ABSTRACT

This study examines the effect of fraud on the performance of Ntarikon Cooperative Credit Union (NTACCUL) in Buea, Cameroon. Fraud remains a critical challenge for microfinance institutions (MFIs), undermining financial stability, eroding customer trust, and impairing operational efficiency. Using a causal research design, the study collected primary data from 109 employees of NTACCUL through structured questionnaires. Descriptive and inferential statistics, including regression analysis, were employed to analyze the data. The findings reveal that fraud prevention has a significant positive effect on MFI performance (β = 0.531, p = 0.004), while fraud detection and anti-fraud policies showed no significant impact. The adjusted R² (0.310) indicates that 31% of performance variation is explained by fraud management strategies. The study highlights the importance of proactive fraud prevention measures, such as internal controls, employee training, and advanced security systems, in enhancing MFI sustainability. Key recommendations include strengthening fraud prevention frameworks, adopting technology-driven monitoring systems, and fostering a culture of transparency. The study contributes to the literature on fraud management in MFIs, particularly in Cameroon’s context, and offers practical insights for policymakers and financial institutions aiming to mitigate fraud risks.

CHAPTER ONE

INTRODUCTION

1.1 Introduction 

This study is carried out to examine the effect of fraud on the performance of Micro Finance Institutions the case of Ntarikon Cooperative Credit Union (NTACCUL) in Buea. This study is organized in five chapters. Chapter comprises of the research background, statement of the problem, the study’s objectives, research questions that guided the research, scope of the study, limitations of the research and organization of the study. The second chapter presents literature review which covers the conceptual, theoretical, empirical review, research gaps and the conceptual framework. Chapter three presents the methodology which gives a rundown of the research design, area of study, the population of the research, sample size and the sampling procedure, the instrument used for data collection and procedure, validity and reliability of the research instrument and finally, data analysis. Chapter four discusses the findings of the study, data analysis, data presentation and the interpretation thereof. Finally, chapter five presents the summary of key findings, conclusions drawn from the findings highlighted, recommendations and suggestions for further research.

1.2. Background of the Study

Fraud as a global phenomenon has eaten deep into many financial institutions. In recent times, fraud has continued to be a terrible obstacle to the survival, growth, and successful operations of Micro Financial Institutions in both developed and developing nations of the world, which requires strong measures as much as possible to reduce its occurrence (Okoye & Ndah, 2019).  Fraud is a global problem that affects the society as a whole and interferes with work and personal life. It has been in existence for a long and it is a complex issue 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 referred to as fraudsters, still manage to funnel ways to override systems (Okoye & Ndah, 2019). 

The modern business environment is complex than ever before, and it is characterized by sophisticated information technology applications that enable customers and Micro Financial Institutions to carry out transactions easily. Some of these technologies allow operations to take place without the physical presence of the customer or actual physical contact between the Micro Financial Institutions and the client. These developments in information technology and other factors have contributed significantly to an increase in the level of frauds that have made many Micro Financial Institutions around the globe to lose substantial sums of money. Frauds have hence become a significant concern among Micro Financial Institutions around the world (Uchenna & Agbo, 2013).

Fraud is an intentional deception which refers to swindle someone for unlawful financial gain or other benefits. Fraud always includes a false statement, misrepresentation or deceitful conduct. The purpose of the fraud is to gain something of value, usually money, by misleading or deceiving someone into believing something that the perpetrator knows to be false. In addition, fraud includes the acts such as deception, theft, bribery, corruption, forgery, embezzlement, misappropriation, conspiracy, collusion, money laundering, extortion and concealment of material facts (Chartered Institute of Management Accountants, 2008).

Every company is at risk of fraud being private, governmental, profit and nonprofit, and even religious. Fraud is one of the most challenges and critical issues in the current business climate (Smith et al., 2005). Large-scale fraud has resulted in the collapse of whole companies, massive investment losses, significant legal expenses, the detention of key people and the deterioration of trust in capital markets. However, fraud imposes various costs on its financial and nonfinancial victims (Rahman & Salim, 2010). The losses in financial transactions, reputational risks and human capital for banking Micro Financial Institutions could include knowledge of risk of bankruptcy (Idowu, 2009). The fraudulent activity has adversely affected the credibility, trademarks and reputation of many Micro Financial Institutions all over the world (Ohando, 2014).

