1.1.1 Background to the Study

Fraud has been in existence throughout history and has taken many different dimensions. Bank fraud has grown with advent of the banking industry, and has been facilitated by the technological innovations and the widespread use of the Internet. According to the fraud triangle (Cressey, 1973), for fraud to occur the three factors; pressure, rationalization and opportunity should be present. Bank employees have knowledge of the systems as well as classified and confidential information which together with technological advancement can give them the opportunity to commit frauds. All they need is some pressure and the rationalization and that way they become part of fraud cartels that are fleecing millions of shillings from the banks.

According to a report by consultant firm, Deloitte Nigerian banks were victims of more than half the Sh4.1 billion ($48.3 million) fraud that hit East African banks in 2012 as technology made the crime easier. At least Ksh1.5 billion ($17.64 million) was stolen from Nigerian banks in the past one year, in schemes hatched by technology-savvy bank employees. This can be attributed to failure by both the bank processes and the employees to detect and control fraud. Security experts say the amounts reported reflect only a small portion of the real losses suffered since banks prefer internal disciplinary measures in cases involving thieving employees (Kimani, 2013).This means that banks should be on an alert and should also revise their controls to keep up with fraud and technology. Information Communication Technology

Information technology has been around for a long, long time. Basically as long as people have been around, information technology has been around because there were always ways of communicating through technology available at that point in time. ICT has transformed the lives of people as well as organizations .It is no surprise that ICT revolution has proven a powerful source for creative vision by utopian thinkers the world over. The reach ICT around the world has been expanding for decades. The recent past has seen particularly rapid rollout of access to communication facilities like telephones and the Internet, as technology advance has driven down costs (Nyokabi, 2012). Like other countries Nigeria has recognized the potential and enabling element of ICT as a tool for social and economic development.

ICT is increasingly seen as a means of enabling other developmental needs rather than as an end in itself hence some types of financial innovation are driven by improvements in ICT. Woherem, (2000) claimed that only banks that overhaul the whole of their payment and delivery systems and apply ICT to their operations are likely to survive and prosper in the new millennium. He recommends that banks should re-examine their service and delivery systems in order to properly position them within the framework of the dictates of the dynamism of ICT.

  1. Fraud

Fraud is an intentional deception made for personal gain to damage another individual. It is a crime and is also a civil law violation. Many hoaxes are fraudulent, although those not made for personal gain are not technically frauds (Wanemba, 2011). According to The American Heritage Dictionary, (Second College Edition), fraud is defined as “a deception deliberately practiced in order to secure unfair or unlawful gain”. In a nutshell, “Fraud always involves one or more persons who, with intent, act secretly to deprive another of something of value, for their own enrichment”(Davia et al., 2000). Wells, (2005) also stresses deception as the linchpin to fraud. Defrauding people of money is presumably the most common type of fraud, but there have also been many fraudulent discoveries, in art, archaeology, and science.

Bank fraud on the other hand, is the use of fraudulent means to obtain money, assets, or other property owned or held by a financial institution (Glaessner and Mass, 1995). Bank fraud is a crime that has been around for as long as banks have been in operation. Anytime there is a large amount of money floating around, there will be people trying to figure out ways of getting it. Fraud can be committed through many methods, including mail, wire, phone, and the internet (computer crime and internet fraud). The difficulty of checking identity and legitimacy online, the ease with which hackers can divert browsers to dishonest sites and steal credit card details, the international dimensions of the web and the ease with which users can hide their location, all contribute to making internet fraud the fastest growing area of fraud. Estimates are that just twenty percent of frauds are exposed and made public. The remaining frauds are either undetected or discovered and not made public because of reputation risk (Bartlett and Ballantine,

2002). Leuchtner, (2011) identified the common fraud schemes in banks as general ledger fraud, identity theft, account takeover and collusion with external criminals.

Apoorva and Juhi , (2007) defined bank fraud as a deliberate act of omission or commission by any person carried out in the course of banking transactions or in the books of accounts, resulting in wrongful gain to any person for a temporary period or otherwise, with or without any monetary loss to the bank. They concluded that bank frauds are the failure of the banker and mentioned the major elements responsible for the commission of frauds in banks; active involvement of the staff-both supervisor and clerical either independent of external elements or in connivance with outsiders, failure on the part of the bank staff to follow meticulously laid down instructions and guidelines and external elements perpetuating frauds on banks by forgeries or manipulations of cheques, drafts and other instruments. There has been a growing collusion between business, top banks executives, civil servants and politicians in power to defraud the banks, by getting the rules bent, regulations flouted and banking norms thrown to the winds.

1.1.3Effect of ICT Utilization on Fraud

The banking industry has witnessed tremendous changes linked with the developments in ICT over the years. The ICT infrastructure used in banks includes internet access, internal networks and automated payment systems e.g. Automated Teller Machine (ATM), Real Time Gross Settlement (RTGS), Electronic Funds Transfer and cheque truncation. Internet access is a precondition for e-Business as it is the main channel for e-banking. The general availability of Internet allows for the analysis of overall ICT-readiness in the Banking Industry. Products that rely on the internet include both internet and mobile banking.

