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.
(i)               
How organized are the institution under
the informal financial institutions?
(ii)            
How effective are the operation of
informal financial institutions?
(iii)          
What are the various factors responsible
for the increasing trend in fraud in informal financial institutions.?
(iv)          
What are the various ways of
perpetrating fraud?
(v)            
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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