James Emejo scrutinises the recent policy intervention by the NDIC to prevent potential bank runs as well as boost confidence in the banking sector amid rising inflation, and naira depreciation, among other headwinds.
In a major policy initiative to boost confidence in the financial landscape, Managing Director/Chief Executive, Nigeria Deposit Insurance Corporation (NDIC), Mr. Bello Hassan, recently announced an increase in Maximum Deposit Insurance Coverage (MDIC) levels for all licensed deposit-taking financial institutions in the country, with immediate effect.
Citing the International Association of Deposit Insurers (IADI) Brief No. 9 of 2023 that examined the recent bank failures in the United States of America and Switzerland, the NDIC boss explained that high levels of uninsured deposits in insured institutions might increase the likelihood of bank runs with dire impact on the stability of the financial system.
He said it had become necessary to review the deposit insurance coverage coverage in the face of current macroeconomic challenges including deposit distribution, the impact of inflation, per capita GDP, exchange rate, and other statistical models.
While reaffirming the NDIC's unwavering commitment to protecting depositors and contributing to the stability of the financial system, he stressed that adjustments to the maximum deposit insurance coverage reflected the corporation's dedication to adapt and evolve in response to the changing landscape of the financial industry.
According to him, "we remain steadfast in our pursuit of a secure and resilient banking environment for all," Hassan said, adding that the NDIC's mandate of deposit guarantee remained a critical component of depositors' protection, as it guarantees the payment of deposits up to a maximum limit in the event of bank failure.
Mitigating Risks to Financial Sector
In the wake of the 2008 global financial crisis, the importance of deposit insurance has become more apparent than ever. Deposit insurance is a crucial safety net that protects depositors in the event of a bank failure, ensuring that their funds are secure and accessible.
Deposit insurance is a government-backed programme designed to protect depositors in the event of a bank failure. The primary function of these programmes is to ensure that depositors have access to their funds, even if a bank becomes insolvent. This not only prevents financial losses for individuals and businesses but also helps to maintain trust in the banking system, which is essential for economic growth and stability.
Following the Silicon Valley Bank (SVB) failures, considered the biggest bank run in history due to the speed and scale, several countries have taken steps to increase the coverage limits of their deposit insurance schemes, recognising the significant role these programmes play in maintaining financial stability, boosting customers' confidence and preventing bank runs.
In March 2023, three small-to-mid size U.S. banks failed in the span of five days - Silicon Valley Bank (SVB), Silvergate Bank, and Signature Bank, driven by a combination of technological, social, and industry-specific factors that enabled rapid and coordinated deposit withdrawals.
The SVB failure was triggered by a bank run, where clients withdrew $42 billion in a single day after the bank announced it had sold its Treasury bond portfolio at a loss.
Review of Deposit Cover
Economic and financial experts have asserted that increasing deposit insurance coverage can have several benefits for both depositors and the banking system as a whole. One of the most significant advantages is that it can help to boost customers' confidence in the banking system. When depositors know that their funds are fully insured, they are more likely to trust the banking system and maintain their deposits, which can help to prevent bank runs and maintain financial stability.
In view of this development, the International Association of Deposit Insurers, in its Policy Brief 9 gave renewed attention to the level of deposit insurance coverage and the risks associated with high shares of uninsured deposits.
IADI also noted that very high per depositor/account coverage rates are in place across most jurisdictions. It was found that globally, deposit insurers fully cover deposits of a very high share of depositors and that both in G7 and G20 jurisdictions, median coverage ratios were above 98 per cent.
NDIC Coverage History
In Nigeria, Maximum Deposit Insurance Cover (MDIC) for depositors of deposit money banks (DMBs) was set at N50,000 at the inception of the Nigeria Deposit Insurance Corporation (NDIC) in 1989. The amount was set to allow 85 per cent of the total depositors in the nation's insured banks to be 100 per cent covered.
Subsequently, 96 per cent of all depositors were protected when the coverage ceiling was raised from N50,000 to N200,000 in 2006. The coverage limit of N100,000 was also set, for the first time, for microfinance banks (MFBs) and primary mortgage banks (PMBs) depositors in the same year.
In the year 2011, the coverage limits for DMBs increased from N200,000 to N500,000 and from N100,000 to N200,000 for depositors of MFBs and PMBs. The coverage level was further adjusted to N500,000 in 2016 for PMB depositors as well as subscribers of licensed Mobile Money Operators (MMOs). Coverage of N500,000 was equally extended to depositors of Payment Service Banks (PSBs) in 2020. Meanwhile the coverage for DMBs remained at N500,000.
