With the reform measures the Central Bank of Nigeria (CBN) recently introduced into the banking industry makes it necessary to examine the unique role of deposit insurance system in promoting banking system stability. One of the primary objectives of establishing a Deposit Insurance System (DIS) is to enhance macro-economic and financial stability by minimizing or preventing incidences of bank runs. This is done through an upfront promise to reimburse insured depositors a guaranteed sum in the event of a bank failure. Such a promise is aimed at building confidence in the banking system.
Where the actual pay-out of insured sums is promptly and efficiently carried out in the event of a bank failure, the extent of disruption to the banking system is highly minimized.
The dynamic nature of modern societies makes social and economic reforms inevitable. Consequently, different reforms have had to be introduced into the Nigerian banking industry at different points in time. Going down memory lane, you would recall that following the adoption of Universal Banking (UB) in 2000, the statutory separation between commercial and merchant activities was abolished. in July 2004, the Central Bank of Nigeria (CBN) articulated a 13-point Agenda that eventually heralded the banking sector consolidation programme.
Arising from the effects of recent global financial crisis coupled with the challenges posed by consolidation and other developments within the economy, the nation went through another bout of financial crisis in 2008/2009 as revealed by the CBN/NDIC joint Special Examination carried out in 2009. In particular, the examination revealed 10 banks were in grave condition which was capable of degenerating into systemic crisis. Some of the identified problems exhibited by the banks were weak corporate governance; massive insider abuse; imprudent dissipation of depositors’ fund; undisclosed large credit exposures to related entities; inadequate capital; poor risk management; and Poor liquidity position. The need to address the associated problems and stabilize the banking system prompted the Regulatory Authorities to apply some interventionist measures in 2009, including the replacement of the Executive Managements of eight (8) of the banks and the injection of N620 billion.
While 5 of the intervened banks had made and/or were making series of efforts to improve their financial condition through recapitalization, it was apparent that the other 3 of them were not making as much efforts that might likely yield any meaningful results by the end of September 2011. Thus, to stop further damage to the banks before that day, the Regulatory Authorities had to further intervene in the affairs of the banks.
Based on the foregoing, on August 5, 2011, the Nigeria Deposit Insurance Corporation, pursuant to the provisions of the NDIC Act, and after due consultation with the CBN and the Federal Ministry of Finance, established three bridge banks for the subsequent transfer of assets and liabilities of Afribank Plc, Bank PHB Plc, and Spring Bank Plc. The Bridge Bank failure resolution option was adopted on August 5, 2011 to resolve the problem of three banks. Following this decision, three bridge banks were created to take over the assets and assumed the liabilities of the three banks. They are: Mainstreet Bank Limited replaces Afirbank Nigeria PLC; Keystone Bank Limited replacesBank PHB PLC and Enterprise Bank Limited replaces Spring Bank PLC.
The bridge bank option was adopted in the interest of depositors and to prevent outright liquidation which would have had dire consequences for depositors, employees of these banks and thus undermine public confidence in the banking system.
Beyond the above-listed measures taken to fix the identified problems, the Regulatory Authorities introduced a new set of measures under the banking sector reform with a view to evolving a more resilient banking system as well as ensuring that banks play their intermediation role more effectively. Some of these measures include: Abolition of Universal banking system and categorization of banks according to functional lines and/or geographical spreads to improve their capacities to intervene in the real sector of the economy; Putting in place strong corporate governance in regulatory agencies and stipulating standards for the operators; Promotion of other types of banking sub-sectors such as non-interest banks and strengthening of the microfinance policy in order to build more inclusive banking system where every Nigerian would have equal access to economic opportunities; and New Cash transaction policy slated to start in June 2012 aims at addressing the currency management challenges as well as enhancing the national payments system.
Some of the measures also include: Establishment of the Asset Corporation of Nigeria (AMCON) which serves as a vehicle for bank resolution; Issuance of new Prudential guidelines; Release of guidelines for non-interest banking; Introduction of common year end for banks; Limiting of tenure for bank CEOs to 10 years; Placing limit of N10 million for single cheque withdrawal; Issuance of guidelines on scope, conditions and minimum standards for commercial and merchant bank; and Establishment of Financial Stability Fund of N1.5 trillion.
The NDIC, a body charged with the responsibility of administering deposit insurance system in Nigeria, contributes to the attainment of the objectives of the current banking reform through: prompt claims settlement as demonstrated in the case of the 103 microfinance banks closed in 2010; creation of level playing field for all operators in the banking system by extending deposit insurance coverage to microfinance banks (MFBs), primary mortgage institutions (PMIs) and the non-interest banks when they come on-board and Enhanced public awareness initiatives which include: the development of a new robust and interactive Website – www.ndic.ng.org and translation of NDIC pamphlets to 3 major Nigerian languages.
It is obvious that the regulatory/supervisory authorities have at different times articulated and implemented necessary reform programmes aimed at enhancing the stability of the Nigerian banking industry in particular and the financial system in general. Yet, in spite of the reform measures, some banks still failed. The reason for this was simply because by their nature, banks that are badly-managed by their operators, will ultimately fail. In other words, banking reforms do not by any means constitute an antidote to or elixir of bank failure. For this singular reason, the role of deposit insurance system (DIS) in banking reforms cannot be over-emphasized.
Going forward, the NDIC would continue to be active in supporting key initiatives to strengthen the banking system. In this regard, the Corporation is currently collaborating with all relevant Regulatory Authorities to develop a framework for integrated deposit insurance system as well as the framework for effective resolution of significantly important financial institutions (SIFIs). I also believe that there should be more micro-finance banks particularly in rural areas in order to enhance financial inclusion and boost the nation’s productivity.
Umaru Ibrahim, Mni, is the Managing Director/Chief Executive Officer, Nigeria Deposit Insurance Corporation (Ndic). The article is an excerpt of his address at the annual Business Editors And Finance Correspondents Association Of Nigeria (Fican) Workshop Held At Dutse, Jigawa STATE