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BENEFITS OF DEPOSIT BENEFITS OF DEPOSIT INSURANCE: NIGERIA’S INSURANCE: NIGERIA’S

EXPERIENCE EXPERIENCE

A PAPER PRESENTEDA PAPER PRESENTED BY BY

UMARU IBRAHIM, mni UMARU IBRAHIM, mniACTING MANAGING DIRECTORACTING MANAGING DIRECTOR

NIGERIA DEPOSIT INSURANCE CORPORATION NIGERIA DEPOSIT INSURANCE CORPORATION (NDIC)(NDIC)

AT THEAT THE2010 IADI AFRICA REGIONAL CONFERENCE2010 IADI AFRICA REGIONAL CONFERENCE

HELD ATHELD ATARUSHA, TANZANIAARUSHA, TANZANIA

DATE:DATE:2929THTH -31 JULY, 2010 -31 JULY, 2010

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OUTLINEOUTLINE

1.0 IntroductionEstablishment of NDICMandate of NDIC

2.0 Nigeria’s Experience: Activities of the NDIC3.0 Nigeria’s experience: Benefits4.0 Nigeria’s experience: Challenges5.0 Conclusion

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INTRODUCTIONINTRODUCTION

• INTRODUCTION• The practice of the DIS in Nigeria commenced with the promulgation

of Decree 22 of 1988 which was repealed and replaced with Nigeria Deposit Insurance Corporation (NDIC) Act 16 of 2006. The primary public objectives the NDIC are to protect depositors and contribute to the stability of the financial system.

• The NDIC commenced operations in March 1989. At inception of the NDIC, Nigeria was the second African country to establish a deposit insurance scheme.

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COUNTRY EXPERIENCE IN DIS: COUNTRY EXPERIENCE IN DIS: NIGERIANIGERIA

MANDATE OF THE NDIC

 The deposit insurer in Nigeria is a risk-minmizer. The basic components of the mandate are:

• Deposit guarantee• Bank Supervision• Distress Resolution

GOVERNANCE• The governing body of the Corporation is the Board of Directors

which is responsible for policy formulation and oversight of its affairs

• Members of the Board are appointed by the President, Commander-in- Chief of the Armed Forces of Nigeria, subject to the confirmation of the Senate.

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SOME INDUSTRY STATISTICS OF BANKSSOME INDUSTRY STATISTICS OF BANKSFOR SELECTED YEARSFOR SELECTED YEARS

PARAMETERS 1989 1999 2004 2005 2008 2009 2010*No of Banks

81 90 89 80 24 24 24Total

Assets(=N=‘B)86,60 1,108.09 3,415.32 4,489.79 15,343.4 14,794.1 15,077.8

Total Credit(=N=‘M) 9.4 370.17 1,346.59 1,832.18 7,411.4 8,912.1 8,852.8

Total Non-performing

Credit(=N=‘B)2.867 94.79 327.55 368.76 463,489.20 2,922.8 3,076.9

Ratio of non-performing Credit to

Total Credit(%)30 24 23 20 6 33 35

Total Deposit(=N=‘M) 30.80 569.80 1,813.87 2,469.07 8,703.0 9,989.8 10,593.7

Total insured Deposits (=N=‘B) 187.46 307.81 449.22 1,468.7 1,594.5 1,519.5

Number of Depositors 16,035,629 18,791,428 26,457.95 36,071,179 39,834,547

INDUSTRY STATISTICS OF INDUSTRY STATISTICS OF MFBs AND PMIsMFBs AND PMIs

PARAMETERS Micro-Finance Banks(MFBs) Primary Mortgage Institutions(PMIs)

2008 2009 2008 2009

No. of Institutions 840 910 81 101

Total assets(=N=’B) 77.88 120.34 253.98 277.19

Total Credit(=N=’B) 27.77 44.74 18.26 39.06

Tota deposit (=N=’B) 39.59 61.20 159.73 121.52

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COUNTRY EXPERIENCE IN DIS: COUNTRY EXPERIENCE IN DIS: NIGERIANIGERIA

• Insured/Uninsured depositsAll types of deposits are insured except:

• Inter-bank Placements• Insider deposits• Deposits held as collateral for loans

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THE NIGERIA’S EXPERIENCE: Activities of the THE NIGERIA’S EXPERIENCE: Activities of the NDIC NDIC

Deposit Guarantee• Increased deposit insurance coverage from N50,000 at

inception to N200,000/depositor/universal bank in 2006.

• Extended insurance coverage to MFBs &PMIs at N100,000 per depositor in 2006.

• The Board had approved upward review of Coverage limits to N500,000 and N200,000 for Universal banks and MFBs/PMIs, respectively and a process to secure the buy-in of the National Assembly before implementation had been initiated.

