INSIDER CREDIT ABUSE IN FINANCIAL INSTITUTION
Insider credit abuse in financial institution: Insider credit abuse refers to unprincipled and/or fraudulent activities being undertaken by employees who are responsible for processing or taking decision on loan applications and credit-related transactions in the bank. This abuse can have serious consequences for both the bank and all its stakeholders.
In recent times, financial institutions, especially banks in Nigeria, Europe, etc is witnessing huge number of bad loans, which are sometimes caused by either negligence, fraudulent practices, or a combination of both.
Insider credit abuse can occur due to various reasons, including but not limited to:
Failure to ensure adherence to established controls: Inadequate oversight and non-adherence to controls can create opportunities for employees to abuse their positions and extend credit to themselves (directly or indirectly), to individuals or entities without proper scrutiny.
Others are situations where staff collude with customers to inflate their loan amounts via forged and misleading documents to boost customers’ eligibility for facilities in exchange for kickbacks, and so on. A good research reports 1,600 finance leaders in the Europe, especially US and Great Britain and shows that 59% of UK businesses and 73% of US businesses have witnessed increases in insider threats and insider employee fraud over the past year.
Weak Risk Management Practices: Banks which have weak risk management practices fail to detect or prevent insider abuses. These abuses may manifest in form of failure of responsible officers to ensure full disclosure of all information relating to obligor which may have significant effect/impact on credit decision making. Similarly, there may also be failure in ensuring adequate documentation and full execution of all conditions precedent and subsequent.
Conflict of Interest: Employees with decision-making authorities might be conflicted without disclosure in making credit related decisions on customers with whom they have personal interests or relationships that may lead them to avail loans to friends, family or associates without proper evaluation of creditworthiness to unfairly obtain credit facilities from the bank.
Personal gratification. Insiders may abuse their credit decision making positions to extend faulty credit in exchange for bribes, due to greed and lack of integrity.
Inadequate Training and Recruitment Failures: These result in poor understanding of credit policies and procedures making the bank’s credit policies susceptible to abuse. Other issues are inadequate background and/or character checks, and so on.
Falsifying Information: From Account Officers to Underwriters, banks have come to see that insider credit abuse occurs when staff provide false or misleading information about a borrower’s financial situation, assets, or creditworthiness to approve loans that should not have been approved.
Inadequate Assurance Reviews: Auditors and Control staff are not left out when they fail to review the effectiveness of the bank’s risk management practices and credit risk exposures.
Compensation Incentives and Pressure to Meet Targets: Pressure to meet lending targets or goals can push employees to cut corners and approve loans without conducting thorough due diligence. Also to blame are compensation structures that reward employees based on the volume of loans originated rather than the quality of loans. This can incentivize risky lending practices.
Lax Enforcement of Policies: When we do not enforce our credit policies rigorously or fail to apply adequate consequence management for violations. This can create an environment where insider credit abuse goes unchecked.
IMPACT OF INSIDER CREDIT ABUSE IN GLOBAL FINANCIAL INSTITUTION
Financial Loss: Loans which were improperly approved or manipulated may result in defaults or losses, impacting the bank’s financial stability. Erosion of shareholders’ value, loss of depositors’ funds can result from insider credit abuses especially if they lead to financial losses or legal liabilities.
Legal and Regulatory Sanctions: Bank may face legal and regulatory penalties for failing to prevent or address insider credit abuses.
Operational Disruption: Investigating and rectifying insider credit abuses can disrupt the banks’ normal operations, diverting resources and management attention away from core activities.
Reputational Damage: Incidents of insider credit abuses can tarnish a bank’s reputation, eroding trust among customers, investors, and the public.
Loss of Talent: If the abuses are widespread or systemic, the bank may lose talented employees who may be implicated or choose to leave due to career concerns.
The cost of insider credit abuse to financial institution in Europe, Nigeria, Asia can be significant, both in terms of immediate financial impact and the long-term consequences of damaged reputation and reduced trust. All employees are responsible for protecting the bank and ensuring that negligence, greed, rationalization and all forms of unethical practises are avoided.