Prevailing economic situation, high inflation, exchange rate disparity and other exigencies, may have neutralised the value of insured sum paid to depositors of liquidated financial institutions by NDIC, ABDULWAHAB ISA reports

Banking sector umpires, the Central Bank of Nigeria (CBN) and the Nigeria Deposit Insurance Corporation (NDIC), work round the clock, routinely to ensure the banking space remains healthy, resilient and strong. On the flip side, NDIC, the insurer on whose shoulders rests the sacred thrust of protecting depositors’ funds in banks’ custody, carries a burden of trust. With the Corporation’s deposit insurance scheme in place, NDIC is depositors’ confidence retainer in the banking sector value chain. Deposit insurance is a system established by government to protect depositors against the loss of their deposits placed with member institutions in the event that a member institution is unable to meet its obligations to depositors. It engenders public confidence, promotes stability of the banking system by assuring depositors of the safety of their funds.

Engendering depositors’ confidence

The advent of NDIC in 1988 changed the banking system. Prior to the time, the banking sector was threatened by enormous challenges. The system was confronted by instability. The scenario ranges from non-performing loans (NPLs), which at the time was high, weak capital base, Return on Capital and Equity (ROCE), weak corporate governance structure and insider abuse related incidences. The challenges facing the banks dragged on until the early 90s. Many banks were distressed. Public confidence waned. The NDIC came to the rescue by implementing various packages of EDIS ranging from provision of financial assistance, use of corrective action, assumption of control and management; restructuring, purchase and assumption, sale of distressed banks through bridged banks and liquidation of terminally distress banks. The CBN and NDIC Examiners routinely conduct planned and random checks (on site/off-site on banks to ensure they remain within the confines of standard and acceptable banking practice. In the event of bank failure, one of the key instruments of EDIS used by NDIC to protect depositors is implementing layers of deposit insurance coverage for depositors of failed banks. The insured sum NDIC pays depositors of failed institutions varies.

The Corporation, over the years, increased deposit insurance coverage to strengthen the confidence of the public in the banking system. This coverage refers to the minimum guaranteed sum that is immediately payable upon a bank’s failure. The coverage for deposit money banks (DMBs) has been increased from N50,000 in 1989 to N200,000 in 2006 and more recently to N500,000 in 2010.

In the case of failure of microfinance banks (MFBs), the insured sum has been reviewed upwards from N100,000 to N200,000 in response to developments and N500,000 insured sum to depositors of Primary Mortgage Bank (PMIs). Categories of assured sum paid by NDIC strengthen confidence of depositors in the banking system. The Corporation, last week, gave an update on liquidation in the banking sector thus far.

The occasion was the yearly Finance Correspondents Association of Nigeria (FICAN) workshop organised by NDIC in Ibadan, Oyo State. The Corporation said it had liquidated at least 500 deposit money, microfinance, and primary mortgage banks whose licences were revoked by the Central Bank of Nigeria. NDIC said it had also commenced settlement of liquidation dividends of depositors of the banks. Galadima Gana, the Director, Insurance and Surveillance Department of the NDIC, confirmed the updates in Ibadan.

According to Gana, the Corporation had closed 325 MFBs, 50 PMBs, and 49 DMBs whose license were revoked by the CBN with minimal effects on the stability and confidence in the banking sector. Cumulatively, he said the Corporation paid N8.27 billion to insured depositors of DMBs, N3.38 billion to insured depositors of MFBs, and N11 billion to insured depositors of PMBs. He stated that the payment to uninsured depositors, creditors, and shareholders of DMBs cumulatively stood at N100.85 billion, N1.27 billion, and N4.83 billion, respectively.

