How NDIC Protects Depositors’ Funds in Banks – Acting MD/CE

The Banking Industry in Nigeria has witnessed quite some transformation in the last one year, thanks to the reform initiatives by the Central Bank of Nigeria (CBN) and the effective collaborative effort between the CBN and the Nigeria Deposit Insurance Corporation (NDIC).

Just recently, the NDIC Acting Managing Director/Chief Executive, Alhaji Umaru Ibrahim shed more light  on these developments, the challenges facing the CBN/NDIC, the strategies that have been mapped out to protect depositors and also facilitate the safety, soundness and stability of the Nation’s banking system. The acting Managing Director granted this interview to the Economic Confidential magazine:

EC: Sir, you took over as Acting Managing Director/Chief Executive of NDIC in November last year. How would you describe your experience so far?
Well I thank God. The experience so far has been quite challenging, difficult at times, but not an impossible challenge. It is very interesting as well. Perhaps, being an insider and somebody who has been with the Corporation since inception, the experience has made it a little easier. But more important is the co-operation and support I have enjoyed from the generality of the staff and my colleagues, the Board and our supervising ministry. All these have helped immensely in making the task much easier.

EC:How would you describe the role of NDIC in the on-going reforms by Central Bank of Nigeria (CBN) in the banking industry?
Well, as you know, one of the primary core mandates of NDIC has to do with supervision and regulation of the licensed banks and other licensed deposit taking institutions. To that extent we are always collaborating with the Central Bank of Nigeria to ensure effective regulation and supervision of these institutions. We have participated in the special examination of the 24 banks. That exercise took place in June last year and it threw up a number of issues and challenges facing the banking system and which is public knowledge now. And this has led to further investigation and even arraignment of some of the erstwhile management teams and Directors, as well as employees of some of those banks who were found to have abused their positions and contributed to a large extent to the adverse conditions in which these banks were found. So, our examiners jointly conducted these examination of all the banks together with the examiners of the Central Bank of Nigeria, and we came out with these findings which were quite revealing concerning the financial condition of the banks that were involved. If you recall, the exercise was to engender and enhance public confidence and protect depositors. It also led to the injection of N620 billion into about 8 banks by the CBN, to ensure that they have sufficient liquidity, so that at any time depositors came calling they would be able to meet their obligations. This really contributed a lot in enhancing confidence in the system. Other measures are gradually being taken to address the problems of each bank that has found itself in the distressed conditions.

EC:You were recently quoted to have said that the Corporation was seeking for some amendments to the new NDIC Act in relation to independence and enforcement powers. Why are you seeking for such amendments?
You know that institutions are like living organisms, the law is dynamic and, the society is also dynamic. The dynamics of regulation and supervision are changing by the day. And the recent-global financial meltdown and what has happened to our banks made it all together necessary for us to seek more enforcement powers to make us much more effective in the supervision of these banks so as to further ensure the protection of depositors, which is our primary core mandate. The idea is to get the National Assembly to appreciate some of the weak areas in our laws which need to be amended to make the law more effective and to give us more enforcement powers. This is to deal particularly with erring bank management, directors and employees, and to have the power of removing and dismissing them. More importantly, it will give us an opportunity to resolve cases of distress which may occur in the banks speedily. This is one of the key things we have achieved in the amendment of the law and we want to drive that further in our ability to quickly and expeditiously pay insured depositors as soon as there are signs and it is confirmed that a bank is unable to meet its obligations. We don’t have to wait until the licence is revoked and a bank is handed over to us; because the depositors must be protected and their interest must be enhanced. This is one of the reasons of getting the law amended.

EC:Equally sir, some analysts say the enforcement powers being sought by the NDIC, if granted, would lead to role conflict between the CBN and the NDIC. What is your take?
I don’t think there will be any role conflict. We have always collaborated with the Central Bank on all issues relating to banking supervision and regulation. Good enough, we have an umbrella body under which consultations are held. For instance, we have happily and recently revived the CBN/NDIC executive committee on bank supervision. This is a forum which enables us to sit down with the CBN to formulate policies pertaining to regulation and supervision of banks. We share information, we share ideas, we initiate policies, we rub minds in this set up, and we also commission our various experts to have in depth study about these issues before policies are thrown up. So I don’t see any role conflict. All we are saying is that any effective deposit insurance system must have a way of enhancing the protection of depositors and the system. And unless our supervisory capacity can do that, you will only function like a toothless bull dog. We have always shared responsibilities with the Central Bank; and the Central Bank, as you know, could also focus more attention on the management of the economy in general. So, I don’t foresee any conflict.

