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The Impact of Fraud on the Performance of Micro Finance Institution

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The study aimed The Impact of Fraud on the Performance of Micro Finance Institution. In an attempt to meet up with the broad coverage of the research work, it was broken down into different specific objectives, which were; firstly, to examine the causes of fraud in micro finance institutions, to assess the risk associated with fraud in financial institutions, to examine the extent to which fraud can affect the return on asset in MFIs in Buea, to examine strategies used to combat fraud in micro finance institutions and to make recommendations on fraud and performance. The study used descriptive survey design with population of the study consisting of the employees of selected micro finance institutions in Buea mu. Data were collected from 30 respondents using questionnaires. The data were analyzed by SPSS. The demographics questionnaires were presented using simple descriptive statistic presented in frequency tables, while the hypothesis test was done using linear regression. The study found out that; firstly, on the impact of risk assessment to performance, it was discovered that risk assessment significantly and positively influences performance. again the findings of this research work also reveal that structural issues influences the performance of micro finance institutions. And lastly, on fraud influence on the performance of micro finance institutions, the studies reveal that there is a strong significant but negative relationship. This implies that a unit increment in fraud would cause performance to fall by -1.096472, thus the null hypothesis was rejected.On the main focus of the research work, the results from the studies reveal that fraud affects performance negatively by about 71%.



1.1 Background of Study

The scandals of Eron , worldcom ,global crossing has left  public awareness about the impact of fraud on business organization. Fraud is a global problem that is affecting the society as whole it cut across a work of life. It has been in existence for a long time and it is a complex problem since fraudsters will always try not to leave any trace. A lot of resources time and energy are used up in developing corporate governance police, implementing internal control system ,risk strategy and training of employees to adhere to these measures but some dishonest, intelligent people commonly refers to as fraudster, still manage to funnel ways to override system. 

Fraud has been defined differently by deferent institutions. According to the Information, System Audit and Control Association (ISACA) defines fraud as a deliberate misrepresentation which course another person to suffer damages, usually monetary loses. Fraud is defined by Durham constabulary as “a criminal deception committed by a person who acts in a false and deceitful way’’. With this definition one will see that fraud in a deliberate act with the intention of obtaining unauthorized benefits either for one self or false suggestion which leads to loses especially financial loses to the other parties. International standard on auditing (ISA). Fraud refers to an international act by one or more individuals amongst management, those charge with governance, employed or third parties involving the use of deception to obtain an unjust or illegal advantage.                                                                                                                        Several causes of fraud have been identified by various researchers according to Kanu and Okorafor(2013). The causes of fraud depend on the environment they classify the causes as technology, legal, personal, social and management. Technological causes are those which have been made possible by the advancement in transfers (EFT) . Legal causes of fraud are those that enhance frau as the result of inefficient legal system. For example instant where a fraudster has several fraud cases pending before the court of law and still goes ahead to perpetrates other frauds .Management causes of fraud are those actions or omissions by management of organization which leads to fraud. For example, fraud committed due to weak internal control system. Personal causes of fraud are those perpetrated by individuals due to under develop character as a result of poor up bring. Social causes of fraud are those enhance due to poor societal values where the society adores a rich person without checking the sources of wealth.

According to the auditing guidelines, fraud is used only to refer to irregularities involving the use of criminal deception to obtain an unjust or illegal advantage. For example, deliberate inflation of stock value in order to impress an entity to continue provides credit to the organization. This is corroborated by American institute of certified public accountants, as it distinguishes fraud from error based on whether the action was intentional of not. This is where the irregularity carry criminal intent they become fraud.

   Fraud has greatly influence the performance of organizations. Performance according to Richard means the actual output of an organization against its intended outputs. According to Richard it includes three specific areas of an organization which are financial performance, product market performance and shareholders performances. And fraud has greatly impact all these aspect of performance in an organization.

Auditors are require to be more concerned with two types of fraud which are which are asset misstatements arising from fraudulent financial report and misstatement arising from the misappropriation of assets. Fraud many still take place even when a company is been regularly audited. the public turn to be disappointed by the auditor as they consider him to detect fraud for getting that an auditor  is no bound to detect fraud but a watch dog ,not a bloodhound by (by Kingston conton mill). The auditor is therefore entitled to place reliance on the representation of trusted officials of the organization he is auditing. However, the auditor requirement has evolved with the standard of care placed upon auditors in Kingston cotton mill case (1896). Subsequent court judgments have gone beyond relying on the representation but talking a physical and personal inspection (Gerrad and sons limited case ,1967).

Some auditor failure to detect fraud has an impact on the stakeholders’ public such as distrust and adverse public opinion. The auditor by companies acts (1862) to date, the Organization for the Harmonization of Business Law in Africa (OHADA) Uniform Acts (1993),the financial law of republic of Cameroon (2018),the Central African Economic and Monetary Community (CEMAC) code and professional code of conduct,(International Federation of Accounting (IFAC),2010) play a fundamental role in preventing ,detecting and deterrence of fraud in  organizations and giving credibility to client ‘financial reports, Custom and Economic Union of Central Africa (UDEAC),1982 and Banque des Etats de l’Afrique Centrale          (BEAC),1985  by Fuanmenya A. Francis

 The Association of Certified fraud Examiners (ACFE)  which is the world largest anti –fraud organization  and premier provider of anti-fraud training founded in 1988 by Joseph T.Wells with over 8000 members . In  2010 publication to nations shows that a typical organization losses 5% of its annual revenue to fraud, according to kroll (2013) 70% of companies reported suffering from at least one type of fraud. This was up from the previous 61% in the year 2012.  This result is not living out Micro Finance Institutions  (MFIs).

