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FRAUDS IDENTIFICATION, PREVENTION & CONTROLS IN MICROFINANCE BANKS |
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Keen observers of developments in microfinance banks as published by some Nigeria dailies would have noted a disturbing frequency of reports of incidence of frauds in the financial institutions sub-sector. THISDAY in its publication of April 22, 2010 captioned ‘EFCC Arraigns 6 Bankers over N12.6m Fraud’’ reported that the anti-fraud Agency has arraigned six former bankers at an Abuja High Court for making fraudulent withdrawals from the accounts of six customers of Fortis Microfinance Bank Limited. Daily Sun on July 09, 2009 reported that some victims groan as thousands of depositors of Green House Microfinance, were swindled of millions of naira, leaving the victims in penury. In another report published on April 21, 2010 by Microfinance Africa, five members of an unnamed microfinance bank in Lagos were arrested by detectives of the Special Fraud Unit [SFU], of the Nigeria Police for defrauding customers to the tune of N60million. These are just few of reported cases while most of the frauds in the sector were largely unreported. |
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The increasing incidence of frauds and the relatively large amounts involved, pose great challenges to the survival and viability of the financial sub-sector. Thus the need for the stakeholders to have a good understanding of what constitute frauds, how they are committed or perpetrated, and the preventive and control measures to put in place to guard against their perpetrations cannot be over-emphasized. |
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Frauds Definitions & Identifications |
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Fraud has been defined as a deception deliberately practiced in order to secure unfair or unlawful gain. It is a deceit, trickery, sharp practice, or breach of confidence, perpetrated for profit or to gain some unfair or dishonest advantage . Frauds manifest in different ways. For microfinance banks, the nature of their daily transactions which is highly involving in cash make them highly susceptible to frauds in thefts and embezzlement; defalcation of customers deposits; suppression of cash lodgments; forgeries of signatures; and abuse of IOU’s. Other forms of frauds to which their operations are exposed include un-authorized lending; misuse of suspense accounts; fraudulent use of bank documents; and over-invoicing of purchases among others. |
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Causes & Effects of Frauds |
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Frauds are caused or succeeded in a banking environment due largely to failure of or inadequacies in internal control processes. Fundamental weaknesses that facilitate commitment of frauds include bad management symbolized by incompetence, inadequate supervision, poor leadership, inadequate controls, lack of proper co-ordination of the various operational activities, corruption and ineptitude. Others include faulty personnel policies of the financial institutions, lack of or ineffective corporate governance, staff infidelity, lack of self discipline, greed, and societal factors. |
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The adverse impacts of frauds on banks could be very damaging to the operational activities and the image or reputation of the financial institutions. The effects include erosion of the bank’s capital, and where severe may lead to liquidity deficiency and insolvency. Indeed it could precipitate a run on the bank and may lead to its eventual liquidation. For the staff of the institutions concerned, the bank failure could lead to destruction of their career and loss of jobs, while the closure of the banks may lead to loss of banking services to the communities where the closed bank is located. For the bank depositors, the loss of their deposits could lead to loss of their life savings, and unexpected decline in their standard of living. |
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Frauds Prevention & Controls |
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Fraud can be prevented and effectively controlled in order to ensure continued and profitable survival of financial institutions. An effective fraud prevention and control mechanism in banks starts at the top, at the board of directors level. The board through its policies and demonstrated practices is expected to send strong signals to the management and staff on its zero-tolerance for frauds and other malpractices that may damage the bank. The board must also show good example by demonstrating at all times that its corporate governance practices abhors insiders abuses in any form; particularly regarding granting of credits to its members and their related parties. The members must also monitor strict adherence to lending policies, and ensure there are no abuses in procurement and expenditure authorization procedures. Most importantly, the board should sanction any infractions of its corporate governance code by its members. It is also the board responsibility to create enabling environment for unhindered performance of internal audit functions by adequately empowering the department while the Head is given independence to report directly to the board, or its committee. |
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It is the management responsibility to ensure strict adherence to operational manual, monitor effective compliance with internal control procedures, have good knowledge of individual staff life styles, monitor observed changing behavioral pattern, and not ignore any alert from whistle blowers. Management must institutionalize job segregation and rotation procedures, while staff must go on annual vacation as due. Good human resource policies that create an environment for competitive remuneration, fairness in decision making, stability in employment, and fair reward for good performance also go a long way to minimize commitment of frauds. There should be adequate supervision of staff, snap and surprise checks on cash and other sensitive operation areas, daily balancing of accounts and call-over of daily transactions, while periodic proofing of all account balances should be part of established routines. |
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