EC:The CBN plans to introduce Islamic banking in the country. What is NDIC doing towards extending deposit insurance cover to Islamic banking?
That is a very good question. We have been preparing ourselves to meet the challenges of the introduction of non-interest bearing financial institution or bank, which you called Islamic Banking. We have sent several of our staff to Malaysia, Turkey, U.K and Egypt to enable them have a good grasp and exposure of the whole concept and practice of Islamic Banking. We have a pool of competent staff who at the end of the day can come up with the framework. We are already developing a framework of a special deposit insurance fund for the Islamic Banking. We have already started to enhance our competence and capacity in that area. We already have an agreement, for instance, with the Malaysian Deposit Insurance Corporation who are already in the practice send our staff for a two to three week attachment so that they can have first hand knowledge and experience of what it is to design a special scheme that will take care of supervision and provide deposit insurance cover to the Islamic banks. We believe that we shall have no problem in that area.

EC:We understand that the NDIC Board undertook a study tour to Malaysia. What was the purpose and outcome of the tour?
Yes, that is true. Since the inauguration of the current Board, it was resolved that the Board would undertake study visits to key deposit insurance agencies in other jurisdictions as part of the efforts to reposition the Corporation in the light of the on-going reforms and emerging challenges in the Nigeria’s financial system. The Malaysian Deposit Insurance Corporation (MDIC) was among the three agencies that were selected for the study visit. The Board had very useful discussions with the Board and Management of the Malaysian Deposit Insurance Corporation (MDIC): its mandate and corporate structure, corporate governance, framework for Islamic Deposit Insurance and enterprise risk management. In the area of the MDIC’s mandate and corporate structure, the NDIC Board was informed that the MDIC operates as a risk minimiser like the NDIC not a pay box. However, unlike NDIC, the MDIC does not act as liquidator in the event of any bank failure. Instead, it recommends to the court the appointment of third parties as liquidator of the closed insured institutions. Under corporate governance, the NDIC Board was briefed about the MDIC’s governance policy framework which is anchored on 15 best practices or standard behaviour and also hinged on three pillars: openness, integrity and accountability.

EC: Is there any intention to register more banks?
As you may be aware, the CBN is about to issue banking licences for Islamic Banking as soon as the law is passed by the National Assembly. The NDIC therefore considered it very necessary to be well prepared for the insurance of deposits of the Islamic banks. The study visit therefore provided an opportunity for the Board to be taken through the framework of the Islamic Deposit Insurance which had been institutionalized as part of Malaysia’s financial safety net. You might also be aware that the Corporation had in 2009 established an enterprise risk management Unit (ERMU) to identify, analyze and manage the inherent risks that could impede on the mandate of the Corporation. Thus, the study visit gave the NDIC Board an insight into the roles of the Board and Management in the identification and monitoring of the significant risks facing the MDIC and the direct reporting relationship of the Chief Risk Officer (CRO) with the MDIC Board.

EC:The Corporation participated in the recently organized conference on the Benefits of Deposit Insurance System (Dls) that was organized by the African Regional Committee of International Association of Deposit Insurers (IADI) at Arusha, Tanzania. What would you say are the benefits of the Dis in Nigeria?
Let me provide a background to the Regional Conference. The DIC is a founding member of IADI, an organization formed in May 2002 with Headquarters in Basel, Switzerland. IADI is a forum for deposit insurers from around the world to exchange information and share knowledge and expertise in areas of common interest in deposit insurance. The Association established regional committees, including Africa Regional Committee, to reflect regional interests through the sharing and exchange of information and expertise at the regional level. The regional conference is an annual event and NDIC had hosted the conference on three occasions in the past. The theme of this year’s conference, as rightly indicated by you, is “Benefits of DIS in Nigeria”. For Nigeria, the benefits of DIS, as indicated in my paper presented at the conference, include the following, among others: The existence of 01 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; and Promoted sound risk management through the adoption of differential premium assessment system and its involvement in supervision. In all, NDIC’s case presents a remarkable experience of benefits of a DIS to the economy in general and to the financial system, in particular.