Fraud cannot happen on its own, it is perpetrated by humans. A high degree of fraudulent activities is perpetrated by top managers, executives and staff of Micro Financial Institutions which has led to poor performance and collapse of a number of Micro Financial Institutions around the world. Micro Financial Institutions all over the world have maintained a unique position in economies through their contribution to the economic growth and development of a nation. Therefore, any problem that tends to hinder their operation such as ‘fraudulent practices’ is often viewed seriously. Banking fraud can be traced as far back as failures that occurred in England between 1815 and 1950 when 200 banks were confirmed liquidated (Murtala et al., 2019).

Fraudsters are adept at taking advantage of weaknesses or gaps in a company’s internal controls.  A perfect example of such a weakness is when business systems do not share or cross-check information.  Specific tests for matches of database fields can be an effective way to uncover potential abnormalities.  Some types of analytic procedures are fairly simple looking for duplicate payments of an invoice. Data analytic tests, however, have to be carefully designed to avoid an excessive number of exceptions that may overwhelm fraud detectives (Michael, 2018). 

According to the Association of Certified Fraud Examiners (ACFE, 2020), the average organization loses 5% of its revenue due to fraud each year. The Banking and Financial Services Sector had the highest rate of 17.8% of fraudulent cases investigated. ACFE categorizes fraud into three categories: misappropriation of assets, corruption, and fraudulent financial statements (ACFE, 2020). Based on a recent study by ACFE, it has found that asset abuse is the most common fraud case (ACFE, 2020). The percentage of cases of misappropriation of assets reached 86%. However, the high percentage of foreclosure cases caused minimal losses among other forms of fraud. Although the losses are significant, this percentage of cases that result in property abuse cannot be ignored. 

Bank fraud is threatening the growth of Micro Financial Institutions as it causes bankruptcy. This is because fraud reduces the deposit of depositors and ultimately leads to the erosion of the banking system (Asukwo, 1999). Fraud costs are often difficult to predict because not all frauds are disclosed or reported as many banks like to hide fraud from their banks in order to maintain customer loyalty and promote the confidence of their customers. Among the consequences of fraud, it often result to loss of income and loss of customer confidence (Akinyomi, 2012). Fraud causes financial losses for both banks and their customers. The result is a lack of debt and a loss of public confidence in the banking industry as a whole. 

Major fraud can led to the collapse of the entire organization, loss of investment, high legal costs, arrests of key individuals, and erosion of confidence in the financial market (ACFE, 2020). Also, fraudulent conduct can seriously damage a company’s reputation, damage shareholder confidence and lead to the collapse of large corporations (O’Reilly-Allen & Zikmund, 2013). The negative economic impact of fraud is more severe on the financial industry than on other economic sectors. In the banking sector, fraud can lead to loss of reputation and lead to loss of potential customers (Vousinas, 2016). In the case of fraud, banks incur high operating costs by repaying customer losses (Gates & Jacob, 2009), while bank customers experience a lot of time and emotional losses that damage the bank’s relationship with the customer due to despair and confidence. Subsequently, this will increase dissatisfaction due to perceived service failures (Hoffmann & Birnbrich, 2012) and may ultimately lead to poor performance and bank failure.

In Cameroon, the accounting scandals in terms of fraud has resulted to the collapse of major companies like Eron, WorldCom and global crossing which have brought about public awareness about the impact of fraud on business organization as well as financial institutuions (Petra and Andrew, 2020). If the act of fraud is not arrested, it might delete the resources and performance of Micro Financial Institutions in Cameroon because foreign investors might not find it wise to transact business via the micro finance institutions and this will affect the performance of Micro Financial Institutions drastically. Micro Financial Institutions in Cameroon 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 financial institutions, the sources of funds for this portion of the market would be limited to friends, family or loan sharks, which restrict entrepreneurial capacity and affect the quality of life of the population (Soares & Sobrinho, 2008). 

The current study of fraud and fraud control is very much focused on detection and prevention. These effective measures are aimed at preventing and detecting fraud early and in line with the firm’s strategic objectives of dealing with fraud before they occur. However, the response measures no doubt require equal focus in order to control the remaining fraud risk. Therefore, an effective business-controlled fraud management approach focuses on four aspects: antifraud policies, fraud detection, fraud prevention, and fraud response (Boateng and Acquah, 2014; KPMG, 2016). 

