The Role Of Deposit Insurance In Ensuring Financial System Stability In Nigeria - G. A. OGUNLEYE
1THE ROLE OF DEPOSIT INSURANCE IN ENSURING FINANCIALSYSTEM STABILITY IN NIGERIABYG. A. OGUNLEYE, OFRMANAGING/DIRECTOR/CEONIGERIA DEPOSIT INSURANCECORPORATION
2PAPER OUTLINEINTRODUCTIONFUNCTIONS OF THE NDICDESIGN FEATURES OF DIS IN NIGERIACONTRIBUTION OF THE NDIC TOFINANCIAL SYSTEM STABILITY INNIGERIASUMMARY AND CONCLUSION
3Initially DIS was implicit in Nigeria (Govt.)Then, Safety-net had two components:Lender of last resortEffective supervisionImplicit DIS is discretionaryProtects all depositors, creditors and shareholdersContingent liability on Federal BudgetCannot engender confidence
4Establishment of NDIC was necessitated by thederegulation of the banking industry during SAPThe scheme was introduced to provide a furtherlayer of protection to depositorscomplement the role of prudent bank managementComplement CBN s supervisory activities in ensuringa safe and sound banking system.
5FUNCTIONS OF THE NDICInsure deposit liabilitiesProvide financial and technical assistanceGuarantee payment to depositorsDistress ResolutionAssist Monetary Authorities in policyformulation and implementation
6DESIGN FEATURES OF DIS INNIGERIAIt is a Risk-MinimizerGovernment ownedMandatory participationLimited CoverageFundingMainly premium contributions from participatingmembersNo government funding except equity capital
7CONTRIBUTION OF THE NDIC TOFINANCIAL SYSTEM STABILITY INNIGERIADeposit GuaranteePaid out N3.3 billion to depositors of 34 banksout N5.2 billion total insured depositsthe general public seem inadequately aware ofthe benefits and limitations of the system.
8CONTRIBUTION OF THE NDIC TOFINANCIAL SYSTEM STABILITY INNIGERIA (ctd)The 50,000.00 MDIC had been reviewedupward to 200,000.00Proposal before NASSLack of legal powers to execute prompt paymentof insured deposits
9CONTRIBUTION OF THE NDIC TOFINANCIAL SYSTEM STABILITY INNIGERIA(ctdBanking supervision provides the oversightrequired to preserve the integrity of, and promotepublic confidence in, the banking system.Carried out through on-site examination and theoff-site surveillance of insured banksNDIC shares the responsibility with the CBN.
10CONTRIBUTION OF THE NDIC TOFINANCIAL SYSTEM STABILITY INNIGERIA (ctd)Examination cycle reduced to one year withthe establishment of NDICThe major challenge to off-site surveillancerelates to inaccurate and unreliable returnsfrom banks.
11CONTRIBUTION OF THE NDIC TOFINANCIAL SYSTEM STABILITY INNIGERIA(ctd)To enhance the effectiveness of supervisionthe Corporation is building supervisorycapacity through:Focused training and acquisition of relevanttools.Enhancing BAS to e-FASSTraining on Basle II Accord.
12CONTRIBUTION OF THE NDIC TOFINANCIAL SYSTEM STABILITY INNIGERIA(ctdDistress ResolutionThe responsibility is shared with the CBNThe Corporation is empowered to providefinancial and technical assistance to failing banksin the interest of depositors.
13CONTRIBUTION OF THE NDIC TOFINANCIAL SYSTEM STABILITY INNIGERIA(ctdThe financial assistance can take the form of:o loans,o guarantee for loan taken by the bank oro acceptance of accommodation bills.the technical assistance may includeo Take-over of management and control of the banko changes in managemento assisted merger with another viable institution.
14CONTRIBUTION OF THE NDIC TOFINANCIAL SYSTEM STABILITY INNIGERIA(ctdNDIC in collaboration with the CBN, had, over theyears, successfully adopted the followingmeasures, among others, to address bankdistress:-Accommodation facilities of 2.3 billion to 10banks in 1989.The crisis occurred barely 3 months after NDICcommenced operations.