EC:Lax corporate governance and poor risk management have been regarded to be the major causes of the banking crisis in Nigeria. What is the NDIC doing to improve corporate governance and risk management in the banks?
The NDIC has always advocated good corporate governance in all the institutions it supervises, be it universal bank, primary mortgage institutions, or the microfinance banks, because corporate governance is the key to success of any institution, especially financial institutions. Each time our examiners examine or audit these institutions, they pay particular attention to corporate governance and where they observe weaknesses, they point them out and speak to the board and management of these institutions so as to ensure that they take to corrective measures. To drive it in further, we have recently collaborated with the Central Bank of Nigeria under the umbrella of the FSRCC to push for code of corporate governance for the insured banks and other financial institutions. And not only for the insured institutions but also for ourselves as regulators. We are quite up and doing in promoting good corporate governance as it affects both institutions we are supervising and ourselves. It is the same for risk management. We are training ourselves more and more on the concept, principles and techniques of good management in these deposit taking institutions, so that our examiners will be in a good position to help them in terms of risk identification, risk analysis, risk management and damage control. And the most significant area is perhaps, credit risk for the banks. This is why we have huge volumes of non-performing loans. And for us, we have installed a new enterprise risk management system. They are a unit that helps us to remind us and evaluate our own risk based profile. As the saying goes “physician heal thyself”. So, we are mindful of this and we are pushing forward. In fact, few weeks ago our examiners attended a two weeks training on risk management, risk-based supervision and examination which was run by an expatriate specialist, Kim Morris who was seconded from IMF/World Bank. He is now domiciled at the Central Bank. But before then, we have been training our staff. In fact, last year we had in-house training sessions on risk-based supervision.

EC:You were recently quoted as saying that the NDIC raised the red flag on some of the governance issues within the banking system before the global financial meltdown, but your efforts were rebuffed. What really happened?
I don’t know who quoted me on that and when however, the fact is that the NDIC from 2007 – 2009, especially during the financial crisis, never minced words in raising the red flag, saying “look all is not well”. And we have made this statement very clearly to the government and the general public. Some of these “alerts” are contained in our Annual Reports. I believe that the government has duly taken note of our position, and our concern. I remember, sometime ago, in fact almost two months ago, when we had a one-day conference in Lagos which was held by Business Day newspaper, the Honourable Minister of State for Finance publicly acknowledged that they received from us factual and useful information on the state of affairs in the banking system during those trying moments.

EC:It is common knowledge that CBN/NDIC have been talking about corporate governance. What are the main issues confronting the Corporation in respect of the management of the insured institutions? What efforts are also being made to address the governance issues?
Good corporate governance is always an aspect that is closely monitored by the Regulatory Authorities in order to ensure the transparency and accountability of management of banking institutions and the curtailment of their risk appetite. It often helps to assure that business strategies are consistent with safe and sound operations and thus can act as the first line of defence against excessive risk – taking. The corporate governance issues in some of the banks include the following: Weak and ineffective risk management systems; Inaccurate financial reporting; Inadequate provisioning for bad quality assets; Excessive insider dealings and abuse; Reckless and fraudulent management and Abuse and fraudulent use of subsidiaries. The effects of the foregoing are: Prevalence of huge non-performing assets that required huge provisioning, diversion and conversion of bank assets and earnings, Illiquidity and Technical insolvency.

EC:What are the efforts being made to address them?
Efforts being made by both the CBN and NDIC include: Issuance of new code of Corporate Governance to banks; Compelling compliance by banks with the provisions of the issued code of corporate governance; Sacking of Management Teams of 8 banks in 2009; Fixing 10 – year tenure for Chief Executive Officers of Banks and Strengthening of our respective organizations’ corporate structures and practice.

EC:From all indications, deposit insurance is a knowledge-based scheme. What efforts is the Corporation making to enhance its capacity in the discharge of its mandate?
Both the Board and successive Managements of the Corporation have long realized the deposit insurance is knowledge-based and that has informed the seriousness being attached to capacity building. Indeed, the NDIC has left no stone unturned in continuously building its human capacity through various means, including training that would enhance skill acquisition as well as that which would provide the attitudinal disposition needed to move the Corporation forward both at strategic and tactical levels.

EC:What are you doing to address the human capacity?
The Corporation’s efforts at enhancing its human capacity have taken some forms which include development of a Training Policy. In order to ensure that training was systematic, integrative, rational and need-driven, a training policy was put in place under the watch of the Training Advisory Committee (TAC), which was established in 1998. With the policy in place, the Corporation has continued to invest heavily on staff training and development through local and overseas training programmes as well as training conducted by the Corporation’s Training Centre, which covers significant number of staff on a regular basis. Areas covered under such training activities include risk-based and consolidated supervision; failure resolution strategies and other specialized areas in deposit insurance. In the same vein, the International Association of Deposit Insurers (IADI), of which the Corporation is a founding member, has contributed significantly in building the capacity of the Corporation’s staff through participation in its annual conferences and other activities.

EC:What are you doing on self development programmes?
The Corporation continues to encourage staff to acquire additional qualifications (Degrees, Diplomas, and Professional Certificates) in various disciplines relevant to the functions of the Corporation. To encourage self-development effort, bonuses (in monetary terms) are granted to staff members who obtain relevant additional qualifications.

