An investigation of the effect of fraud risk management practices on fraud risk in commercial banks in Kenya

Abstract

This study sought to determine the influence of fraud risk management practices in commercial banks and their effect on fraud risk exposure. The main objective was to find the combined effect of fraud risk management practices; fraud prevention and fraud detection on fraud risk incidence in Commercial banks in Kenya. This study adopted a descriptive survey design. The target population was all the 43 Commercial banks operating in Kenya while stratified random sampling was used to determine the sample from which data was collected.

Due to the sensitivity of the subject matter and the confidentiality nature of the banking information, convenience sampling method was used in arriving at the respondents from thirty sampled commercial banks. The study used a questionnaire and interview to obtain primary data. The collected data was organised, sorted, coded and input into SPSS software which was used to generate statistics and used to make conclusions and generalizations. Descriptive statistical methods and frequencies were employed to analyze the data.

The results of the study found that Kenyan commercial banks were applying several fraud risk detection methods and prevention methods to control existing fraud risks. It was found that real time gross settlement related fraud risk was happening with a very high extent. Unapproved loans were also found to be contributing to fraud risk with a high extent. Other areas with moderate, high to very high occurrence were cheque kitting, account opening, computer fraud and credit cards. The fraud risks with small occurrence or none at all were; fund diversion, cheque kitting, account opening, counterfeit securities, money transfer, letters of credit, computer fraud, credit cards, debit cards and waiver of interest.

The regression analysis found that the fraud detection methods and prevention methods led to a negative change in fraud types and vice versa. In terms of p-value, both independent variables are not significant in influencing fraud risk types and hence not significant in explaining fraud risk management among Kenyan commercial banks. Information sharing on fraud matters should be encouraged. There have been instances where banks have suffered loss from the same group of fraudsters due to poor information sharing mechanisms. The commercial banks in Kenya should approach the issue of fraud risk as a sector and not as individual banks.