Micro finance institution(MFIs) provides financial services to the poor and low income earners in the society which allows them to better manage their risk achieve consistent consumption patterns and develop an economic base .However the numerous failure of Micro finance institution for the last decades due to fraud has affected so many people leading to distrust ,fear of MFIs for the last decades . Microfinance Institutions  are been headed by the banking commission of Central Africa  (COBAC) which sets control measures on the performance of MFIs  and also by Minister of finance (MINFI) which is the governance of micro finance institution on Cameroon.

Furthermore, as issue in the micro finance sector in Cameroon is that contrary to expectation the increase in regulation comes from the fact that the MFIs have considerable grown in size which can be seen from their increasing deposits, loan and capital base. And some studies have been carried out to identify the causes of fraud in micro finance institution .As these institutions became bigger fraud is likely to occur due to weak internal control. Anita (2010) explains that microfinance institutions are not immune to the dangers of weak internal control  because it can result to posing financial transactions in wrong account that can lead to a serious loss. Responsibility social investment (2013),highlight that potential cost of and benefits of fraudulent practices Is highly influence by framework due to the low interest  rate which could lead to an  increase in fraudulent activities due to loan rationing. The lack of resources of some theses institution to take these ‘’micro’’ institutions has constantly led to a lack of interest of these institutions to take issues serious, thus leading to numerous question relating to the internal control process in detecting and revealing fraudulent activities within these institution. (Molem and Ngwa in their study of internal control and incidence of fraud in micro finance in the southwest, 2016)

 Samuel Anjeh (2019)  carried out a study on financial statement fraud likelihood determinants in micro financial institutions in Cameroon. This theory sets out investigation on financial statement fraud in microfinance institution in Cameroon. From his findings he came to the conclusion that micro finance institutions should create enabling environment for the stagnation of these elements by strengthening the internal control system of asset, liabilities, expenses and revenue and management should introduce financial management ethics to employees making sure they are sensitive to behavioral red flag.

1.2 Problem Statement

Fraud is a global problem that has existed and effects every business organization. In recent year’s frauds has become the talk of the day and have left so many business organizations to losses that continue to pose significant challenges. The Association of Certified fraud Examiners (ACFE)  in their 2010 publication  shows that a typical organization losses 5% of its annual revenue to fraud. According to kroll (2013) 70% of companies reported suffering from at least one type of fraud. This was up from the previous 61% in the year 2012.

 In Africa several studies have been carried out on by fraud . In some countries like Zambia  in 2018 a survey was carried out on fraud and it reveals that accounting fraud is one of the top prevalent type of fraud with incidence rated at 33%  , in  south Africa Price water house coopers ( PWC’s) 2020 global economic crime and fraud survey reveals that  more than $50 million across all incidence, with 4% reporting direct losses in excess of $100 million for all incidents of fraud ,corruption experience in the last two years,   in Nigeria  statistics on activities of fraudsters in 2001 show that 943 fraud cases involving 11.2 billion were recorded. Obgu (2003) stated that frauds in Nigerian banks continued to rise in 2002 with 77 banks of the 90 in operation ,recording cases involving the sum of N12.9 billion  ,in Cameroon according to the national agency of information technology (ANTIC) 2017 disclosed that in 2013 Cameroon recorded FCFA 4billion in losses due to financial fraud on the internet and moreover FCFA3.7billion have been lost because of bank card fraud.

The continuous increase of fraud has led some individuals carrying out research on fraud for example  Akinyomi (2012) ,greed is a fore most cost of fraud n his study on the examination of fraud in Nigerian banking sector and prevention, Beartice (2014)  carried out a research on the effect of financial performance of deposit taking savings and credit co-portative societies in Kenya. The study shows that the y-intercept was 0.426 for all years and the study concludes that fraud influence financial performance, Samuel (2020) carried out a research on fraud in micro financial institutions in Cameroon.  The objective of the study was to examine the strategies for timely detection and control of occupational fraud in microfinance institutions.  The results  shows that micro finance institutions apart from installing sound internal control system, need to adopt and implement monitoring and surprise audits. He also cautioned micro finance institutions to use information technology control and surveillance strategies with reservation and also encouraged to treat their workers fairly but bearing in mind that fraud must still exist committed by management and staff.

The truth is that most of the Micro finance institution (MFIs) that fall victim to fraud do not take the time to fully understand the actual risks involved in fraud and therefore do not make efforts to detect and prevent fraud. Identifying the method through which fraud can be committed, looking at the risk of fraud, establishing strategies to combat fraud in Micro Finance Institutions (MFIs).

1.3 Research Questions

The main research question is

What is the impact of fraud on the Performance of Micro Finance Institutions?

The specific research questions are;

– What are the causes of fraud in micro finance institution?

-What are the risks associated with fraud in financial institutions?

-To what extent is the return on assets affected by the level of fraud in MFIs in Buea?

-What strategies are used to combat fraud in MFIs?

1.4 Objectives of the Study    

The main objective of this study is to ascertain the impact of fraud on the performance of Micro Finance Institutions.

The specific objectives are:

-To examine the causes of fraud in micro finance institutions.

-To assess the risk associated with fraud in financial institutions

-To examine the extent to which fraud can affect the return on asset in MFIs in Buea.

-To examine strategies used to combat fraud in micro finance institutions.

-To make recommendations

1.5 Hypothesis of the study

The hypothesis to be investigated is

Ho: The level of fraud does not affect the return on asset (ROA) of micro finance institutions.

Hi: The level of fraud affects the return on asset (ROA) of micro finance institutions.


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