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OUTSOURCING POLICY AND EXTENT OF FRAUD IN DEPOSIT MONEY BANKS (DMBs) IN

NIGERIA

BY
Abdulrahman Bala Sani: Department of Accounting, Usmanu Danfodiyo University Sokoto

Umar Makama: Department of Accounting, Ramat Polytechnic Maiduguri

&
Sani Idris: Department of Accounting, Umar Musa Yar’adua University (UMYU);
Correspondence E-mail: sonyaxle9@gmail.com or hairumaz@gmail.com

Abstract
This study assesses the impact of outsourcing policy (OP) on the extent of fraud in Deposit Money Banks in
Nigeria. Data on fraud (2006-2019) were extracted from the annual reports and accounts of NDIC and CBN.
Employing Paired T test, fraud in terms of volume, value and the actual loss suffered during pre and Post-OP
periods have been compared. The results showed that there is a significant difference in the average value and
volume of fraud in DMBs between the periods, but there is no significant difference in the average expected/actual
loss within the periods, hence it is recommended that DMBs that want to reduce incidences of fraud shall closely
monitor its outsourced staff and continuously deploy updated cutting-edge technology that will constantly
increase the chances of detection, prevention and possibly eliminate the incidence of bank fraud; above all they
should introduce more stringent measures in their staff recruitment exercise. The regulatory authorities should
check the excesses of banks in their drives to cut cost of doing business in Nigeria. Pursuant to Section 88(1)(e) of
the Labour Act, CAP L1 Laws of the Federation of Nigeria (LFN) 2004, a fundamental review of Labour Laws
with special attention to outsourcing policy in Nigeria shall be undertaken.
Keywords: Consolidation, Electronic banking, Fraud and Outsourcing policy

Introduction
Efficient management of deposit money banks (DMBs) in an economy can lead to economic growth, expansion of
the economy and provision of funds for investment. DMBs by their peculiar nature, serve as intermediaries
between borrowers and savers; they are authorized by the Central bank of Nigeria (CBN) to deal with money by
accepting deposits from surplus units, giving out loan to deficit units for different reasons and investing profitably
in securities. The existence of a formidable, strong and effective banking sector in Nigeria is critical as the sector
contributes majorly to its growing Economy. The sector also provides and stimulates investments and
employment to our citizens. Contributing to manpower development and reducing the rate of employment in
Nigeria, banks offer places in employment to the chunk of our employable youths. In the aftermath of the induced
consolidation and precisely when the synergistic effects of mergers and acquisitions started to manifest, banks
were faced with burning issues such as regulatory requirements of new entities, technological requirements of
electronic banking, resolving the conflicting culture of legacy staffs and dwindling income due to transfer of
federal government funds to single treasury account in 2015 and gradual withdrawal or phase-out of commission
on turn over (COT) between Year 2012 and 2016, Nigerian banks were in dilemma of manning their staffing
positions with permanent staff or outsourcing from companies with such competencies.

To survive in a competitive market and to accomplish long-term growth banks need to develop and focus on their
core competencies this means that for banks must focus on their core competencies whilst contacting non-core
functions to external entities (Potkony in Abubakar, 2013) In addition to the fact that outsourcing strategy allows
banks to strategically focus on their core banking activities, it is a cost-effective measure and also provides access
to the knowledge and experience of the outsourcing providers. In Nigeria, there is a growing trend in the number
of outsourcing service providers who have created 90,000 jobs (as of September, 2013) out of which more than

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39,000 were outsourced to DMBs. By the end of the year 2019, the total contract staff engaged with banks in
Nigeria stood at 46,235 accounting for 44% of the total number of staff in DMBs (NBS, 2020). In an attempt to
minimize the cost of doing business, Banks in Nigeria have in the year 2012 retrenched their staff on permanent
appointment and in the year 2013 adopted full or partial outsourcing of staff (contract staff) to strategically focus
on their core banking activities; however these developments in the banking sector came with its hybridist- effects
as the enormous benefits of such adoption are with associated negative effects. The fraud perpetrated on the
platforms used by the banks for their routine operations is coincidently alarming and continuing to grow annually
in volume and value. Fraud in banks reduces bank profit where profit exists and also reduces the amount of profit
available for distribution to shareholders and or retention as earnings. Fraud increases bank losses and also exerts
an impact on bank assets, credit mobilization, and liabilities. Jointly the NDIC and CIBN have stated that over
75% of fraud cases in the banking sector had been traced to outsourced or contract staff (NDIC, 2019).

