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FRAUD AND ITS CONTROL IN THE NIGERIA INFORMAL FINANCIAL INSTITUTION (A CASE STUDY OF SELECTED COOPERATIVE SOCIETIES IN EKITI STATE)

ABSTRACT

The problem of fraud in the Nigeria informal financial institution has been a source of concern it industrialists, financial analyst, academic and more importantly the government in the recent times.

It is therefore a statement of facts that most informal institutions in Nigeria have one time or the other experienced this fraudulent practices. A good internal control system in used for controlling and detecting the problem of travel.

The focus of this study, therefore is to examine the role of internal control system in fraud control in informal financial institution in Nigeria.

The basic method employed to generate data relevant into this study was the use of relevant texts journal as well as questionnaire. Eighty questionnaires were sent to the selected informal financial institution in Ekiti State out of which seventy-one (71) questionnaire were returned. The sample of the study beyond on simple random sampling technique and the chi-square method was also used to test for the hypothesis thereof. The institutions selected for the study was ASUU Cooperatire Soceity, Ado-Ekiti Cooperative Society, Agency Cooperative Society, Ado-Ekiti Taxi Cooperative Society and Amuludun Cooperative Society.

The major findings is that the effectiveness and efficiency of the internal central system only would not prevent the incidence of fraud.

In conclusion, improvement of the internal control system will not reduce fraud and therefore a multi-dimensional strategy is recommended.

ABSTRACT

The problem of fraud in the Nigeria informal financial institution has been a source of concern it industrialists, financial analyst, academic and more importantly the government in the recent times.

It is therefore a statement of facts that most informal institutions in Nigeria have one time or the other experienced this fraudulent practices. A good internal control system in used for controlling and detecting the problem of travel.

The focus of this study, therefore is to examine the role of internal control system in fraud control in informal financial institution in Nigeria.

The basic method employed to generate data relevant into this study was the use of relevant texts journal as well as questionnaire. Eighty questionnaires were sent to the selected informal financial institution in Ekiti State out of which seventy-one (71) questionnaire were returned. The sample of the study beyond on simple random sampling technique and the chi-square method was also used to test for the hypothesis thereof. The institutions selected for the study was ASUU Cooperatire Soceity, Ado-Ekiti Cooperative Society, Agency Cooperative Society, Ado-Ekiti Taxi Cooperative Society and Amuludun Cooperative Society.

The major findings is that the effectiveness and efficiency of the internal central system only would not prevent the incidence of fraud.

In conclusion, improvement of the internal control system will not reduce fraud and therefore a multi-dimensional strategy is recommended.                                                                                                                              
TABLE OF CONTENTS