With regards to financial institutions, it may endanger crisis of confidence among the financial institutions, hinder the going concern status of banks and ultimately lead to bank failures (Adeyemo, 2012). Due to the essential roles of Micro Financial Institutions in the growth and economic development of any nation, it has become very necessary to protect this institution from fraudsters. The is therefore the needs for Micro Financial Institutions to put in place appropriate policies and strategies to managed fraud. Thus, after reviewing the arguments from the various conceptual literatures, they is therefore a need to study how Micro Financial Institutions are able to manage their fraud to achieve desirable performance. Thus, the purpose of this research is to examine the effect of fraud on the performance of Micro Finance Institutions the case of NTACUL in Buea.

1.3. Statement of the Problem

Fraud poses a significant threat to the performance and sustainability of microfinance institutions (MFIs) in Buea, Cameroon. Despite their crucial role in promoting financial inclusion and economic development, MFIs in Buea are vulnerable to various forms of fraud, including loan fraud, savings fraud, and internal control fraud (Owusu-Ansah, 2014). According to Muriu (2016), fraud can lead to significant financial losses, erosion of customer trust, and damage to the reputation of MFIs.

The prevalence of fraud in MFIs in Buea is alarming. A study by CGAP (2019) revealed that fraud is one of the major risks facing MFIs in Cameroon. The study further noted that fraud can compromise the ability of MFIs to provide financial services to low-income individuals and small businesses, thereby undermining their mission and objectives.

The consequences of fraud on the performance of MFIs in Buea are severe. Fraud can lead to a decline in the financial performance of MFIs, as well as a loss of customer confidence and trust (Muriu, 2016). Furthermore, fraud can compromise the ability of MFIs to attract and retain customers, thereby undermining their sustainability. Fraud also reduces the institution profit, it also leads to unemployment, and also the liquidity of the institution. 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 (Nwaze, 2006).

Bank fraud is threatening the growth of banking institutions as it causes bankruptcy. This is because fraud reduces the deposit of depositors and ultimately leads to the erosion of the banking system (Asukwo, 1999). Fraud costs are often difficult to predict because not all frauds are disclosed or reported as many banks like to hide fraud from their banks in order to maintain customer loyalty and promote the confidence of their customers. In Cameroon, the National Agency of Information Technology (ANTIC, 2017) reported that in 2013 Cameroon recorded

FCFA 4 billion in losses due to financial fraud on the internet, and an additional FCFA 3.7 billion have been lost due to bank card fraud.

Micro Finance Institutions in Buea are not left out as they are equally experiencing high level of fraud which affect their operations negatively. Thus, fraud remains a major problem which if not handled will have a detrimental effect on the performance of Micro Financial Institutions in Buea. It is on the basis that this study is carried out to examine the effect of fraud on the performance of Micro Finance Institutions the case of Ntarikon Cooperative Credit Union

(NTACCUL) in Buea. 

1.4 Research Questions

1.4.1 Main Research Question

The main research question for the study is: What is the effect of fraud on the performance of Micro Finance Institutions the case of Ntarikon Cooperative Credit Union (NTACCUL) in

Buea? 

1.4.2 Specific Research Questions

The study is guided by the following specific research questions

1. What is the effect of fraud detection on the performance of NTACCUL in Buea?
2. How does fraud prevention affect the performance of NTACCUL in Buea?
3. To what extent does anti-fraud policies affect the performance of NTACCUL in Buea?

1.5 Research Objectives

1.5.1 Main Research Objective 

The main objective of the study is to examine the effect of fraud on the performance of Micro

Finance Institutions the case of Ntarikon Cooperative Credit Union (NTACCUL) in Buea. 

1.5.2 Specific Research Objectives

1. Determining the effect of fraud detection on the performance of NTACCUL in Buea.
2. Assessing the effect of fraud prevention on the performance of NTACCUL in Buea.
3. Evaluating the effect of anti-fraud policies affect the performance of NTACCUL in Buea.

1.6. Research Hypotheses 

Ho₁: Fraud detection has no significant effect on the performance of NTACCUL in Buea.

Ho₂: Fraud prevention has no significant effect on the performance of NTACCUL in Buea.

Ho₃: Anti-fraud policies has no significant effect on the performance of NTACCUL in Buea.