Published On: Mon, Aug 21st, 2017

NDIC Plans for risk free banking

EMEKA EJERE  |

The Nigeria Deposit Insurance Corporation (NDIC) last month secured a landmark judgment to the tune of N556.49 million for the depositors of the defunct Lead Merchant Bank Limited. The depositors’ ordeal had begun with the Central Bank of Nigeria (CBN) revoking the bank’s operating license, with that of 13 other banks th at could not meet the December 31st 2005 recapitalisation deadline.
The NDIC, however, wants to ensure that customers of closed banks are not subjected to long suffering again. To achieve this, the Corporation is seeking a series of amendment to its enabling Act, which among other things, would allowed it to minimise the risk of bank failure, and also to be able to pay customers of failed banks promptly, without legal hindrance.
The Deposit insurance system (DIS) plays a major role in strengthening depositors’ confidence in the financial system. This is because of its pivotal role as a financial safety net component that guarantees protection to depositors, particularly small and uninformed savers up to the maximum insured limit. The DIS ensures that depositors do not lose all their money in the event of a bank failure.
The DIS also guarantees depositors protection by providing compensation in time of need. The interplay of these factors coupled with effective banking supervision and distress resolution mandate of DIS goes a long way in discouraging apathy and anxiety that tend to exclude the unbanked from the formal financial system, thereby promoting financial inclusion.
In financial circles today, the strong relationship existing between financial inclusion, financial literacy and consumer protection has been recognized and given prominence in the quest to achieve Financial System Stability.
The NDIC has its origin in the report of a committee set up in 1983 by the Board of CBN to examine the operations of the banking system in Nigeria. The Committee in its Report recommended the establishment of a Depositors Protection Fund. Consequently, the Nigeria Deposit Insurance Corporation was established through the promulgation of Decree No. 22 of 15th June 1988.
This was part of the economic reform measures taken by the then government to strengthen the safety net for the banking sector following its liberalization policy and the introduction of the 1986 Structural Adjustment Programme (SAP) in Nigeria.
The phenomenal increase in the number of banks from 40 in 1986 to 120 in 1992 led to increased competition amongst banks leading to sharp practices; people of questionable integrity becoming bank owners and managers; inadequate manpower; as well as coming together of strange bedfellows due to the licensing requirement that banks maintain adequate geographical spread.
All these led to serious breakdown in corporate governance and boardroom squabbles. The unpredictable policy environment, downturn in the economy and political upheavals at the time, also exacerbated the difficult situation the Corporation found itself in.
The banking industry was therefore, already in distress by the time the Corporation commenced operations in March 1989. NDIC operated under a difficult terrain at the time and was immediately saddled with the management of distress in the banking industry, to avert the impending systemic crises and its resultant consequences.
Consumer protection
The NDIC administers the DIS with the mission statement: “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”.
Protecting depositors and contributing to financial system stability explains the unique roles which underscore the place of deposit insurance scheme as a forerunner to financial inclusion.
It is unassailable to say that it is only where there is a strong deposit protection mechanism that people can be encouraged and be easily influenced to embrace the mainstream formal financial system. Against this backdrop, the NDIC has continued to take steps that boost confidence in the system.
In 2010, the Corporation increased maximum coverage limits of deposit money banks (DMBs) from N200,000 to N500,000 per depositor per bank and that of microfinance banks (MFBs) from N100,000 to N200,000 per depositor per bank. Similarly, coverage level for depositors of primary mortgage banks (PMBs) was reviewed upward from N200,000 to N500,000 in 2016. The limits were set to cover over 95 per cent of total bank depositors in line with International Association of Deposit Insurers (IADI) core principle for effective deposit insurance which stipulates that coverage should cover large majority of depositors.
Other initiatives adopted by the Corporation to enhance depositor protection and financial inclusion included introduction of Non Interest Deposit Insurance coverage up to N500,000 per depositor to cater for depositors of Non Interest Banks (NIBs) as well as deposit insurance coverage up to maximum limit of N500,000 per subscriber of mobile money operators.
The Corporation also organizes annual workshop for Business editors and Financial Correspondents (FICAN), road shows and participation in various international trade fairs and sensitization seminars for key stakeholders to enhance public awareness on its mandate.
In large measure, the NDIC as one of the three components of financial safety-net has contributed immensely toward engendering depositors’ confidence, soundness and stability of the financial system while consolidating on the gains achieved in the drive towards financial literacy and consumer protection in promoting financial inclusion.
An NDIC study on financial literacy in Nigeria showed gaps in financial literacy among Nigerians. Five domains of financial literacy were identified in the study and they included:
Money Management :- Responses showed only about 46.8% of respondents tracked their expenses and 38.6% reconciled their accounts books. Majority of the respondents would fall on their savings while 26.7% would have to borrow if they run out of money.
Financial Behaviour:- 47.4% shopped around before buying financial products and marketability of a product was the major feature considered by the respondents when making such purchases
Financial Planning:- 69% engaged in budgeting for their expenditures whilst only about 55.4% engaged in long-term financial plan.
Financial Knowledge:- 85.7% of the respondents considered financial knowledge as being important in their day-to-day activities. Except for 4.6% of the respondents who admitted to having poor knowledge, all claimed to have varying degree of knowledge.
Financial Experience:- Evidence showed that most of the respondents operated bank accounts with savings representing the largest of these accounts whilst mortgage accounts were the least. With respect to investments, 68.2% had undiversified investment portfolio while 32.2% had investments in the stock market.
Prompt payment of insured deposits
It is the responsibility of NDIC to ensure that depositors of failed banks have prompt access to their money (the insured deposit). However the Corporation has been severally frustrated from performing this responsibility.
“The greatest significance is the experience from recent bank closures where the Corporation was unable to refund depositors fund trapped in some closed banks. The inability to refund depositors funds was not because there was no money to pay but because the owners of the closed banks had instituted endless litigations against regulatory authorities”, Managing Director/Chief Executive of the Corporation, Alhaji Umaru Ibrahim, had lamented at a Senate hearing.
To address this frustration, the Corporation is seeking amendments that would empower it to pay insured depositors of failed insured institutions even in the face of litigations challenging the revocation of the operating license of the institutions.
This is to ensure depositors do not suffer due to inability to access their money trapped in such institutions. In addition, NDIC is also seeking powers to be able to pay insured depositors whenever an institution becomes insolvent and has suspended payment to depositors.
This means that when an insured institution becomes distressed and cannot pay depositors their money, but its license is yet to be revoked by the CBN, the NDIC can step in and pay the depositors their insured deposit, thus minimising their suffering as a result of the insolvency of the insured institution.
On how soon the amendment could be secured, Head of Communications and Public Affairs Hadi Birchi, told Business Hallmark that NDIC has only made a proposal for the amendment to the National Assembly, saying he was not in position to say when it would be secured.
“It is a proposal that we made to the National Assembly and it’s left for them to act on it. I cannot tell you clearly that this is when it’s going to happen because it’s not within our power to say that,”
Declining bank fraud
Delivering a lecture penultimate week, Alhaji Ibrahim, revealed that the banking industry recorded a decline in the rate of successful fraud incidences and extent of amount of losses in 2016, compared to 2015.
The lecture, titled: “The Role of NDIC in Mitigating Corruption in the Nigerian Banks,” was delivered at the general meeting of the Abuja Chapter of the Alumni Association of the National Institute.
According to Ibrahim, who was represented by the Deputy Director in Research, Policy and International Relations Department, Hashim I. Ahmad, the reported cases of frauds, forgeries and outright theft involving bank staff recorded a huge decline of 48.12 per cent from N18.02 billion in 2015 to N8.68 billion in 2016, while the actual losses to the nation’s banking industry dropped by 24.29 per cent from N3.17 billion in 2015 to N2.40 billion in 2016.
Also, the level of attempted cases of frauds and forgeries declined by N0.329 billion or 11.94 per cent from N2.756 billion in March 2017 to N2.427 billion in June 2017. The NDIC boss also stated that although reported cases of fraud and forgeries rose by 36.42 per cent from 12,279 cases in 2015 to 16,751 cases in 2016, the reduction in the rate of successful fraud incidences and actual losses was an indication of improved regulatory/supervisory oversight, increased vigilance by banks and the deployment of improved security architecture in the banking industry.
He attributed the factors breeding corruption in Nigerian banks to poor corporate governance, infractions in foreign exchange operations, cumbersome legal process and lack of effective sanctions of offenders, amongst others.
Ibrahim reiterated that the NDIC in conjunction with the Central Bank of Nigeria continuously supervise the banks to ensure their strict adherence to sound corporate governance practices, adding that issues bordering on unethical financial practices and the resolution of conflicts between customers and their banks were being addressed by the Bankers Committee.
The NDIC boss also noted the rising trend in the level of banks’ non-performing loans and stated that the NDIC had recommended the prohibition of Directors of licensed banks, including microfinance banks and primary mortgage banks, from obtaining credit facilities from their respective banks.
Ibrahim pointed out that the NDIC collaborated with other stakeholders such as the Economic and Financial Crimes Commission, Police Special Fraud Unit and the Financial Malpractices Investigation Unit to conduct investigations into banking malpractices.

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