- Will, Opportunity and Exit i.e., the will to commit the fraud by the individual the opportunity to execute the fraud and the exit which is the escape from the sanctions against successful or attempted fraud.

Fraud is a global phenomenon. It is not unique in any sector of the economy or peculiar to Nigeria. The level of fraud in the present day Nigeria has assumed an epidemic dimension. It has eaten deep into every aspect of our life to the extent that a three year old child talks about yahoo mail or 419, newly discovered sobriquet for advanced free fraud that is hunting us as a nation. Nigeria, with all of its natural and human resources, tethers on the brink of destruction because of fraud. Much of what we do is “cutting leaves” instead of dealing with the root problem. Generally, fraud takes its root from the human heart. It is an axiom that the heart is deceitful above all things and is desperately wicked.

Fraud is the number one enemy of the business world, no company is immune to it and it is in all works of life, it is becoming predominant in the banking industry, as banks are now persistent targets of frauds. Nwankwo (1991) said that there is no where fraud is more serious than in banking. It is the biggest cause of bank failure. The fear is now rife that the increasing wave of fraud in the financial institutions in recent years, if not arrested might pose certain threats to stability and the survival of individual financial institution and the performance of the industry as a whole and no area of the economy is immune from fraudsters and even the banking system. Fraud if not checked might cause run on in the banking sector.

Fraud together with its sister white-collar crimes which came into being later in the 19th and 20th century inter alia corruption, money laundering, tax evasion, externalization of foreign currency to itemize just a few have stood as potent weapons capable of hemorrhaging the entire world economies particularly the banking sector because of its high risk factor.

Since fraud is carried out over a period of time, a minor one at the initial stage snowballs into a sizeable one over a period of time. However, the incidence of fraud has become a nightmare to the bankers who are particularly concerned, not only because it is on the increase, but also it acquires sophistication and tries outwitting every new technology. In the past years, cases of frauds in banks have been on the increase with each year recording staggering figures, even though most of the reported cases are essentially different types of fraud, An example is defrauding a bank using a genuine account of an employee who is the defrauder.

Another one is through the use of fictitious account; also, fraud is carried out with the aid of an employee’s friend. Similarly this unholy act is sometimes done using an account of a third party that depends on an employee-insider to perpetrate the act.

Fraud is a universal phenomenon which has been in existence for so long. Its magnitude cannot the security team designed to prevent it. Its management has become a central point in banking like the management of risk because of the above facts. Fraud and its management have been the precipitating factor in the distress of banks, and as much as various measures have been taken to minimize the incidence of fraud, it still rises by the day because fraudsters always device tactical ways of committing fraud. This has become a point of great attention in the banking sector as well as every organization in Nigeria.

Technology is invented by man to manipulate his social and physical environments. The sociology of science and technology made us to understand that, technology came with both manifest and latent intents. The manipulation of computer and other information and communication technology (ICT) to detect fraud in banks gives more insight into the manifest function of technological revolution. When computer was invented, the intention of its inventors is to hasten data processing with effortless ease. That it has been doing efficiently by giving timely and accurate information. The ability of computer to control manipulations, frauds, and forgeries continue to give the banking system the urge to upgrade their information communication technology (ICT) department. If not for the introduction of information communication technology system in Nigeria, fraud could have defeated the Nigeria banking industry. In this view, despite the introduction of the first banking ordinance in 1952 and central bank act in 1958 including acts and ordinance with the amendments over the years to control and regulate the activities of the banks, fraud rather increased in size and the techniques gained more sophistication.

The introductions of modern banking methods like automatic electronic gadgets; communication systems and computers; fraud has a watchdog to check its excesses. Due to forgery in cheques, bankers are extremely carefully when clearing them, and most times the forged cheques look authentic and the owner will have to confirm the signature on the cheque as his own. It is against this backdrop that this study seeks to evaluate the role of information and communication technology in Nigerian banks with special reference to First Bank of Nigeria plc.

