Abstract

Fraud has become a worldwide problem that is not set to abate in the near future. It’s eroding the profitability of businesses with disturbing effects of solvency. The main objective which is to evaluate the extent to which fraud affects the performance of micro finance institutions in Buea municipality.

This research aims to contribute to the knowledge of fraud in banks with a focus on micro finance institutions. This research uses a sample size base on a survey of nineteen micro financial institutions. This study had a fundamental objective to attest relationship that exists between fraud and performance of MFIs in Buea.

Thought descriptive analysis and the use pearson’s correlation of analysis, the study finds that fraud has a positive association to the performance of MFIs. Constant audit checks of the financial statements would aid in avoiding the occurrence of fraud. Internal controllers should be instituted. Again, management should endeavor to provide its staff with all necessary remuneration packages, training and proper background checks that will motivate them to give their best.

But fraud may arise if the employee satisfaction requirements are not met. The government of Cameroon on her part can help the situation of fraud in organizations by strengthening law enforcement Institutions to fight fraud. This will go a long way to reduce the rate of theft, defalcations and forgeries suffered in MFIs in Buea.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Micro financial institutions (MFIs) in the European countries cannot withstand the growing pressure of competition among various banks in this countries due to the monster call bank fraud, If this act of fraud is not arrested, it might delete the resource and performance of the institution in the European countries because foreign investors might not find it wise to transact business via the micro finance institution and this will affect the institution performance drastically.

Micro finance in the African countries constitutes an incentive tool for micro and small enterprises that has little or no access to traditional financial system, as well as a source of credit for people and communities in need that do not have sufficient resources to access the traditional financial system. Without MFIs the sources of funds for this portion of the market would be limited to friends, family or loan shark, which restrict entrepreneurial capacity and affect the quality of life of the population (Soares & MeloSobrinho, 2008).

Furthermore, for any economy, especially Cameroon, to develop and grow the financial sector must be effectively solid, strong and efficient. The existence of an effective banking industry is a panacea to growing any economy. The pivot of any economic development is the financial sector through funds from surplus units to deficit units.

This also stimulates investment, economic growth and employment as well as international trade and payments. The plaid role significant by financial institutions is responsible for the importance accorded them by every economy of the world. Over the years the Cameroon banking industry has witnessed several reforms in search of an efficient and effective financial system (Owolabi, 2010).

Organizational performance is the major of how well the organization done the job (Stoner, Freeman &Gilberth, 1995). However, without sound financial performance, the sustainability of micro finance institution is not possible (Pankaj K Agarwal & S K Sinha, Delhi Business Review X Vol. 11, No. 2 2010). Increasingly, questions are being raised over the cost of funds for this enterprises and their ability to earn margin sufficient to cover their operational cost and still live on profit (Arsyad, 2005), it has been pointed out repeatedly that MFIs need to be economically viable and sustainable in the run long (Srinivasan etal. ,2006).

In fact studies have found linkage between the financial sustainability of micro finance institution and achievement of their social objectives. Low income customers are more likely to borrow from institution they see as financially viable (Zeller et al. , 2003). Fraud has remained one of micro finance biggest threat to it performance in the past years.

Fraud is a universal financial word. Its occurrence or perpetration is not limited to Cameroon. The incidence of fraud in the Cameroon micro financial institutions (MFIs) has assumed an alarming proportion of late(Uzoka,2001). With the deregulation of the banking system in the early 1980s, the pace at which MFIs were established increased in an unprecedented manner. Fraud is a global phenomenon that has been in existence for long.

Fraud is a deliberate act that causes a business or economy to suffer damages, often in the form of monetary losses. Fraud according to Adeniji (2014) and ICAN(2006) is an intentional act by one or more individuals among management , employees or third parties which results in a misrepresentation of the financial statement. Fraud in the banking system is a global l phenomenon and its growth in Cameroon economy has been astounding.

Fraud is the number one enemy of every business growth over the world and fraud has a great effect on the performance of every micro financial institution(MFIs). The fear now is that the increase rate of fraud in financial institution if not arrested pose certain threats to stability and survival of individual financial statements and the performance of the industry as a whole and there is no area in the economy that is immune from fraud and fraudsters (Nwankwo, 2005).

In addition, general poverty amongst the citizenry coupled with high degree of unemployment in the larger society made survival a herculean task. Corruption and other forms of vices became easily identifiable with Cameroon irrespective of their gender, social status and professional callings.

Under this dispensation, frauds have grown in scope, nature, methodology and dimensions as the MFIs advances. The rate, frequency and volume of financial losses have been a major source of concern to the regulatory agencies. Government and public statements have been issued because of these cankerworms, which has eaten the fabrics of the society. Unfortunately, the bane of society is agreed and the philosophy to get rich quick is now the order of the day.

According to Nwaze(2006), it will almost amount to an understatement to say that fraud has come to stay. It has been around since the beginning of time and would certainly continue to be an issue until the end of time. Fraud occurs in almost all facets of human endeavor. Employee dishonesty is as old as the work place itself. Fraud has assumed dimensions, albeit with increased sophistication.