Title Page

Certification

Dedication

Acknowledgements

Abstract

Table of Contents

CHAPTER ONE: INTRODUCTION

1.1     Background of the Study

1.2     Statement of the Problems

1.3     Research Questions

1.4     Significance of the Study

1.5     Objectives of the Study

1.6     Research Hypothesis

1.7     Scope and Limitation of the Study

1.8     Definition of Terms

1.9     Organization of the Study

 CHAPTER TWO: CONCEPTUAL ISSUES

2.0     Introduction

2.1     Conceptual Background

2.2     Causes of Fraud

2.2.1  Types and Nature of Fraud In Financial Institutions

2.3     Fraud Control and Prevention

2.3.1  External Audit

2.3.2  Internal Control

2.4     Empirical Literature Review

2.5     Theoretical Literature

2.5.1  The Evolution of Informal Information

Financial Institutions

2.5.2  Forms of Informal Financial Institutions

2.5.3  Organization, Management and Operation of Information

Financial Institutions

2.4.3.1 Revolving Association (Esusu Group)

2.4.3.2 Periodic Collection (Ajo)

2.4.3.3 Local Money Lenders

2.4.3.4 Thrift and Cooperative Societies

CHAPTER THREE: RESEARCH METHOD

3.0     Introduction

3.1     Study Location/Study Area

3.2     Research Designs

3.3     Population of the Study

3.4     Sample and Sampling Technique

3.5     Research Instrument

3.6     Research Methodology

3.7     Validity and Reliability of the Instrument

Validity of the Questionnaire

3.8     Method of Data Collection

3.9     Method of Data Analysis

3.10   Limitation of Research Methodology

CHAPTER FOUR: DATA PRESENTATION, ANALYSIS AND      

   INTERPRETATION

4.0     Introduction

4.1     Analysis of Question

4.2     Analysis and Testing of Hypothesis

4.3     Implication of the Findings

CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSIONS AND

RECOMMENDATION

5.0     Introduction

5.1     Summary

5.2     Conclusion

5.3     Recommendations

Reference

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CHAPTER ONE

INTRODUCTION

1.1     BACKGROUND OF THE STUDY

Fraud, according to Ogwuma (1999), is any unlawful attempt or act through which directors, management staff or customers of any financial institutions or outsiders seek to gain a dishonest advantage over the institutions.

Fraud was defined according to Audit commission code practice (1983) as any international misrepresentation of financial information by one or more individuals among management, employees or third parties.

The Nigerian banking industry, though is one of the most profitable within the economy, higher performance could be attained in terms of their private returns and obligations to the society, which must be so if it is to perform a lending role in reactivating the economy. The sub-optimal performance of the Nigerian and the banking industry is due to an array of problem. Of these problems the issue of fraud in banks is one of the most intractable and monumental.

Fraud is a major economic crime perpetrated in our financial institutions, it has become persuasive as fraudsters become more sophisticated and during in theirs approaches.

This nefarious activity could lead to and has actually led to crisis and collapse of many financial institutions worldwide. The increasing waves of fraud in the Nigerian banking sector may not be unconnected with the interplay of two or more of such problems as poor internal control system, inadequate manpower training as well as unsuitable legal framework for dealing with offenders which pervades most financial institutions.

In addition to these, the lack of commitment on the part of staff and the employment policies of some banks tend to make fraud very attractive. Since the economic growth and development of any country depends on the efficiency, effectiveness and stability of the financial sector, then the issue of fraud that tends to affect bank stability, safely and soundness should be of concern to both the public and the regulatory authorities such as central bank of Nigeria (CBN). Specifically, the NDIC is charged with the responsibility of protecting depositor. Accordingly, section 39 and 40 of the NDIC decree No 22 of 1988, required the insured banks in Nigeria to render to the corporation monthly returns on frauds forgeries or outright that occurring during such months and to notify the corporation of any staff dismissal or termination of their appointment.

Fraud control, however refer to fraud prevention and detection. In every organization, especially financial institutions be it formal or informal, internal audit is the operatives used in fraud prevention and detection.

Internal auditing however is the aspect of accounting which entails the use of employees of enterprises for the purpose of checking and monitoring the financial operatives of the organization, unlike external auditing, the internal auditor is said to be the eyes of the chief executive of the organization.

Management is not an activity that exist on its own right. It is rather a description of Varity of activities carried out by those members of the organization whose role is linked to that of the manager i.e some who has formal responsibilities for the work of at least one other in the organization . The activities carried out by the management have generally been grouped in term of planning, motivating and control activities.

The principal concern of this project is how management of banks and other financial institution in Nigeria. As a result of these anomalies many banks have gone into liquidation while some of the banks could not stand on their “fect” and operate in the modern world.

Financial and non-financial institutions has always been associated with some degree of financial malpractices. This should not be surprising on view of the fact that money and near monies are the stock in trade in the institution. But the fact of been associated has nevertheless “Curb” the incidence of financial malpractices in the banks as well as in the non-financial institution.

The Nigerian society is complicated with the desire the get rich quickly so as to be recognized by all, an average Nigerian believes that wealth is the measure of power and important employees well as clients of forms in all institutions engage in fraudulent practices all over the world. The existence of the fraud in financial institutions is not an uncommon phenomenon, hence it is worrisome because of all the various problems militating against the institution in Nigeria today, fraud the most intractable

More often than not, financial malpractices in the institutions do lead to loss of money. Money that ordinarily belong to others than the institutions. The loss in some cases result in reduction of level of resources available for use in the operation of the institution is crippling and this eventually rob the intuitions of the customers confidence and patronage

More so, frequent occurrence of fraud in the institutions ultimately distracts the attentions of management and leads to an increase in the running cost, time and energies would be expended on preventing financial malpractices in the institution

In view of these, fraud has become the number one enemy to all concerned with the growth and development of financial system in Nigeria. Many banks and non financial institutions have become distressed and taken over the central bank of Nigeria (CBN) in an effort aimed at saving the entire financial system from collapsing.