EC:The NDIC was also recently reported to have migrated from flat rate to the Differential Premium Assessment System (DPAS). How would the Differential Premium Assessment System promote sound risk management in the banks?
Differential Premium Assessment System is designed in line with best practices of the other deposit insurance institutions in the world. It is a great achievement for us as some of these deposit insurance organisations have been in existence for about 50 to 60 years, yet they have barely migrated from the flat rate to the risk based system. We have been able to achieve this in 20 years. So, the whole effort is to reward good risk management and good management generally of these institutions. The better you are rated as being less risky, the less the premium you pay. This is generally a principle by which conventional insurance practices are governed. Comparing a year old car with a ten year old car, if you are insuring them, you will be asked to pay different premium. This is because of perfection and reality of risk on each of them, which is obviously quite different, and, I believe that the banks have found it very useful. It has resulted in the payment of less premium by a lot of them, to the tune of almost 30%. So it has reduced their costs. The idea is okay because, they are making savings here. But they should be able to pass these benefits to their customers by providing better and more efficient services with less cost to customers, since we are equally providing them with insurance services at less cost.

EC:Lack of coordination among the financial services regulators as attested to by the inability of the Financial Services Regulation Coordination Committee (FSRCC) to meet for almost two years have been blamed for the crisis that engulfed the banking sector. How true is this?
We cannot attribute the crisis that engulfed the banking system really to one factor. There are several factors that contributed to this. But certainly, the inability of the committee to meet until very recently had contributed to the inability of the regulatory authorities – the CBN, SEC, NDIC, PENCOM, NAICOM, etc, to have a common forum of sharing ideas, formulating policies and enforcing policies that will help to regulate and sanitize the entire financial services industry, be it pension, be it capital market, or money market. To that extent, yes, but you cannot actually attribute it to one factor and that is the truth.

EC:What is the current status of the liquidated banks on the settlement of depositors in the aftermath of the consolidation exercise?
We are continuing with the effort to make sure that we pay both insured and un-insured depositors whose monies were trapped in these liquidated banks. We have about 34 or so of these banks with the exception of two that have taken us to court. The primary source of funds to pay these depositors is of course through debt recovery which has been a very big challenge. Even the nature of the debt – the bad debts that were inherited, are large and old, the records are not there, the debtors could not be found, some of them have gone to court to stall our efforts; but all the same we are doing our best to recover more and more. Because the more we recover the larger the funds we have to be able to pay depositors. Recently, in order to facilitate that, we have appointed quite a number of debt recovery agents nationwide so that they can handle the debt recovery much more expeditiously. Do not also forget that the Nigerian legal system is quite a challenge as far as debt recovery is concerned. We are not relaxing but pushing ahead and making recoveries although slowly, but we are making progress. Also through the purchase and assumption (P&A) framework, all private sector depositors have been paid under a special arrangement we have with the Central Bank of Nigeria, which enabled healthy banks to acquire some of the assets and liabilities of these moribund banks. And this has helped the private sector depositors to have access to their funds in full. The whole idea is to engender confidence that if you put your money there, you are protected as much as possible, especially, if you are a small depositor. It is working, but it is a big area of challenge. Let me also quickly mention that there is hope because, the Asset Management Company (AMCON) that is coming on board will be a veritable vehicle of tackling the problem of huge sticky and troubled assets. We intend to collaborate with AMCON to offload some of these big bad loans and sell them to the company so that we can get enough funds to pay our depositors. We have also embarked on media campaigns and some other sensitization programmes which will enable our depositors to be encouraged to come forward to collect their deposits. These are some of the measures we have taken to enhance debt recovery and ensure depositors’ reimbursement.

EC:On a final note sir, how does the Fiscal Responsi-bility Act affect the NDIC’s operations?
Well, the Fiscal Responsibility Act provides that certain designated institutions like NDIC, Central Bank of Nigeria and others, I think about eight, which I cannot really remember are required by law to remit 80% of their operating surplus annually to the government for the use of the generality of Nigerians. In general, this is a welcome development because, what the government is trying to do is to encourage revenue generation and utilisation in the country. But for us, it is difficult because it has hindered our ability to build our reserves and to build our Deposit Insurance Fund (DIF). It is the fund we use as a “fall back” whenever it becomes necessary for us to give financial assistance to troubled banks. It is also the fund we use to pay insured depositors; and the way it is, government, since the inception of the Corporation, has made it very clear that it will not dip its hands into the treasury and bring out money to pay depositors. We are not even asking for that, what we are asking for is an opportunity to “grow” the deposit insurance fund so that we will be able to meet our own obligation to depositors. This is our situation. We have made representation to government and we hope that one day it will be looked into.

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