Based on our empirical review of related studies, there are ample studies on fraud and bank performance in
Nigeria but very few studies on outsourcing in the banking industry majority of which focus on outsourced
internal audit functions. However to the best of our knowledge there is none on the impact of outsourcing on the
extent of fraud cases in DMBs in Nigeria. In Nigeria today, fraud in the banking industry has been a topical issue
not only to the researchers, shareholders, regulatory authorities but the public at large: and despite the fact that
there are ample studies on fraud and bank performance in Nigeria with very few studies on outsourced internal
audit functions however to the best of our knowledge there is none on the impact of outsourcing on the extent of
fraud cases in DMBs in Nigeria. This study was designed and limited to the impact of OP on the extent of fraud in
DMBs in Nigeria, with special emphasis on the pre and Post-OP extent of fraud in DMBs. The scope of this
research covered the period (2006 -2019), thus providing 14 years period of analysis with 7 (2006-2012) years pre
and 7 (2013-2019) years post-analysis. This study could not extend into the 2020 financial year as the financials
were not available in the public domain.

Concept of Outsourcing
In general, outsourcing is defined as an organisation delegating its non-core functions to an external organisation
that provides a particular service, function, or product (Hansen, 2009 in Abubakar, 2013 ). Some authors observe
that outsourcing is no longer confined to information technology (IT) services, but has expanded to financial
services, banking services, engineering services, creative services, data management services, hospitality and
clinical laboratories or laboratory medicine, and human resource management (HRM) (Abubakar, 2013). In a
more comprehensive way outsourcing, according to Van Peursem and Wells (2000 p. 69) as cited in Abubakar
(2013),
…..’Is the introduction of expertise into a firm employing contractual obligation other than
direct employment, which may involve temporary contractual arrangements with expert
individuals, long-term contractual relationships or the use of externally-developed electronic
knowledge expert systems’.

Carey, Suhramaniam and Chirg (2006) described outsourcing as contracting with an external party to provide /
services or products that could be provided by an internal source. Ahlawat and Lowe, (2004) defined outsourcing
as the practice whereby a firm is contracted (to perform one or more business activities that traditionally have
been performed inside the organisation. Outsourcing is a strategy used by management to delegate functions or
activities formerly performed inside the organization to specialized and efficient outside providers (Suleiman &
Dandago, 2013) state that outsourcing is a strategy that can be used by organizations to choose highly skilled and
competent service providers and consequently be able to outsource activities for which they do not have a critical
need, or for which they lack the special capabilities to perform internally. In other words, an organization
outsources the service that is either not core to it or service that cannot be carried out by its internal human
resource. The majority of scholars in management suggest that core organizational activities/functions should be

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performed in-house while non-core could be outsourced to external service providers but empirical researches
have shown that it is not only non-core services that are to be outsourced but services closer to the core, such as
internal audit functions (IAF) (Abubakar,2013)

Conceptual Issues on Fraud

There is no precise legal definition of fraud just as there is no single offense that can be called fraud. Nevertheless,
it is usually taken to have elements including an intentional and unlawful misrepresentation which causes
prejudice, most often misappropriation, which is the removal of cash, or asset to which the fraudsters are not
entitled as well as false accounting in which records and numbers reported are falsified to give and create a false
impression. However, the term fraud has been defined severally by many scholars such as Albretch,., Albretch,
Albretch, and Zimbelman (2009) define fraud as a deception made for personal gain. By extension, fraud will
include embezzlement, theft or any attempt to steal or unlawful obtain, misuse, or harm the assets of the bank .
Oxford Advanced Learner's Dictionary defined fraud as the crime of cheating somebody to get money or goods
illegally. It is also a person who pretends to have qualities, abilities, etc. that they do not have to cheat other
people.

Fraud is recognized as a significant threat facing Governments, Businesses and individuals all over the world. In
the Nigerian banking industry, fraud appears to have assumed a tragedy of epic dimension. Fraudsters are not only
becoming more sophisticated, innovative and refined in the planning and execution of their nefarious activities but
are becoming daring as well. Our everyday living experiences are awash with stories of fraudulent acts being
committed in our businesses and on individuals. Fraud results in huge financial losses to banks and other
organizations, their shareholders and customers. In particular, fraud leads to loss of confidence in business,
insolvency or winding up of businesses, bankruptcy, and failure of creditors' business with attendant loss of
employment, revenue to the government, lenders, and investors. It was established that fraud was one of the main
causes of distress in our banking system that led to the closure of many banks in the 1990s and in 2009 when
about 10 banks were decimally performing due to the cumulative effect of fraudulent creation of toxic assets
(NDIC, 2010). The subject of fraud is of great concern to an organization like the Nigeria Deposit Insurance
Corporation (NDIC) that is saddled with the responsibility of protecting depositors of banks and other financial
institutions. Section 3.5 and 3. 6 of NDIC Act No. 16 of 2006 require all insured banks in Nigeria to render to the
Corporation, returns on frauds and forgeries or outright theft occurring in their organizations and also report on
any staff dismissed, terminated, or advised to retire on the grounds of fraud. In the banking industry, fraud can be
committed by employees, customers or others operating independently or in conspiracy with others inside or
outside the Banks (Ibrahim, 2011)

