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NDIC and depositors’ protection

By Bashir Hassan

WITH total banking assets in excess of N22 trillion ($110 billion), Nigeria simply has the largest financial system in sub-Saharan Africa. Such a huge asset base places Nigeria’s Deposit Insurance Corporation, NDIC, as one of the leading deposit insurers in Africa.

In effect, NDIC has huge responsibilities as a risk minimizer with other broad mandates of deposit guarantee, bank supervision as well as providing mechanism for orderly resolution of failure, including bank liquidation. Fulfilling these tasks will require not only a sturdy legal framework but a vigilance that will ensure that such frameworks are constantly updated and brought in line with world best practice and standard.

Last week NDIC was at the Senate Public Hearing on its quest for amendment (repeal and re-enactment bill) 2006 Act to strengthen its operations which focus on protecting the depositors. To understand this quest, one needs to go back in history on the one hand and consider the economic realities that increasingly underlie the complexity of its challenges on the other.

One piece of history took place in 2011 when NDIC was subjected to the International Association of Insurers, IADI, peer review exercise on the extent of its compliance with best standards set under the IADI’s 18 core principles of effective deposit insurance system. The outcome of the assessment revealed that the Corporation had complied fully with seven core principles; largely complied with eight; materially non-complied with two while the last one was found to be not applicable to NDIC.

This means NDIC needs to do more to bridge the gaps in its compliance scorecard. But doing more will require amending any legal frameworks that are hindering its operation or bringing into existence legislation that will enhance its operational excellence. It is pertinent to mention that Nigeria is one of the respected members of the IADI, a global non-profit organisation formed in May 2002 to enhance the effectiveness of deposit insurance systems by promoting guidance, best practice and international cooperation.

Another piece of history was the recent economic recession and realities in Europe, which were partly the consequences of the global economic meltdown of 2008 to 2009. Witnessed across the financial system throughout the world, the meltdown further dictated the need for another round of amendments to its statutes, particularly in the areas of target funding, treatment of systemically important financial institutions and bank living will.

The emerging risks and changes in the global banking practices and cross border operations of the Nigerian banks are strong imperatives for the Corporation to re-engineer its enabling laws in order to be ahead of such emerging threats and challenges.

Now, let’s consider NDIC’s quest for amendment influenced by reasons of our economic realities. Take example of the credit risks posed by the recent nosedive in the price of oil and gas. This turn of events continues to put pressure on the nation’s currency — the Naira — and the capital market is taking the beating for it with massive capital flight from major off shore investments.

All these pieces of events in history and the realities of Nigeria’s economy as of today and the ultimate mandate of NDIC as risk minimizer which seeks to protect the depositor, combine to push NDIC to seek for amendments of its 2006 Act.

So what are these amendments NDIC is seeking? They are many but the major ones are as follows.

The proposed bill (give title of the bill) is aimed at strengthening the Corporation’s supervisory capacity and addressing other challenges in the area of failed financial institutions as well as ensuring compliance with the principles of an effective deposit insurance scheme in Nigeria.

In its bid to reduce the pains of depositors who are subjected to untold hardship anytime erstwhile owners of the banks attempt to forestall liquidation of the failed bank, the new bill empowers the Corporation to pay insured deposits to depositors of an insured institution whose operating license has been revoked even when litigation challenging revocation of the failed institution’s operating license or winding-up order is pending in court.

It has become common knowledge that Nigerian banks have established a number of banking and non-banking financial subsidiaries, affiliates and associates companies beyond the purview of their primary regulators and supervisors. Although the provisions of consolidated supervision have not really been put to actionable test, we all know that Nigerian banks have been widely diversified beyond our shores.

However, in order to prevent such business relationships being exploited in circumvention of banking laws or as avenues for abusive ownership and mismanagement of depositors’ funds, Section 32 (5) of the proposed bill empowers NDIC to have enough access to the books of all such related entities of insured banks with a view to assessing their transactions under the risk-based supervision.

Also, the NDIC Act, 2006 does not make provisions for Public Policy Objectives. The proposed amendment explicitly provides for Public Policy Objectives in line with global best practices in Deposit Insurance Scheme, DIS. Unlike the extant law which makes no provisions for part-time members, the proposed amendment seeks to provide for tenure of part-time members of the Board who would hold office for a period of four years renewable for another four years.

Economic analysts say the move would enhance policy formulation, strategic focus and effective discharge of NDIC’s oversight functions in the banking system.

Although the Act empowers the NDIC Board to prosecute directors and officers for violation of the provisions of the Act, the provisions have not been effectively complied with due to the difficulty in their implementation. However, the new proposal ensures that NDIC is empowered to seek legal redress for infringement of penal laws relating to banking other than the Act. It also seeks to improve the economic value of the legal redress mechanism in the deposit insurance system by subjecting the convicted erring official(s) to civil penalty that would be related directly to the amount involved in the provisions of the law violated.

In addition, the amendment bill seeks to enhance the General Reserve Fund of NDIC which have been negatively affected by some of the provisions of the Fiscal Responsibility Act 2007. The Corporation is entirely dependent on the incomes derived from the investments of the premium paid by the insured deposit-taking financial institutions.

The income from the investment of DIF is not government revenue but funds meant for the operational activities of the corporation and to build up the DIF reserve to meet future funding gap. This is the essence of target funding ratio. When passed into law, income from the investment of the fund will not be liable for remittance to government, contrary to the provisions of the FRA Act of 2007 which compelled the remittance of 80% of the operational surplus.

Although the provisions on the mandate of NDIC as Provisional Liquidator has been tested with the revocation of the operating licenses of 103 micro-finance banks, observers say its efficiency is still in doubt given its experience with the defunct Fortune and Triumph banks. Consequently, the proposed re-enactment provides for the appointment of NDIC as statutory Liquidator, rather than Provisional Liquidator, in order to ensure effective winding up of the affairs of all failed insured deposit-taking financial institutions in Nigeria.

To meet the objectives of approximating to international best practices, the expectation of stakeholders   is that, by the time NDIC participates in the 8th Regional Workshop of IADI on “Assessment of Compliance with the Core Principles for Effective Deposit Insurance Systems” holding in Pristina, Kosovo, next May, the National Assembly would have passed the proposed amendments so the Nigeria will hold her head high for her implementation of a credible Deposit Insurance Scheme, DIS.

Mr. Hassan, development strategist, wrote from Abuja.


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