An effort in view to tighten these anomalies is most desirable. It is in light of this that I am undoubtedly convinced that management control system for the prevention and detection of financial malpractices (Fraud) in our financial institutions and non-financial institutions is a welcome disclosure.

However, for any management to achieve that goal, fraud control must be built into the system meanwhile, unlike the formal financial institution non-formal financial intuitions, though, pot all cases suffer such much more distresses equal to varying frauds.

As it were, mainly the operation of co-operative societies (thrift, credit and loans) our based on trust, membership of the institution is by agreement and may or may not be in a written form. The main functions or objective of cooperative societies (thrift, credit and loans) is to raise investment finance.

Fraud has become a very serious problem in our financial institution. Ebhoghe (1995) informed us that over five years period i.e 1989-1993, for instance, fraud cases in the banking system involved as much as N3.10m. These crimes are perpetrated mainly through the clearing system and electronic fraud transfer.

Meanwhile, it should be mention that as much as we have reported cases of fraud in banks and other financial institutions, it is not so with non financial institutions, fraud are not so reported, non reported cases of fraud is spurred by fear of bad publicity, inadequate evidence, and time and cost involved in the prosecution.

Usually, cooperative societies come into existence as customer/owners to provide a high standard of honest reputable joint business for the mutual benefit of the owners/users. Thrift credit and loans are owned by members of the societies and they are usually managed by committees who are elected by shareholders / customers as the case may be. Members of the societies pay an agreed sum of money into a common fund. The fraud generated is what is disbursed as loans to members at a certain interest rate. Cooperative societies (thrift, credit and loans) could better be described as a saving club and its membership is usually among traders, artisans and peasant farmers.

Fraud prevention involved more than merely carefully design fraud control policies, it also involves putting in place effective accounting and operational control and the maintenance of ethnical climate that encourages staff at all level to actively participate in protecting public and private money and property.

This study attempt to raise awareness on fraud and its control in the Nigerian informal financial institution with the focus on cooperative societies (thrift, credit and loans) in the conduct of this research work, it is bored in mind that fraud prevention plans vary from one organization to another.

The fact that all cooperative societies have not gone into oblivion, shows that a fraud control system is in place, so this study shall find out how frauds are being controlled in an informal financial institutions.

Nevertheless, the study takes into consideration in contributing to fraud challenges and problems in the cooperative societies, the peculiarity of informality and traditionalism of the institution.

1.2     STATEMENT OF THE PROBLEMS

There is no gain saying that the problem of fraud has assumed an alarming rate in Nigeria. Given the unsavory consequences that normally result from such incidence of fraud particularly with regard to the dislocation in the economic and social lives of the nation. It becomes pertinent that a pragmatic approach should be adopted with a view of putting the menace of deviant behaviour under check.

In this regard, this research work is primarily concerned with how the internal control mechanism existing within the informal financial institution in Nigeria can be reinforced in order to be able to address this issue of fraud in as systematic manner.

By this, it is hoped that a conducive business climate would be created for the thriving of the informal institution. On many occasions, the weak nature of the internal control system of these institutions has been blamed for reported cases of fraud in the institutions.

Given the negative effects of this problem on the nation and institution, particularly with regard to decrease in natural productivity and wealth in a situation where the unfortunate institution are forced to fold up, it therefore become imperative that a pragmatic step be taken far checkmating this menace for the sake of posterity.

1.3     RESEARCH QUESTIONS

In attempt to examine the effect of fraud and its control in the Nigeria informal financial institutions, it is worthwhile to answer the following questions.

  • How organized are the institution under the informal financial institutions?
  • How effective are the operation of informal financial institutions?
  • What are the various factors responsible for the increasing trend in fraud in informal financial institutions.?
  • What are the various ways of perpetrating fraud?
  • What necessary measures can actually be taken to curtain the activities of fraudsters?