• Introduced differential premium assessment system for Universal banks in 2007.

THE NIGERIA’S EXPERIENCE: Activities THE NIGERIA’S EXPERIENCE: Activities of the of the NDICNDIC

• Introduced Annual Depositor Protection Awareness Week to facilitate better appreciation of the Corporation’s mandate

• Continuous build-up of DIF.

• Set 90 days target for payment of insured deposits from date of appointment as Liquidator, barring litigation and it has embarked on the process of cutting down the number of days so as to further enhance confidence.

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THE NIGERIA’S EXPERIENCE: Activities of the THE NIGERIA’S EXPERIENCE: Activities of the NDIC NDIC

• Supervision

• Conducted examination of Universal banks, MFBs & PMIs to determine their safety and soundness.

• Pursued a policy of zero tolerance for unprofessional conduct and unethical practices in the banking industry.

• Introduced Risk-Based Supervision in collaboration with CBN.

• Developed, in collaboration with the CBN, Bank Analysis System (BAS) as a supervisory tool which was later

enhanced to electronic Financial Analysis and Surveillance System (e- FASS).

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THE NIGERIA’S EXPERIENCE: Activities of the THE NIGERIA’S EXPERIENCE: Activities of the NDIC NDIC

Supervision (cont’d)Created Special Insured Institutions Department

for the Supervision of MFB & PMIsNDIC, in collaboration with the CBN, is currently

developing an appropriate failure resolution framework for troubled MFBs that will have minimal adverse impact on confidence and on the stability of the financial system.

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THE NIGERIA’S EXPERIENCE: THE NIGERIA’S EXPERIENCE: Activities of the NDIC Activities of the NDIC

Bank ResolutionOpen Bank Assistance• The adoption of the Open Bank Assistance (OBA) took the

following forms:

• Accommodation facilities to the tune of N2.3 billion (about US$500million) were granted to ten (10 banks which had serious liquidity crisis in 1989.

• Take – over of management and control of 28 distressed banks to safeguard their assets between 1996 and 2003.

• Imposition of holding actions

• Acquisition, restructuring and sale of seven (7) distressed banks to new investors between 1996 and 1998.

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THE NIGERIA’S EXPERIENCE: Activities of THE NIGERIA’S EXPERIENCE: Activities of the NDICthe NDIC

Deposit Reimbursement

Depositor reimbursement is precedent upon licence revocation.

No of banks closed since inception:4 banks in 19941 bank in 199526 banks in 19983 banks in 20001 bank in 200313 banks in 2006

Total to date: 48 banks

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THE NIGERIA’S EXPERIENCE: THE NIGERIA’S EXPERIENCE: Activities of the NDICActivities of the NDIC

Payment of Insured deposits (ID) and Uninsured deposits (UD)

• As at the end of 2009, the NDIC Paid N3.3 billion out of N5.2 billion total ID of 34 out of 36 banks closed before 2006. • Declared N12.01 billion dividend to Uninsured depositors of 34 out of 36 banks closed before 2006. 11 of the banks had declared a final dividend of 100 percent of total deposits.

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THE NIGERIA’S EXPERIENCE: Activities of THE NIGERIA’S EXPERIENCE: Activities of the NDICthe NDIC

Purchase & Assumption NDIC, in collaboration with the CBN, Introduced Purchase

and Assumption as a failure resolution mechanism for the first time in January 2006 in order to sustain public confidence and promote financial stability following the failure of 13 weak banks that could not meet the recapitalization requirement deadline of December 2005.

As at 31st December 2008, P&A arrangement had been concluded for all the eleven (11) banks closed in 2006 for which the Corporation had obtained winding- up orders from the court.

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THE NIGERIA’S EXPERIENCE: THE NIGERIA’S EXPERIENCE: Activities of the NDICActivities of the NDIC

As at the end of December 2009, the Corporation had paid about N48.83billion to almost 1 million depositors of the 11 closed banks in 2006 for which P&A transactions had been concluded.

The payments included the uninsured portion of private sector depositors of the 11 banks and some uninsured public sector depositors

OTHER ACTIVITIESOTHER ACTIVITIES

• The Corporation facilitated the implementation of the Failed Banks (Recovery of Debts and Other Financial Malpractices in Banks) Act of 1994 by:– Collating information and supporting documents on bank frauds

and financial malpractices;– Lodging criminal complaints to the police for investigation;– Providing necessary technical and logistic support for police

investigation; and – Coordinating and monitoring of criminal and civil cases.

