By Babajide Komolafe

John Bull had to wait for six years before he could get N50, 000 of his money trapped in the defunct Fortune International Bank. He had over N300, 000 in his current account with the bank before the Central Bank of Nigeria (CBN) revoked its operating license, with that of 13 other banks that could not meet the December 31st 2005 recapitalisation deadline.

As the organisation established to insure bank deposits, the Nigeria Deposit Insurance Corporation (NDIC) should have immediately paid John Bull and other customers of Fortune Bank N50,000 of their money trapped in the banks being the maximum insured deposit as at then, or transferred their deposits to other banks as was the case for the individual customers of the defunct Allstates Trust Bank, Assurance Bank, Lead Bank and Trade Bank.

But this could not happen, as the owners of Fortune Bank as well as two other banks instituted court actions to challenge the revocation of their operating license. As a result, John Bull and other customers had to wait and suffer the agony of not having access to their money.

The NDIC however wants to ensure that customers of closed banks are not subjected to such suffering again. To achieve this, the Corporation is seeking a series of amendment to its enabling Act, which among other things would allowed it to minimise the risk of bank failure, and also to be able to pay customers of failed banks promptly, without legal hindrance.

Learning from the past

Speaking at the Senate Hearing on the proposed NDIC Act 2014, which is an amendment of the NDIC Act 2006, Managing Director/Chief Executive of the Corporation, Alhaji Umaru Ibrahim, stated that the proposed amendments are based on lessons learnt from past and recent experiences of the Corporation in the supervision of banks and protection of bank deposits. “If passed into law, the amendments would address the constraints and challenges facing the Corporation, given the observed inadequacies in the existing law. It would also enable the Corporation to be more effective and efficient in carrying out its mandate of promoting safe and sound banking practices, protecting depositors through effective supervision of insured financial institutions, prompt payment of guaranteed sums and orderly resolution of failed institutions and thus engender public confidence in the banking system”, he said.

Minimise occurrences of bank failures

As part of the mandate of insuring bank deposits, the NDIC has the responsibility to reduce the risk of bank failures. This is in deference to the adage that says, “Prevention is better than cure”. It is better to prevent bank failures than allow banks to fail and subject depositors to untold hardship, and the system to huge expenses needed to settle the depositors. Thus from inception, the NDIC had been empowered through its enabling laws to supervise the activities of banks and make recommendations to address observed lapses that could lead to distress. While the Corporation has been doing this effectively in collaboration with the CBN, it is however seeking amendments to strengthen its supervision of banks.

For example, the Corporation among other things is seeking an amendment that would empower it to supervise related entities (holding company or subsidiary) of insured institutions namely commercial banks, mortgage banks and microfinance banks. This is to prevent businesses related to insured institutions from being used as vehicles through which depositors funds are dissipated. It would be recalled that this practice led to the distress of some of the banks affected by the recent global financial crises, and which also resulted to the introduction of a new banking model by the CBN.

The amendments also introduces additional measures for ensuring that board of insured institutions implements the Corporation’s recommendations in Examination’s Report. This is to prevent such institutions from becoming distressed as a result of the findings of the examination exercise.

In this regard, the Corporation is seeking amendment to empower it, in consultation with the CBN, to stop insuring the deposit of any institution, when found to have grievously violated its obligations under the NDIC Act

Prompt Payment of insured deposits

It is the responsibility of NDIC to ensure that depositors of failed banks have prompt access to their money (the insured deposit). However the Corporation has been severally frustrated from performing this responsibility. “The greatest significance is the experience from recent bank closures where the Corporation was unable to refund depositors fund trapped in some closed banks. The inability to refund depositors funds was not because there was no money to pay but because the owners of the closed banks had instituted endless litigations against regulatory authorities”, lamented Ibrahim at the Senate Hearing.

To address this frustration, the Corporation is seeking amendments that would empower it to pay insured depositors of failed insured institutions even in the face of litigation challenging the revocation of the operating license of the institutions. This is to ensure depositors do not suffer due to inability to access their money trapped in such institutions.

In addition, NDIC is also seeking powers to be able to pay insured depositors whenever an institution becomes insolvent and has suspended payment to depositors. This means that when an insured institution becomes distressed and cannot pay depositors their money, but its license is yet to be revoked by the CBN, the NDIC can step in and pay the depositors their insured deposit, thus minimising their suffering as a result of the insolvency of the insured institution.

Global best practices

The amendments sought by the NDIC to its enabling Act are further informed by global best practices in the practice of deposit insurance. This is reflected by the laws governing the operations of the Federal Deposit Insurance Corporation in the United States of America along which lines the NDIC was fashioned. According to Umir, “The Corporation is therefore not re-inventing the wheel but merely adopting best practices that have proved successful over time.”

Confirming this position, Alheri Nyako, Former Secretary to the Board of NDIC, stated “Most of the challenges which NDIC is facing which informed the need for the review of its enabling laws had already been addressed by the enabling legislation of deposit insurance agencies in other jurisdictions, and the current efforts of the National Assembly to upgrade the Deposit Insurance System (DIS) legal framework in Nigeria is consistent with international best practice”.