Nigerian banks and financial institutions should tighten their controls and risk management system in view of rising cases of electronic fraud in the country as recently advised by a consulting firm. The advice was contained in a report by H. Pierson Associates, a consulting firm with specialisation in risk management, advisory and talent management.
The report also confirmed a recent assessment of e-fraud and forgery cases in the banking sector by the Central Bank of Nigeria (CBN) and the Nigeria Deposit Insurance Corporation (NDIC). According to the CBN “Draft 2018 Half Year Economic Report”, commercial banks in the country lost a total of N12.06 billion to fraud and forgery in the first six months of 2018. The report also revealed that there were 20,768 reported cases of fraud and forgery valued at N19.77 billion during the period under review, compared with 16,762 cases, involving N5.52 billion and $0.12 million in the corresponding period of 2017.
Reacting to the CBN report, H. Pierson Associates stressed the need for improved corporate governance in Nigerian banking sector and other financial institutions. Besides, the consulting firm advised that the banks should be mindful of staff quality control at recruitment. It is also said that other soft considerations such as ethics, character, competence, among others, should be properly evaluated. This is necessary because some of the electronic fraud and forgery cases were perpetrated by banks’ staff. An earlier report by NDIC showed that the number of e-fraud and forgery cases attributed to insider abuse had been on the increase. A total of 26,132 of such cases were recorded in 2017. The NDIC report relied on 286 responses received from 26 banks during the period.
Most of the fraud cases were facilitated through Automated Teller Machines (ATMs). This, therefore, makes it more imperative for banks to tighten their internal control and risk management systems. Based on the CBN, NDIC and H. Pierson Associates reports, there is need for increased vigilance and stricter regulation and supervision by the relevant government agencies.
It is not in doubt that weak security infrastructure and insufficient internal controls can lead to rising cases of electronic fraud in this age of cybercrime. Apart from the huge financial loss to customers, financial institutions and the economy, online fraud also damages the financial system’s reputation and increases the risk of participating in its offering. Electronic fraud can be regarded as a threat to the attainment of the financial inclusion target of 20 percent of Nigerians by 2020.
We, therefore, urge the banks to take pragmatic steps to tighten their security systems, keep abreast of cyber-security issues and deepen their operational risk culture through quality training. There is also need for the banks to adopt appropriate fraud risk technology that must include multi-layered security structures and traditional cross checks of unusual payments with customers. Some of the banks, particularly the smaller ones, are yet to have advanced risk-based internal audit, according to the 2019 Outlook for African banks by Moody’s Investor Service, one of the leading global rating agencies. According to the agency, this makes the smaller banks vulnerable to internal and external frauds.
The commercial banks should heed the CBN’s warning to guard against emerging risks in the financial system as the sector’s resilience is receding. At its Monetary Policy Committee (MPC) in September, the CBN expressed worry over rising Non-Performing Loans (NPLs) ratio in the sector, driven largely by oil sector exposures. Moody’s report also confirmed these concerns, and stressed that capital outflows across emerging markets, including Nigeria, could significantly harm African banks’ loan quality. However, Nigerian banks have relatively stable outlook when compared with many African countries, because of the improved foreign currency liquidity and rising loan quality.
Nonetheless, banks and other financial institutions must come up with measures to check the rising cases of e-fraud and forgery in the sector.