Preventive Fraud Risk Management and Fraud Incidence: Evidence from Commercial Banks in Kenya (2020–2024)

Abstract

Fraudulent activities often undermine institutional stability, erode customer confidence, and damage reputations among players in the banking sector. In Kenya, commercial banks lose approximately Ksh. 13 billion annually to fraud despite substantial investments in internal control systems and fraud prevention technologies. This study examined the effect of preventive fraud risk management practices (FRMP) on fraud incidence among commercial banks in Kenya between 2020 and 2024. Anchored on the Fraud Management Life Cycle Theory (FMLCT), the study adopted a causal research design and a quantitative approach. Data were collected using structured questionnaires from 168 senior officers drawn from 28 randomly selected commercial banks in Nairobi, Kenya. Correlation and simple linear regression analysis was conducted using SPSS Version 28. Results revealed a weak but significant negative relationship between preventive FRMP and fraud incidence (β = -0.405, p = .022, R² = .046). Key preventive practices like audit committee empowerment, customer due diligence, fraud prevention training, and staff rotation were found to moderately reduce fraud occurrences in commercial banks. The study concludes that preventive FRMP are essential but insufficient in isolation; their effectiveness depends on integration with other measures within a strong organizational risk culture. It recommends strengthening audit committees, enhancing fraud awareness training, and leveraging emerging technologies such as AI and data analytics to reinforce preventive measures and minimize fraud risks in the banking sector.