Factors Causing Fraud and its Extent

Many factors cause fraud in Nigeria and these can be classified into three main groups, namely: institutional,
social, and individual.
Institutional Factors: Many institutions unconsciously create conditions that allow fraud to flourish. In such
institutions, a lot of loopholes are allowed to exist which fraudsters easily identify and exploit to commit their
acts. The common institutional causes of fraud in the banking sector are inadequate internal control, the
inexperience of staff/inadequate staff training, employment disaffection, poor management, negligence of
staff/customers, automation and computerization (Gazali, 2015).
Social Factors: The societal factors are further grouped into societal values and individual factors and discussed
as follows:
Societal Values: The value system in our society today is such that reputation, respect, honour and other social
status are conferred on people mainly based on their material wealth. Access to political power, chieftaincy titles,
religious positions and influence are seen to be for money bags. People are no longer respected for honesty,
integrity and wisdom. Instead, recognition is accorded to materialism. People are therefore driven to commit fraud

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as a means of easy acquisition of money and property which in today's world translate into recognition and power.
The following are major factors under social factors poor economy and slow and tortuous legal process.
Individual Factors: These are factors that pertain to the person, that is, those that are peculiar to the individual
who may encourage him to live a fraudulent life. These factors include; i) Biological make-up - e.g. Kleptomania
ii) Poor moral upbringing iii) Criminal background, and iv) Weak mind .Fraud and Bank Assets: Fraud in banks
either results in loss of assets or manipulation of financial statements. Asset loss reduces the value of assets and if
recorded, the financial statement will show a true and fair view. In manipulation, the financial statements do not
show a true and fair view as manipulation implies that there may be falsification, fabrication, or intentional
change of accounting policy to attain the desired goal. ( Gazali, 2015)

Theoretical Review
There is a vast number of theories on fraud as put forward by Comer (1985) which explains fraud from various
angles. These theories are discussed below as:
Theory of Fraud Triangle: The classical theory of the fraud triangle was developed by Donald Cressey.
According to Cressey (1973), fraud is likely to occur if a combination of these three factors exists, that is Pressure
(Motivation), Opportunity and rationalization. Trusted persons become trust violators when they conceive
themselves as having a financial problem that is non-shareable and is aware this problem can be secretly resolved
by a violation of the position of financial trust and can apply to their conduct in that situation which enables them
to adjust their conceptions of themselves as trusted persons with their conceptions of themselves as users of the
entrusted funds or property.
Theory of Fraud Diamond: Kanu and Okorafor (2013) stated that Wolfe and Hermerson in 2004 postulated the
fraud diamond theory. Fraud diamond added a fourth dimension to fraud triangle where it states that an
individual’s capability, personality trait and abilities can play a major role in determination of fraud occurrence.
Despite the existence of opportunity, with pressure and rationalization as attracting forces to it, individual’s trait
and ability to recognize the opportunity and perpetrate the fraud were other essential factors for fraud to occur.
Theory of Deviations:
The Theory of Deviations as developed by Michael Comer in 1985 explains that fraud portrays deviant behaviour
and the culprits often conceal their dishonesty as plausible breaches of rules. It is a variance from a normal
procedure. More often than not, the culprits are limited to the available opportunities and also concentrate on ways
to conceal their guilt. Generally, deviations from the accepted procedures are the first symptoms of fraud.
A common theme in each of these theories is that if a conflict of interest arises between the owner(s) and
employees, this may lead to dissatisfaction among employees. The affected employee(s) may seek relief by
resorting to fraud.

