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Deposit Insurance Scheme: Pillar for Financial Safety-net

19 May 2013

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Nigeria Deposit Insurance Corporation,  Umaru Ibrahim



Kingsley Habu
The advent of bank failures in Nigeria emerged in the 1950s when all the 25 except three banks collapsed without any form of protection to the affected depositors. However, in furtherance of the implementation of the Structural Adjustment Programme (SAP) in 1986, the Federal Government accepted the recommendations of IMF and considered the need to establish an explicit deposit protection scheme.  This move paved way for the establishment of the Nigeria Deposit Insurance Corporation (NDIC).

The NDIC was established by NDIC Decree No. 22 of 1988, now repealed and replaced with the NDIC Act, 2006 to implement the Deposit Insurance Scheme in Nigeria. A Deposit Insurance Scheme is a financial guarantee to protect depositors in the event of failure of a deposit-taking financial institution. It also offers a measure of safety and engender confidence in the banking system by providing financial guarantee up to a maximum limit as provided for in the NDIC Act. It is currently fixed at N500,000 and N200,000 per depositor of deposit money banks (DMBs) as well as microfinance banks (MFBs) and primary mortgage banks (PMBs) respectively. The Corporation is also one of three pillars of the financial safety net in Nigeria with others being regulation/supervision and lender-of-last-resort role of the central bank.

The Corporation is also one of three pillars of the financial safety net in Nigeria with others being regulation/supervision and lender-of-last-resort role of the central bank. Without this type of assurance provided by the NDIC, slight speculation of liquidity problem of a financial institution can degenerate into a full-blown systemic crisis. With the DIS as a component of financial safety-net arrangement in Nigeria, depositors’ confidence has been strengthened. The NDIC operates as a “risk minimizer” which makes its broad mandate to cover the examination of books and affairs of the insured banks in order to monitor continuously their financial condition.

The NDIC has the mandate of deposit guarantee, banking supervision, failure resolution and liquidation. To achieve its mandate, the Corporation rolled out a five year strategic plan which covers the period 2011-2015. The strategic thrusts represented a mark of excellence that target four main initiatives: operational readiness, culture of continuous performance management, strategic partnering and collaboration with key stakeholders and promoting public awareness on deposit insurance system.
Deposit guarantee is the key and distinct function of the Corporation. At inception, the insurance coverage was only limited to DMBs and the maximum insured sum was N50,000 per depositor per bank. In 2006, the coverage level was increased to N200,000 for DMBs while N100,000 was fixed for microfinance banks (MFBs) and primary mortgage banks (PMBs)  when the DIS was extended to that category of institutions. By 2010, to demonstrate its commitment to depositor protection, the NDIC Board reviewed upward the insured sum to N500,000 and N200,000 for DMBs, and PMBs and MFBs respectively. That was to conform with global best practice and in line with economic realities of our environment. The Corporation was able to meet its obligation solely from the annual premiums it collected from all the insured deposit-taking financial institutions in Nigeria. The  deposit insurance guarantee scheme presently covers 20 deposit money banks (DMBs), 880 microfinance banks (MFBs) and 77 primary mortgage banks (PMIs) operating in Nigeria.

The banking supervision task of the Corporation is another mandate that aims at determining the financial condition of the deposit-taking financial institutions in order to facilitate safety, soundness and stability of the financial system. It also aims at reducing the potential risk of failure and ensure that unsafe and unsound banking practices are checked promptly. The supervisory responsibilities of the Corporation are undertaken through the off-site surveillance and on-site examination of the insured institutions from which exception reports are written with recommendations based on observed lapses. This supervisory function is shared with the CBN and over the years the two bodies have developed a comprehensive framework which had removed any conflict and duplication of efforts in exercising of their functions.

It would be recalled that soon after it commenced operations in 1989, the NDIC provided financial assistance to the tune of N2.3 billion to bail out 10 distressed banks following the withdrawal of public sector deposits in the banking system.

In the area of liquidation, the Corporation’s responsibility commences from the moment the CBN revokes the operating licence of any deposit-taking financial institution. Liquidation involves orderly and efficient closure of failed institutions with minimal disruption to the banking system, settlement of insured sums, cost-effectiveness in realization of risk and physical assets and settlement of uninsured claims to depositors, creditors and shareholders.