Regulatory intervention
Experts have over the years stressed that these maximum deposit insurance coverage limits were inadequate to protect customers in Nigeria because it failed to provide full coverage to significant portions of bank customers' deposits. This left a substantial portion of deposits exposed to market discipline.
In view of these recent global and domestic developments, the NDIC promptly raised the MDIC of affected institutions, a move that was welcomed by stakeholders.
Under the new template, the NDIC MD/CEO said coverage for Deposit Money Banks (DMBs) had been increased to N5 million from N500,000 to provide full coverage of 98.98 per cent of total depositors compared to the current 89.20 per cent.
In terms of the value of deposits covered, he said the revised coverage would increase deposits covered by deposit insurance to 25.37 per cent compared to the current 6.31 per cent of total value of deposits.
Hassan, who disclosed the adjustments at a media briefing in Abuja, said under the new regime, the maximum deposit coverage for Microfinance Banks (MFBs) had also been increased to N2 million from N200,000 to offer full coverage of 99.27 per cent of depositors compared to 98.76 per cent currently. The NDIC chief executive said this would increase the value of deposits covered by deposit insurance to 34.43 per cent compared to 14.38 per cent.
Furthermore, deposit coverage for Primary Mortgage Banks (PMBs) was raised to N2 million from N500,000 to provide full coverage for 99.34 per cent of depositors compared with the current 97.98 per cent. Hassan further stated that this would increase the value of deposits covered by deposit insurance to 21.04 per cent compared to 10.77 per cent currently applicable.
The adjustments also included an increase of deposit cover to N2 million from N500,000 for Payment Service Banks (PSBs) to offer full coverage of 99.99 per cent of depositors, to increase the value of deposits covered to 43.10 per cent from 40.60 per cent.
In addition, the maximum Pass-through deposit insurance coverage for Mobile Money Operators (MMOs) was increased to N5 million from N500,000 per subscriber per MMO as the applicable coverage level for depositors of DMBs. Hassan, pointed out that the revised coverage remained a strategic balance between protecting depositors and ensuring the stability of the financial system, adding that the changes aim to extend protection to a larger percentage of the population, enhance financial inclusion, and mitigate the potential destabilising effects of bank runs.
He said the adoption of the revised maximum deposit insurance coverage is supported by the NDIC's current funding, expected annual premium collection, enhanced supervision that would reduce the likelihood of bank failures, effective bank resolution frameworks, and other funding arrangements provided by the NDIC Act No. 33 of 2023.
Besides, he said the total amount in the NDIC's Deposit Insurance Funds is now in excess of N2 trillion and gives the NDIC the 'firepower' to take on the new maximum deposit insurance coverage levels for all licensed deposit-taking financial institutions. This ensures the increased protection can be sustained without placing undue burden on financial institutions.
The money is made up of current balances in all the four deposit insurance funds managed by the NDIC including, the Deposit Money Banks (DMBs); Primary Mortgage Banks and microfinance banks; non interest banks; and the payment service banks.
Hassan also assured that the increase in maximum deposit insurance coverage will not affect the premium payments from financial institutions since the NDIC now operates with a risk-based premium framework which assesses each bank's premium based on the risk perception on the defined parameters already known by the banks.
He said, "If a bank is able to manage its risk properly, it may end up paying the base rate which is 35 basis points, but if it does not, it will end up paying a higher premium which could range up to 65 basis points. So, the ball is in their court."
An analysis of NDIC by number of customers at end-June 2023 showed that the total number of customers in DMBs as at end-June 2023 stood at 206,166,014. The total number of customers in DMBs with N5 million and below fully covered by the current deposit insurance coverage level stood at 204,063,294
This indicates that the only number of customers not fully covered by the current deposit insurance coverage level stood at 2,102,720 of the 206,166,014, representing 1.02 per cent of the entire customers of the DMBs.
For PMBS, available data showed that the total number of customers in PMBs as at end-June 2023 stood at 205,810. The total number of customers in PMBs with N2 million and below fully covered by the current deposit insurance coverage level stood at 204,469. This indicates that the only number of customers not fully covered by the current deposit insurance coverage level stood at 1,341, representing 0.66 per cent of the entire customers of the PMBs.
For MFBS, the total number of customers in MFBs as at end-June 2023 stood at 16,889,804. The total number of customers in MFBs with N2 million and below fully covered by the current deposit insurance coverage level stood at 16,765,773. Accordingly, the only number of customers not fully covered by the current deposit insurance coverage level stood at 124,031, representing 0.73 per cent of the entire customers of the MFBs.