Related Empirical Studies

Nwankwo (2013), in their study, evaluated the impact of fraud on the performance of commercial banks in
Nigeria. In testing the hypothesis of this the study regression analysis was used. The outcome of the research
revealed that there is a significant impact of fraud on the performance of commercial banks in Nigeria. it was
recommended that there is an urgent need for effective monitoring of bank fraud through the use of ATM to allow
for the growth of Nigeria commercial banks performance. Muritala, Ijaiya, and Adeniran (2016) Using time series
annual data for the period (2002- 2014) gathered from the Central Bank of Nigeria statistical bulletin; evaluated
the growth of bank frauds and the impact on the Nigerian banking industry. Multiple regression techniques and
the Augmented Dickey-Fuller (ADF) Unit Root test were used in analyzing the data. The result showed that there
exist a negative significant relationship between Bank Profitability and the total amount involved in frauds
committed in the banking sector. Employing regression analysis, Offiong, Udoka, and Ibor (2016) analysed
banking sector frauds in Nigeria from 1994 to 2013. The study found that the problems of Nigerian banking sector
frauds require strong inter-agency collaboration, public education and cross-border cooperation to accomplish
sustainable success. The study recommended, among others, that existing regulatory guidelines on the prevention

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of banking sector frauds, which are currently inadequately addressing detection and mitigation activities, should
be strengthened and broadened to include forensic accounting/auditing to aid recovery of losses.

Inaya and Isoto (2016) investigated the social impact of fraud on the Nigerian banking industry from 1990 to
2014. Using the ordinary least squares regression techniques, findings from the study showed that there was a
negative social impact of fraud on the Nigerian banking industry. In Adeniyi (2016), the effect of forensic
auditing and financial fraud in the Nigerian deposit money banks (DMBs) was examined by analysing
questionnaires using logistic regression analysis. The study found that forensic auditing has a significant effect on
financial fraud control in Nigerian (DMBs). A strong internal control system was recommended in the study to
reduce the occurrence of fraud. Also Osuala, Opara and Okoro (2016) examined the impact of fraud on the risk
assets of commercial banks in Nigeria from 1990 to 2013, by employing Johansen's approach to co-integration
and error correction model. They found that fraud significantly impacts on commercial bank loans and advances
in Nigeria.

Muritala etal (2017) In their study of impact of fraud on bank performance in the Nigerian banking industry
using quarterly data spanning from 2000 to 2013; found out that the number of staff involved in fraud has a
significantly positive impact on the return on the asset while the fraud perpetrated and the amount involved in
fraud perpetration both have a negative impact on bank performance. The expected coefficient of the (VECM)
result showed that there is a short-run dynamic effect of the changes on the return on asset meaning that the
variables adjusted to correct the imbalances in the fraudulent banking environment. Udeh and Ugwu (2018)
examined fraud in the Nigerian banking sector. An ex-post facto research design was adopted for the study. Data
for the period 2006-2015 were collected from Nigeria Deposit Insurance Corporation's (NDIC) annual reports.
Data relating to fraud, bank profit, bank assets and bank deposits were collected. Descriptive analysis and the
Ordinary Least Square (OLS) method of regression analysis were used for the data analysis. It was discovered that
fraud has a negative but insignificant relationship with bank profit amongst others. they recommend amongst
others that banks should include the amount involved in fraud in their financial statements and entrench good
corporate governance (Fraud Box Model) as the key to lock the fraud -risk factors as contained in fraud diamond.

Kolapo and Olaniyan (2019), in their contribution investigated the impact of fraud on the performance of deposit
money banks in Nigeria between the periods in 1994 through 2015. In this study, bank deposit was specified as
the dependent variable while the one-period lagged value of bank deposit, amount involved in reported fraud
cases, the amount lost to fraud and number of staffs involved in fraud cases were used as independent variables.
The Generalized Method of Moments (GMM) estimator was employed to analyze the data. This study showed
that the amounts involved in fraud cases, the amount lost to fraud and the number of staff involved in fraud has a
negative and significant influence on the deposit of banks in Nigeria. Charles, Patrick, Gideon, and John (2020) in
their study examined electronic fraud and the performance of Deposit Money Banks in Nigeria. The data collected
were analyzed using basic descriptive ordinary least square (OLS) and multivariate regression panel data set with
econometric analyses. The results showed a negative and insignificant relationship between electronic fraud
channels and financial performance variables. The study concluded that there is no significant relationship
between electronic fraud and the financial performance of Deposit Money Banks in Nigeria in the period of study.
The study recommended more proactive collaborations between DMBs, CBN and other stakeholders via NeFF to
tackle fraud.

Methodology
This study adopted an Ex-post facto research design, chosen because the study is reporting what is already in
existence over some time .The target population of the study consists of all the 29 DMBs as at 31st December
2019, duly registered to do banking business in Nigeria (NDIC, 2019) and this study used a census of all the 29
DMBs hence there was no need for sampling. The study used secondary data taken from CBN and NDIC Annual

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Reports and Statement of Accounts for a period of 14 years (2006 to 2019). Data were analyzed using a t-test
(paired) at 5% level of significance using SPSS; while descriptive statistics was used to summarize the aggregated
data on the volume of fraud, value (amount) of fraud and actual loss arising from such frauds. Pre-OP average
data was compared with the Post- OP average data in determining the changes in fraud indicators.

