EFFECTS OF FRAUD ON THE PERFORMANCE OF SELECTED BANKS IN NIGERIA

Abstract

This study focused on the effects of fraud activities on the performance of commercial banks in Nigeria. Specifically, the study sought to determine the extent to which bank loan fraud (LF), ATM (ATMF) fraud, cash theft (CTF) fraud and internet banking fraud (IBF) affect banks’ performance. Twenty-one (21) deposit money banks in Nigeria were purposively selected. Secondary data on these banks were obtained from the Nigeria Deposit Insurance Corporation (NDIC). The data were analyzed using both descriptive statistics and co-integration technique. The trend analysis demonstrates that the banks experienced the highest incidence of these four types of frauds in year 2008, the year when the highest negative amount of Profit Before Tax (PBT) was recorded. The Augmented Dickey-Fuller test for unit root revealed that only the PBT series was stationary at its level while the four fraud series i.e ATMF, IBF, CTF and LF were stationary after the first differencing. The co-integration test indicated five (5) co-integrating vectors at the 5% level of significance, which implies a long run relationship between PBT and all the included fraud variables. The short–run dynamics among the variables which was captured by the error correction model (ECM) revealed that about 99% of variations in PBT was accounted for by the included fraud variables. The results also revealed that ATMF and IBF displayed negative and statistically significant effects on banks’ performance. The response of PBT to the fraud variables was very fast as revealed by the speed of adjustment of about 95%. The implication of these findings is that two of the four included fraud variables namely; ATMF and IBF were the major fraud variables whose effects exerted heavy toll on PBT during the study period. There is therefore the need to strengthen internal control systems in Nigerian banks and the regulatory bodies should improve their supervisory and regulatory roles in order to check and curb the incidence of fraud in Nigeria’s banking industry.