 

1.4     SIGNIFICANCE OF THE STUDY

The research work is beneficial to various interest group. It is expected to provide useful information to the financial experts, government policy formulators and general public. It is of great benefit to those depending on the institutions in particular and for the overall development of the nation in general. It is of great benefit to the CBN that would supervise and coordinate the activities and operation of the informal financial institutions and this would involve the formulation of the appropriate legal framework for the sector. It will expose to general public various institutional policies adopted by the regulating authorities on the performances of the informal financial institutions such as issuing of license, registration and appropriate interest rate. Finally, it will be of reference value to the educational researchers, the banking and finance students, business administration and accounting, insurance and marketing in higher institutions of learning who will find the material for inclusion is assignment and term paper.

1.5     OBJECTIVES OF THE STUDY

The main objective of the study is to empirically investigate the impact of fraud on the performance of the informal financial institutions while specific objectives are into;

(i)      Appraise the effect of fraud on the informal financial institutions and loan administration in the sector and it recovery.

(ii)     Evaluate the problems facing informal financial institutions with the hope of solving it.

(iii)    Evaluate logical deduction aimed at alleviating the incidence of fraud in the Nigeria informal financial institutions.

(iv)    examine the legal measure against any body involve in fraud.

1.6     RESEARCH HYPOTHESIS

This study is strictly based on making a field research, which involve the use of journals, tables and testing hypothesis. In this study, the following hypothesis are stated as follows:

Ho         (NULL HYPOTHESIS): Fraud has no impact on the performance of the informal financial institutions.

Hi      (ALTERNATIVE HYPOTHESIS):- Fraud has impact on the performance of the informal financial institutions.

Ho      (NULL HYPOTHESIS):- Regulation of informal financial institution will reduce fraud.

Hi          (ALTERNATIVE HYPOTHESIS:- Regulation of informal financial institution will not reduce fraud.

1.7    SCOPE AND LIMITATION OF THE STUDY

The study is specially directed to the informal financial institution, which can be used as a benchmark for other financial institutions.

The scope of the study focuses on the fraud in informal financial institutions and how is been controlled.

It is a fact that the role played by this sector in the overall development of the nation cannot be under estimated. Since this research work cannot examine the issue of fraud as it affect all the informal institutions in Nigeria due to time and resources constraints effort would be made to narrow the scope of the study to four (4) informal financial institutions in Ekiti State

It is therefore, hope that the contribution of this research work to the existing frontier of knowledge of the problem under study would be consolidated upon future scholars.

1.8     DEFINITION OF TERMS

Management – Daft (1997) in his book described management as attainment of organization goals in an effective and efficient manner through planning, organizing, leading and controlling organizational resources. It is the process of coordinating effectively both financial and human resources.

Cooperative society – Ejifor (1989) in his book defines cooperative society as an association of personnel faced by the same economic problems, who voluntarily pool their resources on the basis of equity through joint effort and mutual participating to redeem their plight.

Fraud – Adewunmi (1986) defines fraud as a “conscious predetermined action of person or group of person with the intention of altering the truth or fact for self personal monetary gains”. It involves the use of deceit tricks.

“Forgery can be defined as the crime of counterfeiting handwriting documents, scheque draft, currency notes and other various negotiable instruments”.

Informal institutions – it consists of the activities of indigenous institutions and individuals such as money lenders, pawn brokers, landlord, merchant and traders, friends and relatives.

1.9     ORGANIZATION OF THE STUDY

The research work is in chapter format, it has five chapters. The first chapter deal with the introductory parts of the study which focuses on the background of the study, the problem statement, research questions, significance of the study, objectives of the study, research hypothesis, scope and limitation of the study and organization of the study. While chapter two we seek to put the study in perspective by review of related literature and conceptual issues. Chapter three addresses the methodology aspect of the study in details as it shed more light on data analysis, nature of data, in chapter four, we present and interpret the empirical result and the last chapter summaries, conclude give the appropriate policy recommendations.

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Updated: September 20, 2017 — 1:31 pm

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