15CONTRIBUTION OF THE NDIC TOFINANCIAL SYSTEM STABILITY INNIGERIA(ctdTake-over of management and control oftwenty-five (25) distressed banks byCBN/NDIC to safe guard their assets.Acquisition, restructuring and sale of seven(7) distressed banks to new investors.
16CONTRIBUTION OF THE NDIC TOFINANCIAL SYSTEM STABILITY INNIGERIA (ctd)Closure of 36 terminally distressed banksSavannah Bank of Nigeria and Peak MerchantBank still challenging the revocation of theirlicences in court
17CONTRIBUTION OF THE NDIC TOFINANCIAL SYSTEM STABILITY INNIGERIA(ctdBank LiquidationIt is adopted as a last resortDepositors are given priority over all othercreditors.Insured deposits paid from DIF
18CONTRIBUTION OF THE NDIC TOFINANCIAL SYSTEM STABILITY INNIGERIA(ctdPayment of Liquidation Dividend toDepositorsAs at 31st July, 2005, the sum of 5.872billion had been paid out to the depositors of32 of the 34 banks in liquidation.This is more than half of the 10.75 billiondeclared as liquidation dividends.
19CONTRIBUTION OF THE NDIC TOFINANCIAL SYSTEM STABILITY INNIGERIA(ctdThe Corporation had declared 100%dividend (i.e full recovery) for all uninsureddepositors 10 banks.Dividend declared is as high as 93% in someother banks.
20CONTRIBUTION OF THE NDIC TOFINANCIAL SYSTEM STABILITY INNIGERIA(ctdPayment Of Liquidation Dividend toGeneral CreditorsThe general creditors of five banks-in-liquidation had received the sum of 659.56million out of 753.31 declared.
21CONTRIBUTION OF THE NDIC TOFINANCIAL SYSTEM STABILITY INNIGERIA(ctdPayment of Liquidation Dividend to ShareholdersShareholders of Nigeria Merchant Bank Ltd werepaid liquidation dividends of N620 million based ontheir ownership ratio of 40:60.The sum of N293 million had been paid to formerowners of Pan African Bank Ltd.
22CONTRIBUTION OF THE NDIC TOFINANCIAL SYSTEM STABILITY INNIGERIA(ctdThe Corporation has commenced payment ofdividends to the shareholders of the defunctAlpha Merchant Bank Plc.
23CONTRIBUTION OF THE NDIC TOFINANCIAL SYSTEM STABILITY INNIGERIA(ctdChallenges facing NDIC as a liquidator:Appointment as Liquidator must beadvertisedInadequate legal powersLegal actions by owners of closed banksPoor debt recoveryInability to dispose some physical assets
24OTHER CONTRIBUTIONS OF THENDIC TO FINANCIAL SYSTEMSTABILITY IN NIGERIAThe Corporation, in its capacity as aliquidator, facilitated the implementation ofthe Failed Banks Act No. 18 of 1994.Following the implementation of theDecree, about 4.3 billion wasrecovered.
25OTHER CONTRIBUTIONS OF THENDIC TO FINANCIAL SYSTEMSTABILITY IN NIGERIARelationship with Other Safety-Net ParticipantsNDIC collaborates effectively with CBN through:Planning and scheduling of bank examination;Deliberation on how to ensure effective regulation anddistress resolution;Deliberation on implementing the new banking reformagenda; andProvision of input into the conduct of fit and proper persontest for bank owners and management.
26OTHER CONTRIBUTIONS OF THE NDIC TOFINANCIAL SYSTEM STABILITY IN NIGERIARelationship with Other Safety-Net ParticipantsMoU was executed by all the members of theFSRCC In order to facilitate access to relevantinformationThe MoU contained safeguards for confidentialityof information.NDIC participates actively in FSRCC
27CONCLUSIONDIS being implemented by NDIC hascontributed to financial system stability ofNigeria.DIS in Nigeria has removed the contingentliability of bailing out distressed banks by theFederal Government.DIS is not however designed to handlesystemic crises if and when they occur.