Hence forgeries, deceit and other unwholesome practices have continued to be a way of life and the practitioners have flourished overtime at the expense of the larger society. Incidentally, banks especially MFIs are their major targets in recent times notwithstanding the increase use of technology in banking operations. No bank appears safe from the menacing epidemic.

Financial institution fraud generally bringing untold hardship on bank owners, staff, customer, and family members as must MFIs failures are always associated with large scale frauds (okoro, 2003). According to oseni(2006) the incessant fraud in the MFIs are getting to a level at which many stakeholders in the institution are losing their trust and confidence in the institution. Corroborating the view of oseni and idolo(2010) stress that the spate of fraud in Cameroon MFIs has lately become a source of embarrassment to the nation as apparent in the seeming attempt of the law  enforcement agencies to successfully tract down culprits.

Although the incidence of fraud neither limited to the banking industries nor peculiars to Cameroon economy fraud is everywhere even in the United States of America. However, the high rate of fraud in the micro finance institution calls for urgent attention with the viewing to find solution. Fraud in it effect reduces institution asset and increases it liabilities.

Fraud also has a great effect on management performance that is it reduces the institution profit; it also leads to unemployment, and also the liquidity of the institution. Fraud if not checked might cause run on in MFIs. The high turnover of fraud, theft, defalcation and forgeries in the MFIs is capable of undermine the performance, growth, development and stability of MFIs which at the moment seems to be doggedly affected the micro financial institution of the economy.

With regards to banking industry, it may endanger crisis of confidence among the financial institution, impede the going concern status of the bank and ultimately lead to bank failure (adeyemo 2012). Due to the pivotal roles of MFIs in the growth and economic development of any nation, it has become very necessary to protect this institution from fraudsters. Thus, the purpose of this research is to discuss from practical point of view how fraud can affect MFIs performance.

1.2 Statement of Problem

Micro financial institution generally has been experiencing fraud since it evolution. This affects the performance and profitability and management body of MFIs and may possibly lead to distress. The inability to identify the immediate and remote causes of continuous cases of bank fraud in MFIs in Cameroon is one of the problems brought to bare. Fraud is a major challenge to the entire banking industry. No bank is immune to it and in all facets of life (olorunsegun, 2010).

Though there were known cases of fraud in MFIs, one major question still remains unanswered which is What is the nature and different ways through which fraud can be perpetuated in MFIs. It is asserted by Adeyemo(2012) that fraud in the MFIs is possible with corroboration of an insider. MFIs are expected to ensure that they carry out their responsibility with sincerity of purpose which is devoid of fraudulent practices; this is relevant if the MFIs is to gain public trust and goodwill.

In Cameroon, in spite of the banking regulations and bank examination by the central bank of Cameroon there are still cases of fraud in MFIs. It is vital to an organization large or small, to have fraud prevention plan in place. According to the 2014 reporting to the nation on occupational fraud and abuse (copyright 2014 by the association of certified fraud examiners) research shows that the typical organization losses 5% of it revenue each year due to employee’s fraud.

The fraud cases studied in the association of certified fraud examiners (ACFE 2014) revealed that the fraudulent activities studied lasted for a year and a half there by having an effect on the performance and also management of the institution. For fraud to occur it must have been prompted by the negligence of some institution vital policies.

Furthermore, the causes of fraud like weak internal control systems can enable theft of assets which will negatively reduce the bank’s capital base, poor management practices lead to poor supervision of employees thereby leading to laxity and loss accountability enabling them to commit fraud undetected. Employees collusion with customers like overvaluing securities given as guarantee for loans and clearing of fraudulent cheques, which increase fraudulent loan been given to customers and increases cheque fraud, thereby reducing the profitability of MFIs and affecting the organization performance negatively and increasing bad debt of the institution. Luckily there are some mitigation taken to prevent fraud in MFIs.

These measures are know your employees, make employees aware/set up reporting systems, implement internal control systems, monitor vacation balances, hire experts, live the corporate culture, reduce the theft of assets, laxity in the performance, supervision of employees and proper customer care.

In addition, there should also be a detection method in place and make them visible to employees. According to managing the business risk of fraud: a practical guide, published by (ACFE), the visibility of these controls acts as one of the best deterrent to fraudulent behavior. it is important to continuously monitor and update your fraud detection strategies to ensure they are effective. This will in turn translate to better performance of employees, an increase in customers and the long run increase in profitability of the micro finance institution.

Hiring competent personal to manage the affairs of the bank, this reduces chances of fraud caused by poor management practices hence increasing the performance of the institution. Despite all the measures given above to prevent fraud in the MFIs, fraud has still been a main problem in the performance of micro financial institution (MFIs). All this problems bring forth research on effect of fraud on the performance of micro financial institutions in the Buea municipality.

1.3 Research Questions

1. What is the effect of fraudulent money transfer on the profit of micro financial institution (MFIs) in Buea municipality?
2. What is the influence of unauthorized withdrawal on the profit of micro financial institution (MFIs) in the Buea municipality?
3. To what extent do theft and embezzlement affect the profit of micro finance institutions (MFIs) in the Buea municipality?
4. To what extent does the unauthorized use of credit or debit cards affect the profit of micro-financial institutions in Buea municipality?

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