1.2       STATEMENT OF THE PROBLEM

The enormity of bank frauds in Nigeria can be inferred from its value, volume and actual loss. A good number of banks’ frauds never get reported to the appropriate authorities, rather they are suppressed partly because of the personalities involved or because of concern over the negative image effect that disclosure may cause if information is leaked to the ban1cin’ public. The banks’ customers may lose confidence in the bank and this could cause a setback in the growth of the bank in particular.

Fraud leads to loss of money, which belong to either the bank or customers. Such losses may be absorbed by the profits for the affected trading period and this consequently reduces the amount of profit, which would have been available for distribution to shareholders. Losses from fraud which are absorbed to equity capital f the bank impairs the bank’s financial health and constraints its ability to extend loans and advances for profitable operations. In extreme cases rampant and large incidents 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 prevention, detection and protection of assets. Moreover, devoting valuable time to safeguarding its asset from fraudulent men distracts management. Overall, this unproductive diversion of resources always reduces outputs and low profits which in turn could retard the growth of the bank. It also leads to a diminishing effect on the asset quality of banks. This work therefore tends to look into how the Nigerian banks can use information and communication technology (ICT) to detect and minimize fraud.

1.3       RESEARCH QUESTIONS

1. How has the introduction of ICT into the banking industry reduced the incidence of fraud?
2. Do lack of motivation contributes to incidence of fraud in FBN
3. Are the Nigerian banking laws adequate for fraud control in Nigerian banks?
4. Do poor salaries and inadequate working conditions induce bank staff to commit fraud?
5. How effective is information and communication technology in detection offraud in Nigerian banks?

 1.4       OBJECTIVES OF THE STUDY

The main aim of this study is to find a practical means of detecting the incidences of fraud in Nigeria banks with the aid of information and communication technology. While specific objectives are:

1. To investigate whether the introduction of information and communication technology into the banking industry reduced the incidence of fraud.
2. To investigate if lack of motivation contributes to incidence of fraud in FBN
3. To investigate if the Nigerian banking laws are adequate for fraud control
4. To find out if poor salaries and inadequate working conditions induce bank staff to commit fraud.
5. To evaluate the effectiveness of information and communication technology on fraud detection.

1.5       HYPOTHESIS OF THE STUDY

1. Ho: the introduction of ICT into the banking industry reduced the incidence of fraud in Nigerian banks
2. Ho: lack of staff motivation has effect on the incidence of fraud in First Bank of Nigeria
3. Ho the Nigerian banking laws are not adequate for fraud control in banks

1.6       SCOPE OF THE STUDY

The research covers the First bank of Nigeria plc within the Enugu metropolis. The information used for the analysis covers the five years period between 2004 and 2009.In order to attain the objectives of this research, the scope of the study is defined to involve all relevant aspect of fraud in First bank operations. Information is obtained on the number of fraud cases perpetrated in First bank and their frequency, the effect it has on the bank, the persons involved, and causes of fraud and the level of effectiveness of the information and communication technology employed.

 1.7       LIMITATIONS OF THE STUDY

The main limitations of the study are the uncooperative attitude of some staff of the bank taken into study, inadequacy of time and financial constraints. Some of those approached for information declined and refused to cooperate. This affected the volume of information available for the study. Again, limited time allocated for this research work did not provide room for accuracy and reliability of results.

1.8       SIGNIFICANCE OF THE STUDY

This study can be of importance to the banking industry at large, particularly the first bank of Nigeria because it will expose the fraud perpetuators which will be of interest to the management. It is also prepared for those who may be interested or willing in carrying out further investigation on fraud detection with special reference to first bank of Nigeria. It will throw more light on ways by which fraud can be detected and minimized with the aid of ICT the study will serve as a body of knowledge to be referred to by researchers.