An analysis of PSBs also showed that the total number of customers in PSBs as at end-June 2023 stood at 24,005,438. The total number of customers in PSBs with N2 million and below fully covered by the current deposit insurance coverage level stood at 24,005,395. As a result, the only number of customers not fully covered by the current deposit insurance coverage level stood at 43, representing 0.0002 per cent of the entire customers of the PSBs.
Analysts' Perspectives
Commenting on the development, Economic Policy Expert, Dr. Justine Amase said the policy is long overdue. The former commissioner of information in Benue State said the NDIC has proactively taken a step to build confidence by raising the insurable limit of bank deposits such that there will be certainty in the system at international and local levels.
He said, "That confidence will also enhance financial inclusion," adding that without increasing the insurable percentage, there is a bigger risk to the depositors to the extent that if there is any bank instability, a large proportion of their deposits will not be covered.
Amase said, "For the banks, this will build confidence in their operation. Customers can feel more confident dealing with them and sustaining their relationship. For the depositors, the uncertainties surrounding bank failure and instability would have been reduced, while it also helps the regulators to prevent bank failures."
Other financial experts who commended the NDIC for taking the decision pointed to the fact that the international financial system (Nigeria inclusive) had faced many risks since the COVID-19 outbreak of 2020, compounded by the Russia/Ukraine conflict.
He said, "Though not directly, the risks have come to create financial instability both locally and internationally. These are the challenges that have a spillover effect on the local financial industry."
According to him, the "2023 banks' failure in the US and elsewhere. It is on this premise, therefore, that the increase in the Maximum Deposit Insurance Coverage seeks to further insulate depositors from the likely negative impacts of financial instability that may affect the banking sector."
The NDIC's mandate of Deposit Guarantee is a critical component of depositors' protection, as it guarantees the payment of deposits up to a maximum set limit in the event of bank failure.
Also speaking, President of Capital Market Academics of Nigeria, Prof. Uche Uwaleke, applauded the NDIC for the upward review of maximum deposit insurance coverage for deposit financial institutions.
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Uwaleke described the move as a welcome development against the backdrop of elevated inflation and current Naira depreciation.
He said the increase would be a confidence booster in the country's banking sector as well as enhance financial inclusion.
He told THISDAY, "The increase in the maximum deposit insurance coverage level from N500,000 to N5 million for Deposit Money Banks and from N200,000 to N2 million for Microfinance Banks is a welcome development.
"This is against the backdrop of elevated inflation and Naira depreciation."
On his part, the Head of Financial Institutions at Agusto & Co, Ayokunle Olubunmi, also applauded the move by the corporation, adding that it is in tune with current realities in the country.
He said, "The increase in the deposit insurance coverage is imperative given that inflation and persistent naira devaluation have eroded the value of the hitherto insured amount. The development will also strengthen the confidence in the Nigerian financial services sector, particularly the banking and Micro-Finance industries. This will support financial inclusion activities in the country."
Speaking in the same vein, the Managing Director/Chief Executive, Arthur Steven Asset Management Limited, Mr. Olatunde Amolegbe, said the increase in deposit cover was appropriate, adding that the regulations must change or keep up as the environment changes.
Amolegbe said, "Recent CBN figures have also shown that money supply has risen significantly in the last few years just as inflation has also increased astronomically. All of this among other factors means the number of depositors covered by the previous levels has fallen below international standards that could engender confidence within the system.
"The NDIC data has shown that depositors' coverage level had fallen to about 89 per cent of depositors but the new increase to N5 million will increase the covered depositors' figure to about 98 per cent which is quite reassuring for anyone using the banking system. I therefore think this is an appropriate proactive move by the NDIC."
On his part, the Chartered Stockbroker & Investment Banker, Mr. Charles Fakrogha said the development will ensure stability in the financial system.
He said, "This is a step in the right direction. But at the same time, what I will employ NDIC and CBN to do, because these are the two major regulators in that sector, to ensure that the banks are properly regulated, not only the commercial banks, merchant banks, mortgage banks, microfinance banks, that they are properly regulated so that we have people who are fit to run the institutions.
"This is very key as it will translate to good corporate governance. We should not wait for the banks to have issues before stepping in. We need to be proactive. Let us see all what can be done to ensure that our financial institution does not get to that situation where the government will intervene. So, the only way they can do this is through proper regulatory function."
A bank customer, Chukuma Derek noted that the review was positive as more customers are now covered. Another bank customer and a banking agent, Johnson Okanlawon noted that, with more people having accounts with MMOs and PSB, it had become apparent to ensure that the depositors' funds are adequately protected. He stated that the upward review is to help engender increased financial inclusion in the country.
