Kenyan Research paper on Kenya Commercial bank

BBM/57/11

TOPIC: EFFECTS OF BANKING ANTI-FRAUD STRATEGIES ON THE PERFORMANCE OF COMMERCIAL BANKS: A CASE STUDY OF KENYA COMMERCIAL BANK (KCB).

Background to the Study

Banking fraud is a purposeful duplicity made for individual benefit to harm a commercial bank financially. It is a crime and is likewise a common law infringement. Bank fraud then again, is the utilization of deceitful intends to get cash, possessions, or other property claimed or held by a monetary institution. Bank misrepresentation is a wrongdoing that has been around since the time banks have been in operation. At whatever time there is a lot of cash coasting around, there are going to be individuals attempting to evaluate methods for getting it fraudulently.

Bank extortion can be carried out through numerous ways, including mail, wire, telephone, and the web (computer fraud and web misrepresentation). The trouble of checking character and authenticity on the web, the simplicity with which programmers can divert programs to unscrupulous locales, the worldwide dimensions of the internet and straightforwardness with which clients can conceal their area, all help making web extortion the quickest developing range of fraud. Research shows that only twenty percent of frauds are uncovered and made open. The remaining cheats are either undetected or found and not made open due to notoriety hazard.

The history of Kenya Commercial Bank Limited dates back to July 1896, when its predecessor, the National Bank of India opened a branch in Mombasa to handle the business that the port was attracting at that time. In 1958, Grindlays Bank merged with the National Bank of India to form the National and Grindlays Bank. Upon independence, the Government of Kenya acquired 60% shareholding in National and Grindlays Bank in an effort to bring banking closer to the majority of Kenyans. In 1970, the Government acquired 100% of shareholding in the Bank to take full control of the largest commercial bank in Kenya. National and Grindlays Bank was then renamed Kenya Commercial Bank. In 1972, Kenya Commercial Bank acquired 100% of Savings & Loan Kenya Limited, which specialized in the provision of mortgage finance. Since then, the bank has grown to become the largest bank in Kenya in terms of capital investment.

Fraudsters normally have used customer’s SIM card in order to get one-time passwords (OTP) sent to them by the KCB. Using the one time passwords, criminals are able to change, add beneficiaries and transfer money out of your account using their personal information that they would have obtained through phishing. Through this way and a couple of other fraudulent activities including those done by employees, the bank has had to handle numerous cases of fraud.

Commercial banks in Kenya today are confronting a great deal of difficulties in managing both inward and outer fraud cases that frequently come up. As said prior, improvement in technology has exceedingly helped this. This is influencing the bank's profits and its reputation is likewise at danger. There is hence requirement for banks to react fittingly to the difficulties of fraud. Thus this study embraces to inspect the methodologies applied by business banks in Kenya to battle fraud.

Statement of the Problem

Incidents of fraud in the banking sector have been on the rise. The industry has been losing too much cash through fraudulent exercises, a circumstance which has had a negative effect on their profits. This has also been affecting the level of customer confidence with the banking sector as well as reduction in incomes as they are compelled to put resources into new technology to secure client data. The worldwide financial meltdown occasioned by credit crunch has compounded the circumstances by restricting access to finances, and numerous corrupt individuals have turned to fraudulent exercises to overcome any and all hardships.

A percentage of the difficulties that Commercial Banks in Kenya are confronting, as far as fraud is involved are as follows: Development in technology which has further increased fraud, for example, most frauds are carried out through the web. Fraudsters are exploiting

technology to discover better approaches for victimizing banks. Bank staff complicity and plot with outsiders is additionally an alternate test. This is made conceivable by feeble interior

controls inside a few banks, which can undoubtedly be overridden and a lax staff unwilling to hold fast to the controls set up. Absence of highly skilled administrators or fraud officers, making fraud evaluation ineffectual. Absence of putting resources into worker preparing on what misrepresentation is and how to be included in forestalling misrepresentation, and poor verifying of new staff hired, are additionally some of the difficulties confronted.

Significance of this research.

This research will shade some light on how commercial banks can combat frauds that

occur within their organizations. The study will be of relevance to the following:

A. It will aid managers of various institutions in determining strategies that they can use to

fight different frauds that occur.

B. The study will also be of importance to the policy makers. They will be able to obtain

knowledge of the strategies adopted by the banking industry in Kenya, and therefore

obtain guidance from the study, in designing appropriate policies that will regulate the

banking industry.

C. It will help other researchers will develop a better understanding of fraud, and how to apply appropriate strategies to fight fraud occurrence. This will expand their knowledge on fraud in the banking industry and identify areas of further study.