The application of networks is also vital part of an effective ICT-enabled system, which is

especially true in the case of banks with a branch network. Local Area Network (LAN) may also

be seen as a basic indicator of the minimum infrastructure required to enable banks to conduct e-

banking at a substantial level. Wire-based LAN is currently the dominating technology. Wireless

LAN is a relatively new technology in the Banking Industry, and is used to permit bank

employees to access network resources from nearly any convenient location. Instant notification

of transactions made is another innovation brought by ICT through the use of smart phone in


conjunction with the internet facility in the Banking Industry. There has also been the digitalization of formerly paper-based processes. Electronic mail is increasingly being applied for especially non-legal correspondence like account statements, marketing and sales (Agboola, 2001).

The security issue which is the basis of ICT related fraud is of special concern in the Banking Industry, as banking is highly based on trust from its customers. The risk of hackers, denial of service attacks, technological failures, breach of privacy of customer information, and opportunities for fraud created by the anonymity of the parties to electronic transactions can be managed by enhancing security of information. Depending upon its nature and scope, a breach in security can seriously damage public confidence in the stability of a financial institution or of a nation's entire banking system. By introducing the appropriate security measures and putting security concerns at ease, banks might be able to attract the segments among consumers who previously were not inclined to use e-banking. Furthermore, it is also in the banks’ own interest to improve security, as digital fraud can be costly both in financial losses, and in terms of the damage it does to the brand of the bank in question. The common concern among users of e- banking is related to the authentication of users and data connections. This includes the use of digital signatures, PIN codes and encryption (Agboola, 2001).        Commercial Banks in Nigeria

A commercial bank is a type of financial intermediary and a type of bank. Commercial banking is also known as business banking. It is a bank that provides checking accounts, savings account, and money market accounts and that accepts time deposits. It raises funds by collecting deposits from businesses and consumers via checkable deposits, savings deposits, and time (or term) deposits. It advances loans to businesses and consumers. It also buys corporate bonds and government bonds. Commercial banks’ primary liabilities are deposits, and the primary assets are loans and bonds.

The banking industry in Nigeria is governed by the Companies Act, the Banking Act, the Central

Bank of Nigeria Act and the various prudential guidelines issued by the Central Bank of Nigeria

(CBK). The CBK, which falls under the Minister for Finance’s docket, is responsible for

formulating and implementing monetary policy and fostering the liquidity, solvency and proper


functioning of the financial system. The CBK publishes information on Nigeria’s commercial banks and non-banking financial institutions, interest rates and other publications and guidelines. The banks have come together under the Nigeria Bankers Association (KBA), which serves as a lobby for the banks’ interests and also addresses issues affecting its members. (Central Bank of Nigeria, 2013)

There are forty-three banks and non-bank financial institutions, fifteen micro finance institutions and forty-eight foreign exchange bureaus. Six of the major banks are listed on the Nairobi Securities Exchange. The commercial banks and non-banking financial institutions offer corporate and retail banking services but a small number, mainly comprising the larger banks, offer other services including investment banking.

1.1.2 Statement of the Problem

Bank fraud has grown with advent of the banking industry, and has been facilitated by the technological innovations and the widespread use of the Internet. The main driver of financial innovations in banks is adoption of ICT. It enables banks to develop sophisticated products, implement reliable techniques for control of risks and to reach geographically distant and diversified markets. On the other hand, a pre-condition for ICT adoption is proper risk management including fraud risk. The risk management framework cannot fully address the risk of fraud because it involves collusion between several parties. As technology advances fraudsters have also become technologically savvy. The speed at which some bank transactions are effected has rendered it almost impossible to detect fraud. Banks are rapidly adopting the Real Time Gross Settlement (RTGS) which processes amounts above one million shillings on a real time and gross basis. This may be a challenge because fraud on such transactions is noticed after it has occurred.

Scholars have different opinions on IT and fraud. Kariuki, (2005) agreed that ICT has positive impacts on the banking performance in commercial banks in Nigeria. However, Apoorva and Juhi, (2007) were of the opinion that the losses sustained by banks as a result of frauds exceed the losses due to robbery, burglary and theft-all put together. Nigerian banks have not been spared as theft in banks has shifted from robbery and burglary to the technology related fraud. Such fraud is perpetrated by employees within the bank, outsiders or even both employees and outsiders in collusion.

Wanjiru, (2012) studied the strategic responses to increasing fraud related risks while Wanemba, (2010) tried to establish the challenges of fraud faced by commercial banks in Nigeria and to identify the strategies that commercial banks use to combat fraud. Sitienei, (2012) carried out a study to determine the factors influencing credit card fraud in the banking sector. No study has been done on the effect ICT utilization on fraud losses. This research sought to answer the question; what is the relationship between ICT utilization and fraud losses in commercial banks in Nigeria?

1.1.3 Objective of the Study

The objective of the research was to examine the relationship between ICT utilization and fraud losses in commercial banks in Nigeria.

1.1.4 Significance of the Study

The study will open up and increase the knowledge in the area of bank fraud. It is an important topic especially in Nigeria because it will help the banking sector to realize that the technological advancement in the country calls for advancement in fraud control and detection skills especially in banks that can be said to highly computerized. Such technology has increased fraud in banks hence the need to invest more in detecting and deterring it instead of trying to suppress the number of fraud and theft-related cases that they file at the High Court.

Other commercial organizations can rely on the results to identify how they can enhance their control environment. Since ICT cuts across the whole economy, other organization will understand that as ICT advances, there is need to focus on fraud prevention, detection and control in order to reap the positive benefits of ICT.

Researchers and scholars can use the findings from this study as a basis for future research on the fraud and ICT challenges.

The government can rely on the findings of this study to formulate the relevant laws relating to fraud. It can also set up the legislation relating to adoption and implementation of ICT.