Established in 1998 to address the myriads of challenges associated with rampart bank failures at the time, the Nigeria Deposit Insurance Corporation (NDIC) has grown to become a shining light in Nigeria’s financial landscape; BENJAMIN Umuteme writes.
The NDIC was established by the NDIC Decree No 22 of 1988 which was later replaced by the NDIC Act No 16 of 2006 as a response to the government’s search for a third leg of the financial safety-net components comprising the lender of the last resort by the Central Bank of Nigeria (CBN).
It is meant to administer the deposit protection scheme on behalf of the federal government and to serve as a vehicle for implementing failure resolution options for badly managed insolvent banks.
As an independent agency of the federal government, part of its mission is to protect depositors and contribute to the stability of the financial system through effective supervision of insured institutions, provision of financial/technical assistance to eligible insured institutions, prompt payment of guaranteed sums and orderly resolution of failed insured financial institutions.
The purpose of the deposit insurance system is to protect depositors and guarantee the settlement of insured funds when a deposit-taking financial institution can no longer repay their deposits, thereby helping to maintain financial system stability.
What has helped the regulator to continue effectively in carrying out its mandate is the belief that teamwork, respect and fairness, integrity, professionalism and passion should drive the Corporation as it strives to attain a standard that other regulators worldwide can emulate.
The Deposit Insurance Scheme (DIS) being implemented by the NDIC was designed as a Risk Minimiser, with the mandate to execute deposit insurance, bank supervision, failure resolution and bank liquidation.
In a broader sense, it is meant to insure all deposit liabilities of licensed banks and such other financial institutions operating in Nigeria within the meaning of Sections 16 and 20 of this Act so as to engender confidence in the Nigerian banking system; give assistance to insured institutions in the interest of depositors, in case of imminent or actual financial difficulties of banks, particularly where suspension of payments is threatened, and avoiding damage to public confidence in the banking system; guarantee payments to depositors, in case of imminent or actual suspension of payments by insured institutions up to the maximum as provided for in section 20 of this Act; assist monetary authorities in the formulation and implementation of policies so as to ensure sound banking practice and fair competition among insured institutions in the country; and pursue any other measures necessary to achieve the functions of the Corporation provided such measures and actions are not repugnant to the objects of the Corporation.
Warning signals
As in most cases, before any financial institution fails, there must be warning signals which most times, its operators skirt over or fail to notice.
In the course of supervision, the Corporation looks out for these early signals which could eventually lead to a bank not being able to meet its obligations.
Among such signs are: insider abuse, abusive ownership and weak board of directors, weak corporate governance, poor risk management process, inadequate capital, weak regulatory and supervisory measures as well as economic and political factors are primary reasons why some of these banks failed.
And the deposit insurer has not shied away from its responsibility as it looks out for signs such as aggressive growth and excessive competition for deposits, shareholder’s squabbles, frequent changes in management and ownership, change in major business lines.
Others are failure to meet the minimum Capital Adequacy Ratio of ten per cent, rising non-performing loans to total credit ratio of above five per cent, failure to meet the prevailing minimum liquidity ratio of 30 per cent, high total expense to total income ratio and high incidences of fraud.
“Once a bank’s license is revoked, NDIC takes over for liquidation,” he noted.
For political economist Adefolarin Olamilekan, the recent challenges within the banking system of Nigeria, in regard to activities of unscrupulous individuals and groups defrauding innocent people of their money, shark loans apps, failed transactions, wonder banks operators, unregistered microfinance banks and credit thrift associations, the NDIC has its hands full, and it is not yet Uhuru for the financial sector regulator.
He noted that many Nigerians across board have fallen victims of disgruntled elements that have taken advantage of some loopholes to wreak havoc.
According to him, the NDIC has its hands full in its bid to sanitise the financial sector by ensuring that appropriate measures are taken to rid the sector of bad eggs, and clean-up the entire system.