The Research Objectives

A) General objectives;

To study the effects of banking anti-fraud strategies on the performance of commercial banks: a case study of Kenya Commercial Bank (KCB).

B) Specific objectives;

To establish how commercial banks use the following strategies to combat fraud;

1. Use of identification information through the use of identification documents for every transaction

2. Use of address verification system

3. Signatures on delivery

4. No use of free emails like yahoo, from customers, requesting for transactions

5. Real time fraud detection solutions

6. Application of Know Your Customer

7. Proper vetting of new staff

CHAPTER 2.

2.0: LITERATURE REVIEW

This chapter sets out various stages and phases that were followed in completing the

study. The research design, the research method tools and instruments that were used to

collect the data required, the parameters and statistics identified in the operational

framework from the basis of the data collection, were identified.

2.1: Performance of commercial banks

The Kenyan Banking Sector registered improved performance with the size of assets standing at Ksh. 2.4. trillion, loans & advances amounting to Ksh. 1.4 trillion, while the deposit base stood at Ksh. 1.8 trillion and profit before tax of Ksh. 28.2 billion as at 31st March 2013. During the same period, the number of bank customer deposit and loan accounts stood at 17.3 million and 2.3 million respectively.

2.2: Banking Fraud

Bank fraud is the use of potentially illegal means to obtain money, assets, or other property owned or held by a financial institution, or to obtain money from depositors by fraudulently posing as a bank or other financial institution. In many instances, bank fraud is a criminal offence. While the specific elements of particular banking fraud laws vary between jurisdictions, the term bank fraud applies to actions that employ a scheme or artifice, as opposed to bank robbery or theft. For this reason, bank fraud is sometimes considered a white-collar crime.

The following are the types of fraud that have ever been experienced in KCB: theft and embezzlement, defalcation, forgeries, suppression, unauthorized lending, lending to ghost borrowers, kite flying and cross Firing, unofficial borrowing, foreign exchange malpractices, impersonation, over invoicing, manipulation of vouchers, fictitious contracts, fictitious accounts, over valuation/under valuation of properties, false declaration of cash shortages, fraudulent use of bank documents, falsification of status report, misuse of suspense account, duplication of cheque books, inflation of statistical data, laundering, computer frauds, ,robberies and fake payment.

2.3: Theories of banking fraud.

Theories of Fraud

There are three theories of fraud which explains frauds from various angles.

-Differential Opportunity

- Theory of concealment

- Theory of Deviation

Differential Opportunity

This theory puts forward the fact that all people have the opportunity to commit fraud, against their employers, against suppliers and customers of their employer, against third parties and against government departments. However such opportunity is guided or regulated by

- Accessibility of the perpetrator to the accounts, assets, premises and

to computer systems.

- Skill required to identify that such opportunity exists and to be used.

- Availability of sufficient time to plan and execute the fraud.

Theory of Concealment

Concealment is an essential ingredient of most systematic fraud. It can be defined as a manipulation of an accounting record or misrepresentation of a physical, personal or commercial reality intended to;

- Hide, disguise or alter an account/inventory discrepancy before, during or after a fraudulent act.

- Disguise, confuse, or delay the recognition the perpetrators guilt (to avoid location of blame) or to establish a plausible excuse for dishonesty;

- Enable the perpetrator to obtain, a dishonest advantage by deception.

The theory explains the fact that the perpetrators deliberately introduce confusion during, or after the act, to conceal it or assist in its omission. Greed motivates this type of fraud to exploit any opportunities available. Self preservation is crucial when it comes to concealment. The perpetrator usually tries to hide the loss and the evidence which indicates that he is responsible

for it. He will strife to conceal the fraud in the best way available to him and may adopt optimum concealment course.

Theory of Deviations

Fraud is deviant behavior and perpetrators often conceal their dishonesty as plausible breaches of rules or procedures. It is a variance from a normal procedure or pertains. More often than not, the perpetrators 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.

2.4: Theoretical concept of fraud

2.5: Operational concept of fraud

2.5.1: Measurement of performance of commercial banks.

2.5.2: Anti-fraud strategies

2.5.2.1: Use of passwords.

2.5.2.2: Vetting of new employees

2.5.3: Periodic audits

2.5.3: Conceptual Framework

Independent variables Dependent variables

( Profits Customer confidence Increased operational cost Build up of debt ) ( Employee vetting Use of personalized passwords I nternal controls System Audits Level of skills possessed by managers Employee training )