In an interview with journalists, NDIC Managing Director, Mr. Bello Hassan, said the Corporation had begun paying liquidation dividends of depositors of the banks. ”One of our mandates is also to liquidate licensed deposit institutions whose deposits have been revoked by the CBN. So, you have various categories that are currently in liquidation, the Deposit Money Banks (DMBs), Micro Finance Banks (MFBs), and Primary Mortgage Banks (PMBs). “As liquidators, what we do immediately there is (a) revocation of license is to pay the maximum insured amount. “After that, the Corporation “proceeded to recover the loans and advances” granted by the liquidated institutions before revocation and “also realise the assets” left behind “so that we can pay it to the depositors. “We only pay the maximum insured amount at the point of liquidation then, subsequently, begin to pay depositors and after that, we wind up, but the payment is currently on-going,” he said.

Imperative of upward review of insured deposit

Currently, NDIC pays insured deposits of various amounts to the depositors of liquidated banks. The sum ranges from N200,000 in the case of MFBs and N500,000 to DMBs and PMIs. Given the current inflationary pressure, exchange pressure, arguments are being canvased for upward review of sum insured paid to the depositors of liquidated banks by NDIC.

The managing director of the Corporation, Hassan, admitted at a recent workshop for FICAN that the agency was working on the upward review of deposit insurance fund in order to address the financial crisis that may arise when a bank collapses.

He spoke on the theme: “Enduring Extreme Disruptions: Resilience and Reinvention for Banking System Stability & Deposit Insurance.” Deposit Insurance Fund is used to meet the primary obligations of the Corporation in the form of payment of guaranteed sums and provision of financial assistance to eligible insured institutions. Hassan noted that the Corporation was also mulling the review of its determination of premium by banks to make it more riskbased. To this end, Hassan said the recent revised framework would enable the NDIC to accurately determine the amount that will be sufficient to meet any liability that might crystallise on the deposit insurer. He said that the review will be implemented in line with Section (2) sub-section (1) of the NDIC Act.

The sub-section states that “the Corporation shall have responsibility for giving assistance to insured institutions in the interest of depositors, in case of imminent or actual financial difficulties particularly where suspension of payments is threatened to avoid damage to public confidence in the banking system.” The NDIC boss added that the Corporation was also considering other reforms to ensure that it delivers on its mandate to ensure the stability of insured institutions. “In the area of deposit insurance, as a key mandate of the Corporation, we have evolved a strategy, which accentuates our existing framework.

The initiative strives to ensure that the insurance cover is adequate to support this objective within the banking sector. In addition, considering the importance of the optimum Funding Ratio in deposit insurance, we are developing an effective methodology for determining a realistic Target Funding Ratio for the Corporation.

“Furthermore, there have been recent calls on the Corporation to enhance the provision of support to insured institutions that are facing financial difficulties. To this end, we have identified the need to reconsider our framework, to provide realistic terms and conditions that will enable qualifying insured financial institution promptly access technical and or financial support, in line with S.(2)(1)(b) of the NDIC Act, whilst also protecting the Corporation from possible downside risks,” he said.

Speaking on the rationale behind the review, he said: “Essentially, we want to make it risk based looking at the various factors that could impact on the viability of the bank to be able to say that maybe this is the number of banks that might likely collapse and if they collapse do we have sufficient funding to be able to make that payout?” The NDIC boss said that the Corporation was collaborating with relevant stakeholders to ensure that it discharges its responsibilities efficiently without hindrances, following the revocation of licenses of any insured institution by the Central Bank of Nigeria. He said that this move had become critical, given the need to improve on its processes in resolving liquidated financial institutions. Hassan said that the theme was apt as it highlights the need for stakeholders to develop strategies that can build resilience into the Nigerian financial system. On some of the challenges hindering the efficient resolution of the liquidated institutions, Hassan said the slow recovery and realisation of assets as well as litigations by erstwhile shareholders and creditors of closed banks could only be addressed through effective collaboration.

Last line

Prevailing high inflation rate, weak purchasing power and wide disparity in exchange rate between national currency and other foreign currencies make it compelling for NDIC to review upward insured deposits paid to depositors of liquidated financial institutions.