Pragmatism in depositors’ protection
A peep at what the NDIC has done over the several decades of its establishment is to ensure that depositors are not short changed as a result of the recklessness of bank officials as well as ensure the stability of the financial system through effective supervision of insured institutions, provision of financial/technical assistance to eligible insured institutions, prompt payment of guaranteed sums and orderly resolution of failed insured financial institutions.
Added to this is the fact that the Corporation supervises banks so as to protect depositors; foster monetary stability; promote an effective and efficient payment system; and promote competition and innovation in the banking system.
As an innovative regulator looking to be one step ahead in its game, the Corporation adopted various options in resolving the failures of DMBs, MFBs that have failed since its establishment.
The options employed however depended on the peculiarity of the problems of the insured institutions.
They ranged from Open Bank Assistance to Deposit Pay-out, Purchase and Assumption, and Bridge Bank.
One of the landmark achievements in distress resolution was the institution of a framework for the provision of financial and technical assistance to deserving insured institutions to alleviate the liquidity challenges being faced by MFBs and PMBs.
The framework was fine tuned in 2014 and the sum of N16 billion was set aside for eligible insured institutions to access. In addition, a framework for consolidated supervision was developed in conjunction with the CBN which enables the supervision of banks’ related entities with a view to ring-fencing the banks and protecting depositors’ funds.
From 1988 when it was incorporated, the Corporation has so far liquidated 425 financial institutions.
A breakdown showed that 51 of the liquidated institutions were Deposit Money Banks; 325 were Microfinance Banks while 51 were Primary Mortgage Banks.
There have been delays to payment to depositors due to litigation challenging the revocation of their operating licences by the Central Bank of Nigeria.
For instance, depositors of failed Fortune International Bank, Triumph Bank and Peak Merchant Bank should have been paid since 2019 but various litigations have put a hold on that exercise.
Like the assistant director, Insurance and Surveillance Department of the Corporation, John Abiodun, pointed out, NDIC has been able to through efficient and diligent liquidation activities successfully paid in full the deposits of customers of 18 DMBs that were both insured and uninsured.
He said, “But payment to Depositors of Fortune International Bank, Triumph Bank and Peak Merchant Bank was put on hold as at the end of 2019 due to litigation challenging the revocation of their operating licence.”
Experts’ views
According to Adefolarin, the stability of the nation’s financial sector is the core essence why NDIC was established. He noted that the financial sector is the first victim when things go south.
“We believe the act that established NDIC is sensitive to making the institution enjoy power to deepen financial stability in the country. Therefore, NDIC cannot but ensure it plays by its rules, especially by engaging in ethical standards that would allow smooth operations of its mandates.
“In other words, it is imperative that NDIC as a regulator ultimately builds a robust monitoring and evaluation mechanism that regularly updates events in the sector.
“Another one is a feedback element that should be built to analyse financial transactions and outflow, so as to checkmate abuses of the system,” he said.
Continuing, he said, “Moreso, it is appropriate that NDIC with the act that established it use relevant clauses to sanctions and penalise erring financial institutions when necessary.
“Consequently, embracing a stakeholders’ platform as a medium of building confidence, shared responsibility and collective commitment in the sector will go a long way to make NDIC deepen Nigeria’s financial stability. What this means is that beyond NDIC being a regulator, it has also demystified it to enjoy sector players’ trust.
“Similarly, the use of technology cannot be overemphasized in the financial sector. NDIC in this respect mist take advantage of technology, essentially to create an inclusive model that takes cognizance of bottom top approach.
“Meanwhile, deployment of media channels cannot be overestimated by the Corporation toward deepening financial stability in Nigeria. Again, the role and engagement of the media is very key.
“This would help in public education and sensitization on how best Nigerians can relate with NDIC and further boost confidence in the sector.
“In all this, we still acknowledge the efforts of the current managers and staff, we however admonish them to keep their heads up because the coast is not clear yet as evil mechanisms against the system continue to fashion ways to compromise the sector.”
