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TRUST AND POLICY RENDERING: RE-WORKING THE NIGERIAN FINANCIAL SYSTEM IN THE FACE OF GLOBAL FINANCIAL REFORM

BY: U. Ibrahim, mni

Ag. MD/CEONigeria Deposit Insurance Corporation

Presented at an Executive Seminar on Trust and Policy Rendering (TPR) in the Nigerian Financial Services Industry Organised by AME&T Group and FITC Held at Eko Hotel, Lagos Nigeria on March 10, 2010.

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Introduction

The Seminar, being organised at the most apposite time, broadly aims at:

Restructuring and repositioning the banking, insurance, capital market, pension, and other non-bank sub-sectors in the financial system by Designing a framework that will enhance restoration of confidence and stability in the Nigerian financial system.

The seminar also aims at introducing TPR Nigeria Financial Trust Index.

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Introduction Ct’d

My contribution will attempt to address two main issues, namely:

How does a Deposit Insurance System (DIS) contribute to the enhancement of confidence in the financial system? and

What factors should be considered in the construction of the ‘TPR Nigeria Financial Trust Index’?

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Definition of Deposit Insurance

A Deposit Insurance Scheme (DIS) is a financial guarantee to depositors, particularly the small ones in the event of a bank failure.

It has the following benefits: Protects depositors against full or partial loss of

their savings Reduces bank “runs” and contributes to financial

stability Can limit government fiscal and political

exposure Creates a formal mechanism for addressing bank

failure

The most important macro objective of a DIS is to contribute to financial system stability by primarily engendering public confidence

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Deposit Insurance and Public Confidence

Introduction: Components of the financial safety net

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Strong & Robust Banking System Financial Stability

Depositor Protection

FINANCIAL SAFETY NET

Prudential Regulation & Supervision

Lender-of-last resort facility

Deposit insurance system

Deposit insurance enhances depositor confidence Deposit insurance enhances depositor confidence

Enhancing Public confidence

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Confidence is achieved when a depositor believes that N100 in his bank account is as good as N100 in his pocket

Protects depositors’ savings

Prevents bank runs

Maintains Public confidence

Enhancing Public confidence

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DIS Maintains and reinforces public confidence throughEnsuring adequate deposit coverage level.Extending DIS coverage to non-bank deposit taking

financial institutions. Expanding range of deposit products covered beyond

traditional bank deposit insurance products.Effective supervision where a DIS has the powers. Implementing systemic stabilization measures eg.

Blanket guarantee

Enhancing Public confidence

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DIS can also contribute to the enhancement of public confidence by:Educating depositors in financial literacy and

deposit insurance issues as:Knowledgeable depositors make informed financial

decisionsFinancially literate depositors who know their rights

could impose additional market discipline on the banking system by scrutinizing the conduct and practices of banking institutions.

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THE NIGERIA’S EXPERIENCE

Increased deposit insurance coverage from N50,000 to N200,000 per depositor for universal banks in 2006.

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

Already developing a framework for extending DIS coverage to non-interest bearing deposit products.

Working out strategies on how to achieve prompt depositor reimbursement.

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THE NIGERIA’S EXPERIENCE Ctd

Supervision Conducted examination of universal banks,

MFBs & PMIs to determine their safety and soundness.

Participation of NDIC in bank examination reduced examination cycle to once in a year instead of once in 2 or 3 years that hitherto obtained.

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

Clearly defined mandate and powers Sound Governance/operational

independence Adequate funding Effective public awareness Flexibility in dealing with a crisis:

Comprehensive toolboxFlexibility to call upon these tools

Close cooperation with other safety net players 12

Factors that make DIS Effective in Enhancing Public Confidence

Mandate and Powers

Pay Box Minimal RoleMain function: to make disbursement to depositors when banks fail

Cost Minimizer Seeks least cost resolution once bank is insolvent

Risk Minimizer Assesses and monitors risk on an on-going basis with wide intervention powers (NDIC is a risk minimizer)

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Sound Governance: A Key Element of Trust Building

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Well managed and well governed DIS

Carry out all obligations effectively

Build credibility in good times

Build Trust

Operational Independence

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THE NIGERIA’S EXPERIENCE

GOVERNANCE NDIC has on its Board competent and experienced

individuals The Board has effective Committees NDIC has Comprehensive business plans with explicit

Key Performance Indicators (KPIs) There is an effective enterprise risk management unit

with operational framework NDIC has put in place sound accounting and internal

controls NDIC publishes and widely circulates its Annual Report

and Statement of Accounts amongst its stakeholders and members of the public.