Results
The data collected for the period under review are presented in Tables containing values for the pre and Post-OP
periods in respect of each variable of the study.
Table 4.1 Descriptive statistic on Banks fraud in Nigeria
CHANGE IN STANDARD STANDARD
VARIABLE PERIOD MEAN MEAN DEVIATION ERROR MEAN
BEFORE 1,968.71 724.26 273.72
VOLFRAUD 20,844.14
AFTER 22,812.86 17134.89 6,476.38
BEFORE 1,968.71 724.26 273.72
VALFRAUD 20,844.14
AFTER 22,812.86 17134.89 6,476.38
BEFORE 7,285.69 5514.72 2,084.37
ACTFRAUD 1,499.40
AFTER 5,786.29 4433.38 1,675.66
SOURCE: Author’s compilation 2021
Fraud in terms of volume, value and the actual loss suffered during pre and Post-OP periods have been compared.
From Table 4.1, In the case of volume, the mean has increased from 1, 969 to 22,813 cases Post -OP showing the
mean difference of 20,844 cases. Substantially, the average value of fraud committed before OP of N1,969B has
increased by N20,844B to N22, 813B Post-OP. In a similar trend, the mean value in respect of the Actual amount
lost due to fraud has decreased to N5,786B from the Pre-OP mean value of N7,286B. Therefore, there is
convincing evidence to the belief that the trend is increasing in volume and value but with a slide decrease in the
amount lost to fraud by the DMBs. However, to conclude further on whether the changes in the mean value or
differences in the mean values are statistically significant or otherwise the computed values of the test statistic and
the corresponding p-values are compared with the help of Table 4.2 which shows the summary of t-test results for
hypotheses one to three for the pre and Post-OP periods.

Discussion of Findings
Table 4.2: Summary of T-test for Hypotheses
ALPHA
MEAN MEAN CHANGE LEVEL
VARIABLE BEFORE AFTER IN MEAN @5% P-VALUE REMARKS
VOLFRAUD 1,968.71 22,812.86 20,844.14 0.05 0.016 PV<AL,SIG
VALFRAUD 1,968.71 22,812.86 20,844.14 0.05 0.016 PV<AL,SIG
ACTFRAUD 7,285.69 5,786.29 1,499.40 0.05 0.662 PV>AL,NSIG
Source: Author’s compilation 2021
In Table 4.2, it shows that VOLFRAUD with p-value of 0.016 and VALFRAUD with also p-value of 0.016 are
statistically significant and since their p-values are less than the α-levels then there is significant difference
between their performance during Pre- OP and Post -OP periods. In contrast, ACTFRAUD has a p-value of 0.662,
which is greater than the alpha level, this is not statistically significant. From the foregoing, we reject null
hypotheses one and two and alternate hypotheses which state that there are significant differences between Pre-OP
and Post-OP fraud in volume and value are respectively accepted at 5% level of significance. In respect of

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hypothesis three we accepted the alternate hypothesis meaning that there is no statistically significant difference
between the periods.

Conclusion
In drawing our conclusion we need to restate that this study examined the impact of OP on the extent of fraud in
the DMBs in Nigeria therefore in line with this objective, research questions and assumptions and based on pre-
post analysis of data, this study has established significant differences of means in respect of selected variables on
fraud in Deposit Money Banks before and after OP, The findings of this study are :( 1) there is a significant
difference the volume of fraud in DMBs between Pre-OP and Post-OP periods. (2) There is significant difference
in the value of fraud in DMBs between Pre-OP and Post-OP periods and (3) there is no significant difference in
the expected/actual loss arising from fraud in DMBs between Pre-OP and Post-OP periods.

Recommendations
Based upon the findings and conclusion of this study, the following recommendations are made:
1. DMBs want to reduce incidences of fraud shall closely monitor its outsourced staff and shall continuously
deploy updated cutting-edge technology that will constantly increase the chances of detection, prevention and
possibly eliminate the incidence of bank fraud; above all they should introduce more stringent measures in
their staff recruitment exercise.
2. The regulatory authorities should check the excesses of banks in their drives to cut cost of doing business in
Nigeria. Pursuant to Section 88(1)(e) of the Labour Act, CAP L1 Laws of the Federation of Nigeria (LFN)
2004, a fundamental review of Labour Laws with special attention on outsourcing policy in Nigeria shall be
undertaken.

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