• Through the Failed Banks Tribunal, the Corporation was able to recover a large volume of debts thereby enhancing liquidation dividend to depositors and other eligible claimants

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OTHER ACTIVITIES (C’td.)OTHER ACTIVITIES (C’td.)

• Enhanced public awareness activities through its publications like Annual Report, Quarterly, Hand bills, enlarged logo for display at entrances of insured institutions, Books and Law Reports as well as through the development of a robust and interactive web site: www.ndic.ng.org and translation of Facts about NDIC into 3 Nigerian major languages, among others.

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THE NIGERIA’S EXPERIENCE: Effect of THE NIGERIA’S EXPERIENCE: Effect of ActivitiesActivities

The combined effect of the foregoing activities manifested in significant growth of

financial soundness indicators, including:Growth of banks’ deposit liabilities from

N30.8billion (about US3.3 billion) in 1989 to N9.99 trillion (about US$66.6 billion) in 2009

Growth of banks’ total assets from N86.9billion (about US$9.7billion) in 1989 to N17.5 trillion (about US$116.67 billion) in 2009.

Growth of deposit accounts from 15.8 million in 2002 to 36.071million in 2009

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THE NIGERIA’S EXPERIENCE: EffectTHE NIGERIA’S EXPERIENCE: Effect

Year TOTAL DEPOSITS OF INSURED BANKS ‘(n Billion)

1989 30.8

1994 177.4

1999 569.8

2002 1,226.6

2004 1,814.7

2006 3,412.7

2008 8,703.0

2009 9,989.0

Benefits Of Deposit Insurance In NigeriaBenefits Of Deposit Insurance In Nigeria

• The existence of DI in the country has helped to complete the safety-net arrangement in Nigeria thereby establishing an effective framework for ensuring a stable and resilient financial system.

• Trapped deposits were paid thereby reducing the loss to depositors or eliminating such loss in some cases

• Enhanced financial inclusion through extension of deposit insurance to MFBs.

• Reduced the financial burden of handling failure on the part of government

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Benefits Of Deposit Insurance In Nigeria Benefits Of Deposit Insurance In Nigeria (Cont’d)(Cont’d)

• Promoted sound risk management through the adoption of differential premium assessment system and its involvement in supervision.

• Participation of NDIC in bank examination has reduced examination cycle to once in a year instead of once in 2 or three years that was hitherto obtained

• Provided expanded avenue for depositors to lodge complaints or make enquires about their banks and get prompt attention

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Benefits Of Deposit Insurance In Nigeria (Cont’d)Benefits Of Deposit Insurance In Nigeria (Cont’d)

• Enhanced the effectiveness of banks in performing their intermediation role by boosting confidence through the determination of adequate coverage limits and adjustment of same to reflect the dynamics of the industry, as well as prompt depositor reimbursement all of which have led to growth in individual banks and the entire banking system as shown in the Table in Slide 5.

• Served as a repository of knowledge on bank resolution. For example, the adoption of P&A in 2006 was facilitated by the NDIC. Also the introduction of Asset Management company of Nigeria(AMCON), as a vehicle for failure resolution, was muted by NDIC in 1996 and was built upon and introduced in 2010

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Benefits Of Deposit Insurance In Nigeria Benefits Of Deposit Insurance In Nigeria (Cont’d)(Cont’d)

• NDIC’s supervisory activities as well as its role in the implementation of Failed Banks Act had instilled discipline on banks and helped to promote good corporate governance

• NDIC has enhanced the awareness about the relevance and importance of deposit insurance in Nigeria in particular and in Africa in general through its publications, paper presentations and hosting of requests by countries wishing to establish DIS.

• NDIC has contributed to the development of legal system through the publication of the Nigerian Law Report.

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THE NIGERIA’S EXPERIENCE: ChallengesTHE NIGERIA’S EXPERIENCE: Challenges

Low- level of Public Awareness of the Deposit Insurance System Low claim response by depositors of closed banks Long drawn-out litigation by erstwhile shareholders/directors of

closed banks e.g. Savannah Bank Implementing Risk- Based Supervision Ensuring Sound Governance of insured Institutions Cumbersome judicial process Unwillingness of Debtors to honour obligations, large volume of

unsecured or fraudulently granted loans Inadequacy of legal framework to deal with erring bank officials.

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ConclusionConclusion• A deposit insurance system is designed to promote confidence and

contribute to financial stability

• In order to be effective in ensuring financial system stability, the following factors are critical:

 • Clearly defined mandate which are legislated in laws

• High degree of operational independence

• Legal Indemnification for directors and employees of DIS

• Access to adequate and timely information

• Existence of a robust legal and judicial system

• NDIC’s case presents a remarkable experience

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Thank you for your attention