The Corporation has recorded giant landmark achievements in its liquidation activities despite precarious challenges over the twenty years of its existence some of which are as follows.  It is on record that the NDIC had paid a cumulative sum  of N90.13 billion to depositors of 48 deposit money banks (DMBs) in-liquidation as at 31st December, 2012 as against N80.18 billion paid as at 31st December, 2011 representing an increase of about N10 billion. Similarly, a total sum of N2.50 billion had been paid to depositors of the 103 closed Microfinance Banks (MFBs) as at 31st December, 2012 as against the sum of N2.25 billion that was paid as at the end of December 2011. That was not all, the NDIC also paid cumulative liquidation dividend to shareholders of Alpha Merchant Bank, Nigeria Merchant Bank and Pan African Bank (in-liquidation) to the tune of N373.04 million, N620.0 million and N293.0 million respectively. That was in addition to the settlement of all the depositors and creditors of the three banks (In Liquidation). The debt recoveries from closed DMBs was a cumulative sum of N24.68 billion while that of MFBs stood at N42.63 million as at 31st December, 2012. In furtherance to its commitment to maximum recovery, the Corporation packaged and offered for sale 11 debts accounts to AMCON for the sum of N795 million in 2012.

It is imperative to report that the NDIC had declared full payment of 100% of total deposits to all the depositors of 14 out of 34 banks in-liquidation prior to 2006 and had concluded the purchase and assumption (P&A) transactions on 11 out of 13 banks in-liquidation for banks closed in 2006 after the banking consolidation exercise.  The P & A method was adopted in 2006, after the bank consolidation programme which ended in December 2005 during which some DMBs could not meet the N25 billion recapitalization requirement set by the CBN. The method reduced the number of DMBs from 89 to 25 well capitalized banks.

At the end of the recapitalization exercise, 13 banks failed to meet the N25 billion requirement and therefore, had their licences revoked by the CBN. Consequently, The NDIC Board approved the adoption of P & A transaction mechanism in resolving the affairs of the affected banks in order to sustain public confidence in the banking system. The P & A transaction is a process where healthy banks are allowed to assume the deposit liabilities and assume some or all the assets of the failed banks.  The approach adopted in Nigeria, allowed private depositors’ full access to their funds. It is instructive to note that 2 out of the 13 banks, namely Fortune Bank and Triumph Bank Limited contested the revocation of their operating licences in court. As a responsible corporate citizen, the Corporation had to operate within the dictates of the law.

The latest resolution option the NDIC adopted in August, 2011 was bridge bank approach which was novel in Africa. It was a situation where regulatory authorities rescued 3 ailing banks whose failure was deemed to be capable of causing systemic crisis in the banking system. The 3 DMBs which were resolved seamlessly without disruption to the financial system were Afribank Plc, Bank PHB Plc and Spring Bank Plc which metamorphosed into bridge banks that were bought over by Asset Management Corporation (AMCON) as Mainstreet Bank Limited, Keystone Bank Limited and Enterprise Bank Plc respectively. The seamless introduction of 3 bridge banks had also saved over 3.7 million depositors from losing their funds and over 6600 jobs in the erstwhile Afribank Plc, Bank PHB and Spring Bank in August 2011.

The Corporation is also working conscientiously with the CBN to resolve the case of Savannah Bank of Nigeria Plc while it had assisted Societe Generale Bank Limited (now Heritage Bank Limited) to reopen its doors in the interest of the affected depositors who suffered untold hardship over the years.

Further to its commitment to sanitize other sub-sector of the banking industry, NDIC, in collaboration with CBN set new supervisory framework and guidelines for MFBs and PMBs. The regulatory bodies conducted special examination of all the existing MFBs, the outcome of which led to the revocation of licences by the CBN of 103 MFBs which were immediately handed over to NDIC for liquidation. Similarly, in 2013, the Corporation commenced the liquidation of 25 PMBs to give the mortgage sub sector a renewed vigor in its operations.