1.9       OVERVIEW OF FIRST BANK OF NIGERIA PLC

First Bank of Nigeria Plc (FBN) traces its ancestry back to the first major Financial institution founded in Nigeria; hence the name. The current chairman is Dr. Ayoola Oba Otudeko, OFR. The bank is the largest retail lender in the nation, while most banks gather funds from consumers and loan it out to large corporations and multinationals, First Bank has created a small market for some of its retail clients.

At the end of August 2006, the bank had assets totaling 650 billion Naira or $5 billion dollars. The bank was also the most highly capitalized stock on the Nigerian Stock Exchange, and had about 10 billion outstanding shares. It has a subsidiary in the United Kingdom, FBN Bank (UK), which has a branch in Paris.

The bank also has representative offices in South Africa and China. The company was named the best bank in Nigeria by Global Finance magazine in September 2006. The firm’s auditors are Akintola Williams Deloitte & Touche (Chartered Accountants) and KPMG Audit (Chartered Accountants). The firm has solid short and long term ratings from Fitch and the Global Credit Rating Company partly due to its low exposure to non-performing loans. The firm’s compliance with financial laws has also strengthened with the Economic Financial Crimes Commission giving it a strong rating.

The Bank traces its history back to 1894 and the Bank of British West Africa. The bank originally served the British shipping and trading agencies in Nigeria. The founder, Alfred Lewis Jones, was a shipping magnate who originally had a monopoly on importing silver currency into West Africa through his Elder Dernpster shipping company. According to its founder, without a bank, economies were reduced to using barter and a wide variety of mediums of exchange, leading to unsound practices. A bank could provide a secured home for deposits and also a uniform medium of exchange. The bank primarily financed foreign trade, but did little lending to indigenous Nigerians, who had little to offer as collateral for loans.

In 1957, Bank of British West Africa changed its name to Bank of West Africa (BWA). After Nigeria’s independence in 1960, the bank began to extend more credit to indigenous Nigerians. At the same time, citizens began to trust British banks since there was an ‘independent financial control mechanism and more citizens began to patronize the new Bank of West Africa.

In 1965, Standard Bank of South Africa acquired Bank of West Africa and changed its acquisition’s name to Standard Bank of West Africa. In 1969, Standard Bank of West Africa incorporated its Nigerian operations under the name Standard Bank of Nigeria. In 1971, Standard Bank of Nigeria listed its shares on the Nigerian Stock Exchange and placed 13% of its share capital with Nigerian investors. After the end of the Nigerian civil war, Nigeria’s military government sought to increase local control of the retail-banking sector. In response, now Standard Chartered Bank reduced its stake in Standard Bank Nigeria to 38%. Once it had lost majority control, Standard Chartered wished to signal that it was no longer responsible for the bank and the bank changed its name to First Bank of Nigeria in 1979. By then, the bank had re-organized and had more Nigerian directors than ever.

In 1982 First Bank opened a branch in London, that in 2002 it converted to a subsidiary, FBN Bank (UK). Its most recent international expansion was the opening in 2004 of a representative office in Johannesburg, South Africa. In 2005 it acquired MBC International Bank Ltd. and FBN (Merchant Bankers) Ltd. Paribas and a group of Nigerian investors had founded MBC in 1982 as a merchant bank; it had become a commercial bank in 2002.

In June 2009, Stephen Olabisi Oiiasanya was appointed Group Managing Director (CEO), replacing Sanusi Lamido Sanusi, who had been appointed governor of the Central Bank of Nigeria. Onasanya was formerly Executive Director of Banking Operations & Services.

1.10     DEFINITION OF TERMS

Bank: section 41 of Nigerian banking act of 1969 defined a bank as an institution that carries on banking business and includes a commercial bank an acceptance house, discount house, financial institution and merchant bank.

Banking: the section defined banking as the business of receiving money from outside source as deposits perspective of the payment of interest or the granting of bills and cheques or the purchase and sale of securities for account of other or the incurring of the obligation to acquire claims in respect of loan prior to their maturity.

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