Adequate Funding

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Support public Confidence

Nigeria’s Experience : Funding

Premium contribution by insured institutions is the major source of funding

The aggregation of the premium collected constitutes Deposit Insurance Fund (DIF).

The Funds are used to meet the primary obligations of the Corporation

The operations of the Corporation are financed from the proceeds of investment of the DIF.

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Nigeria’s Experience : Funding Ctd.

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Effective Public Awareness Programme

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Nigeria’s Experience : Public Awareness.

Has an improved web-site Already completing work on Help Desk Facility that

will facilitate response to enquiries. Published information booklets on deposit

insurance and distributed widely to all insured institutions. Work is on in translating the materials to Hausa, Igbo and Yoruba.

Organises annual Depositor Awareness Week Organises annual Seminar for Financial

Correspondents of Nigeria (FICAN) and their Editors.

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Access to ready and comprehensive stabilization toolbox without going through legislative process in times of crisis

Comprehensive toolbox includes powers to: Increase coverage limit (NDIC Act 2006 has granted

such powers to NDIC Board)Broaden range of deposit products insured (NDIC also

has the powers)Extend coverage to non-bank deposit taking financial

institutions as in the case of MFBs and PMIs; andRestructure troubled insured institutions – NDIC has

powers to adopt failure resolution options such as: Open Bank Assistance, depositor reimbursement, P & A and Bridge Banking.

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Flexibility in dealing with a crisis

Smooth cooperation and goodwill amongst safety net players essential

Information sharing, clear division of powers and responsibilities and coordination are particularly relevant

Formal arrangements essential to avoid or minimize potential conflicts

Coordinated actions most important when handling troubled banks

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Close Cooperation With Other Safety Net Players

NDIC collaborates actively with CBN, SEC, FMF, NAICOM, PENCOM and CAC

NDIC is an active member of Financial Services Regulation Coordinating Committee (FSRCC)

FSRCC has launched its web site to facilitate information sharing amongst its members as well as the public.

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Close Cooperation With Other Safety Net Players: Nigeria’s Experience

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THE NIGERIA’S EXPERIENCE: Challenges

Low-level Public Awareness of the Deposit Insurance System.

The Fiscal Responsibility Act which requires that 80% of the Corporation’s operating should be remitted to the Federation Account constrains rapid build-up of DIF

Long drawn-out litigation by erstwhile shareholders/directors of closed banks and cumbersome judicial process

Poor corporate governance of insured institutions.

Factors to consider for Constructing Trust Index

In my view, I believe that the following factors/parameters are critical in the construction of a financial Trust Index. The factors include:

Sound and Effective Legal Regime that stipulates and enforces right of contract

Strong Prudential Regulation and Supervision with appropriate institutional and policy framework

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Factors to consider for Constructing Trust Index

Sound Accounting and Financial Reporting Regimes;

Comprehensive Disclosure Regimes that will guarantee transparency and promote market discipline;

Sound governance with all the required ingredients of Independence, integrity, transparency and accountability on the part of both the regulators and operators;

Effective risk management practices by both regulators and operators; and

Effective financial literacy.

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Factors to consider for Constructing Trust Index

In addition to some other factors that could be found relevant, it is my view that the ‘Trust Financial Index’ could evolve when all the factors are assigned weights that reflect the peculiarities of the Nigerian environment and are calibrated.

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CONCLUSION

Deposit insurance system is an integral part of an effective safety-net framework

A deposit insurance system is always designed to promote confidence and contribute to financial stability.

Effectiveness of a deposit insurance system depends on mandates and powers, capacity and flexibility to act promptly before banks are insolvent

NDIC’s case presents a remarkable experience

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Conclusion Ct’d.

Finally, I believe that factors such as sound and effective legal regime, strong prudential regulation/supervision, effective legal regime and other factors listed above could be found useful in the construction of the proposed Financial Trust Index.

Thank you for your attention.