It is pertinent at this juncture to point out that the deposit insurance coverage of the NDIC has some exceptions which were aimed at reinforcing discipline and guard against moral hazard in the banking system. These exceptions which are clearly spelt out in the NDIC enabling law, include insider deposits (belonging to staff and directors), counter-claims deposits from persons who maintain both deposit and loan accounts, where the deposits serve as collateral for the loan account and interbank deposits. It would be recalled that some shareholders who invested during the public offers of the DMBs in-liquidation recently clamored for reimbursement from the Corporation.

In all its liquidation exercises, the NDIC has been very steadfast in ensuring prompt payment to depositors, which was within 90 days in the past and 48 hours in the case of closure of the 3 bridge banks. The Corporation also appointed agent banks to continue the payment to depositors of the 34 banks closed prior 2006 and for the 103 MFBs liquidated in 2010. Depositors’ reimbursement had also commenced for 7 out of the 25 PMBs closed recently through the appointed agent banks. Furthermore, the Corporation recently initiated a pilot scheme referred to as “depositor tracer” to reach out to depositors of liquidated banks who were yet to file their claims to come forward and collect such trapped funds. Under the scheme the Corporation staff traced the depositors to their respective addresses for the payment of their trapped claims.  The pilot scheme commenced with depositors of Ivory Merchant Bank in-liquidation which was liquidated in January 1998. As at December 2012, over 30 depositors that were traced successfully to their current addresses were paid N36.303 million representing 84.6 percent of the N42.89 million outstanding insured deposit against the failed bank. Another batch of 158 depositors with wrong or changed addresses had been referred to the agent banks appointed by the Corporation for payment of their claims under the insured deposits. This scheme was also extended to the depositors and creditors of Continental Merchant Bank in-liquidation which was also liquidated in 1998, out of which N839,523.15 was paid to two creditors.  In furtherance of such effort, the Corporation is currently documenting its experience to develop a framework for tracing missing depositors of other liquidated banks.

The Corporation has continued to embark on vigorous public enlightenment programmes to improve the understanding of its stakeholders about the deposit insurance scheme. This was undertaken in many ways. For instance, the Corporation created a Help Desk, which is a dedicated toll-free 24-hour telephone line (080063424357), to address depositors and other stakeholders’ enquiries. It also, developed of a user-friendly, robust and interactive Website-www.ndic.ng.org   and Email -info@ndic.org.ng.

The Corporation has also established Complaint Units in the Bank Examination Department (BED), Claims Resolution Department (CRD), and Special Insured Institutions Department (SIID) to address complaints of customers of the deposit money banks and microfinance banks/primary mortgage banks respectively. It is instructive to note that the Corporation has been receiving a lot of commendations from depositors for this initiative.

The NDIC has published books, pamphlets, and fliers such as Facts about NDIC, Basic Knowledge in Banking, 20 years of Deposit Insurance in addition, among other publications which were distributed to students on educational visits, tertiary institutions and general public free of charge

Other public awareness initiatives embarked upon by the Corporation included the following: Periodic press briefings by the Corporation’s MD/CEO; Sensitisation Seminar for relevant Committees of the National Assembly, Judges and other key stakeholders; Partnership with the mass media through the annual Editors Forum and Annual Workshop for Business Editors and Finance Correspondents under the umbrella of the Finance Correspondents Association of Nigeria (FICAN); Production of depositor protection awareness television and radio jingles in three major Nigerian Languages, namely Igbo, Hausa and Yoruba and transmitting same on national and local television and radio stations nationwide; Production and transmission of a weekly public enlightenment television programmes tagged “NDIC Calling”; and hosting of students of secondary schools, universities and other higher institutions on educational visits.

The Corporation is also championing a cause for the establishment of an explicit Investor and insurance policy holder Protection Schemes to protect small investors and insurance policy holders in the capital market and conventional insurance sub-sectors of the financial system. There is no doubt that it is never a case of too little or too late for reimbursement of depositors of liquidated banks in Nigeria. The NDIC has been very proactive and left no one in doubt as to its commitment to protect depositors’ interest. As a matter of fact, unlike what obtains in other jurisdictions, the NDIC allows depositors of liquidated banks to file their claims beyond the statutory time limit of five (5) years as contained in the NDIC Act 2006.

—Kingsley Habu is a Lagos-based financial analyst.

Tags: Business, Nigeria, Featured, Insurance Scheme

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