11 November 2012

Nigeria: Deepening Deposit Insurance


Despite its growing popularity and obvious benefits, deposit insurance scheme (now operative in 111 countries), is not without critics as some people even questioned its necessity. The debate between the proponents and opponents of deposit insurance has a long history dating back to the 1930s in the US. It was a tug of war between Branch-banking conglomerates of the South and the Unit Bank entrepreneurs of the North. It is a fact from that history that bank insurance was once not the exclusive domain of the government.

There is no denying the fact that, the central role of Government in providing protection against systemic collapse of the banking system even by proponents of private insurance of deposits is critical. The major reason of governments that adopted the deposit insurance to date has always been the social costs associated with disruption to the economy's payment system arising from financial panics during banks' insolvency crisis--which is a re-occurring phenomenon in history and across geographical boundaries.

Nigeria joined the league of world deposit insurance schemes in 1988. Nigeria Deposit Insurance Corporation (NDIC) was established as part of the economic reform measures taken by the General Babangida administration, to strengthen the safety net for the banking sector following the implementation of the 1986 Structural Adjustment Programme (SAP) in 1986. The mid-eighties to early nineties was a particular difficult period in Nigeria's financial history. This was the period the country witnessed the phenomenal increase of banks from 40 in 1986 to 120 in 1992. Soon distress in the banking sector became manifest.

Thus, NDIC came into existence at a period when risks facing depositor's funds were at their peak. Increased competition amongst rising number of banks led to sharp practices in the industry. People of questionable integrity found their ways into ownership and managerial positions in banks while inadequate manpower threatened the quality of services offered. Under these circumstances even the most passionate advocate of private insurance cannot possibility close his eyes to the need of a strong government regulatory institution to sanitize the industry, which the NDIC was poised to offer.

The impact of NDIC during those difficult years and beyond is clear for any careful observer of Nigeria's financial scene. Through its supervisory actions, NDIC ensured harmony between owners and managers in fierce boardroom fights. During the same difficult periods it placed Holding Actions on 33 distressed banks to restrict operation and encourage self-restructuring. Particularly in 1989, the year the Corporation commenced operation, NDIC, in collaboration with CBN, granted facilities to the tune of N2.3 billion to ten banks mired in liquidity problems. And between 1991 and 1996 it literarily took over the management and control of almost 30 distressed banks, while between 1996 and 2000 it supervised the handing over through acquisition and restructuring of seven distressed banks to new investors.

The days of the incumbent MD/CEO, Alhaji Umaru Ibrahim at the helm of affairs saw the Corporation continually building on its past successes--successes which he has been part and parcel of having joined the Corporation since its inception in 1989. Worthy of note is the strengthening of Risk-Based Supervisory (RBS) approach in its supervisory role, which is in line with international best practice. The new approach allowed for the optimization of supervisory resources, as well as encouraged prudent risk management in banks.

Determined to avoid the repeat of the 2008 banking crisis in the country, the NDIC under Alhaji Ibrahim, who was appointed MD/CEO in 2010, is pursuing vigorously the examination of insured institutions. This can be seen from the dispatch with which the Corporation is handling maiden examination of the three recently acquired banks by AMCON which commenced on Monday 7th May, 2012 all in an effort to promote safe and sound banking practice and also engender depositor confidence in the financial system. The examination was meant to assess the regulatory compliance and financial condition of the banks in the first five months of their existence.

The good news coming out of the financial system, especially in the last one year is that the banking industry is well capitalised, adequately liquid with improved asset quality. For example the off-site supervisory activities of the Corporation revealed that the financial condition and performance of the banking industry improved in the current financial year compared to its performance as at 31st December, 2011. The banking industry total assets grew by 5.38% from N18.20 trillion in December 2011 to N19.18 trillion as at 31st August, 2012. Similarly, Net Loans and Advances increased by 16.20% from N6.42 trillion as at 31st December, 2011 to N7.46 trillion as at 31st August, 2012. Industry total deposit liabilities also grew by 6.57% from N12.33 trillion as at 31st December, 2011 to N13.14 trillion as at 31st August, 2012. All banks met the CBN prescribed minimum liquidity ratio of 30% during the current financial year.

Similarly, much progress has been recorded by the corporation in its role as liquidator of the closed insured banks through asset realisation and payment of liquidation dividends to un-insured depositors and other eligible claimants of the closed insured banks. In a recent submission to the Senate Committee on Banking, Insurance and Other Financial Institutions, the Corporation reported that "a cumulative recovery for deposit money banks (DMBs) from 1994 to September 2012 stood at N23.334 billion as against N22.260 billion recovered as at 31st December, 2011. That showed an increase of N1,074.36 million, representing 4.83% in debt recovery between January and September 2012. Similarly, total cumulative recoveries from the closed MFBs as at August 31st, 2012 stood at N30.66 million against N13.57 million recovered as at December, 2011. That showed an increase of N17.09 million, representing an increase of almost 126% over the December 2011 figure".

With the above highlighted examples of the achievements of the Corporation since its inception and in the last two years, the imperatives of a strong state-backed deposit insurance scheme in Nigeria cannot be over emphasised.

Ibrahim Hassan wrote this piece from Abuja

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