DEPOSIT INSURANCE
AND CONSUMER
PROTECTION
BEING A PAPER DELIVERED
BY THE ACTING MD/CEO OF
NIGERIA DEPOSIT
INSURANCE CORPORATION,
U. IBRAHIM, AT THE
WORLD CONSUMER RIGHTS
DAY HELD ON 15 TH MARCH,
2010
Introduction
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Definition
A Deposit Insurance Scheme (DIS) is a financial
guarantee to depositors, particularly the small ones
in the event of a bank failure.
It has the following benefits:
Protects depositors against full or partial loss of their
savings
Reduces bank “runs” and contributes to financial
stability
Can limit government fiscal and political exposure
Creates a formal mechanism for addressing bank failure
Introduction (cont’d)
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Strong & Robust
Banking System
Financial Stability
Depositor
Protection
FINANCIAL SAFETY NET
Prudential
Regulation &
Supervision
Lender-of-last
resort facility
Deposit
insurance
system
Deposit insurance enhances depositor confidence
INTRODUCTION (cont’d)
• DIS Policy Objectives
 To protect small depositors in the event of bank failure
 To contribute to financial system and macroeconomic
stability
 To provide formal mechanism for failure resolution
 To contribute to orderly payment system
 To redistribute the cost of failure
 To promote competition amongst deposit-taking financial
institutions
 To facilitate transitioning from blanket coverage to limited
coverage
DEPOSIT INSURANCE SYSTEM IN
NIGERIA
 Establishment
 The DIS in Nigeria is the explicit type with an enabling
law
 The organization running the DIS, the Nigeria Deposit
Insurance Corporation (NDIC), is a separate entity
from other agencies of government though is owned by
two government agencies: Central Bank of Nigeria(60%)
and Federal Ministry of Finance (40%)
 The NDIC was created by Act No. 22 of 1988(now
repealed) but commenced operation in 1989.
 A new statute, Act No. 16 of 2006 has replaced the old
Act
DEPOSIT INSURANCE SYSTEM IN
NIGERIA (cont’d)
 Mandate of the Corporation
 Deposit Guarantee
 Banking Supervision
 Failure Resolution
THE ROLE OF DEPOSIT INSURANCE
IN CONSUMER PROTECTION
 Consumer protection by a DIS essentially involves the
apportionment of losses arising from the failure of a set of
existing contracts and the recognition of a fresh set of
contracts. These can be broadly categorized into civil and
Social contracts.
 Civil Contracts:
 First is between the depositor and the bank in which the
bank borrows funds from the depositor and pledges to pay
the nominal value of the deposit plus interest, in some
instances, on demand or at a given date. This is called
liability-side liquidity promising contract of unconditional
withdrawal right of depositors.
 Second is between the bank and the borrower on a loan in
which the bank deploys depositors’ funds ( also known as
asset-side loan contract).
THE ROLE OF DEPOSIT INSURANCE
IN CONSUMER PROTECTION
 Social Contract:
 This is a contract where the citizens expect that the state will
protect individual property rights by enforcing the civil
contract through regulatory agencies, in the same manner an
impartial judiciary does.
 The adoption of DIS is therefore to:
o restore public confidence;
o Preserve the sanctity of social contract; and
o Provide an opportunity to build a banking system that can
better provide an efficient services necessary to enhance the
development of the economy.
 Nigeria, like most countries with DIS, gives priority to the
claims of “depositors” when the financial institution
collapses. This, of course, is the narrowest of the role asof
deposit insurance
THE ROLE OF DEPOSIT INSURANCE IN
CONSUMER PROTECTION(cont’d)
 The other form of consumer protection is less direct.
Depositors are seldom in a position to make an informed
analysis of the financial stability of the financial institutions
with which they deal as a result of what is known as
‘information asymmetry’.
 DIS therefore exists to form a second layer of protection for
depositors and reinforces the efforts of the primary
regulator/supervisor in ensuring safety and soundness of the
financial institutions.
THE ROLE OF DEPOSIT INSURANCE
IN CONSUMER PROTECTION(cont’d)
• In the broadest sense, deposit insurance system offers
consumers the greatest protection through its contribution
to financial system stability.
• How does the deposit insurance system contribute to the
soundness and stability of the financial system and thereby
protect consumers?
 Instilling confidence in insured institutions. This can be achieved by
 Supporting and contributing to an orderly or proper functioning of the
payment system; and
 Assuring the public that a naira in their bank accounts is the same as a
naira in their pockets.
THE ROLE OF DEPOSIT INSURANCE
IN CONSUMER PROTECTION(cont’d)
 Encouraging
banks to manage risks responsibly and
reducing moral hazard. This can be achieved through a
number of ways including:
 Providing incentives for sound risk management of banks
 Allowing troubled banks to fail
 Providing limited insurance coverage
 Reducing the likelihood of bank runs and preventing
banking panic from spreading quickly to other banks, the
so-called contagious effect. This can be achieved by
educating and assuring depositors that their deposits are
protected from losses and that they would be repaid
promptly, in the event of bank failure
 Employing a formal mechanism for early bank resolution.
THE ROLE OF DEPOSIT INSURANCE
IN CONSUMER PROTECTION(cont’d
 Reducing the severity of an economic downturn by
mitigating the consequences of failures of insured
institutions for depositors. For example , adjusting the level
and scope of coverage during the time of crisis
 Instilling discipline on member institutions and elicit
responsible behaviour through
 Demanding higher premium payment from riskier banks
 Imposing sanctions for non-compliance with regulatory
rules
 Threat of termination and cancellation of membership or
even the removal of directors and/or officers
THE ROLE OF DEPOSIT INSURANCE
IN CONSUMER PROTECTION(cont’d)
 Enhancing bank operational standards by enforcing good governance
and sound banking practices which ensure prudent risk management
practices, integrity and fair/equitable consumer treatment
 Actively promoting financial literacy because increased financial
literacy could enhance market discipline. Financially educated clientele
are likely to take more rational decisions . Ability to appreciate the
trade-offs between risk and rewards could contribute to financial
stability
 Finally, a DIS should help put in place in collaboration with other
safety-net players, other infrastructure for consumer protection such as
avenues for redress , for example, a Financial Services Ombudsman to
provide alternate
dispute resolution mechanism such that all
consumers may have access to fair treatment.
EFFORTS OF THE NDIC AT
CONSUMER PROTECTION
 Basically, the NDIC has made tremendous efforts over the
years to protect consumers of financial services .
Essentially, the Corporation has been able to do this
through fulfilling its core mandate : deposit guarantee,
banking supervision and distress resolution
 Deposit Guarantee
 Coverage of all deposit liabilities in universal banks and
extension of deposit insurance coverage to Microfinance
Banks (MFBs) and Primary Mortgage Institutions
(PMIs);
EFFORTS OF THE NDIC AT
CONSUMER PROTECTION(cont’d
 Adoption of differential premium assessment system which
resulted in reduction of premium burden on universal
banks. (35% and 36% reductions were achieved in 2008
and 2009 respectively);
 Insurance coverage was increased from N50,000.00 to
N200,000.00 for depositors of universal banks and
N100,000.00 for depositors of MFBs and PMIs;
 90 days target was set for payment of depositors of failed
banks after appointment as liquidator (barring litigations)
EFFORTS OF THE NDIC AT
CONSUMER PROTECTION(cont’d)
 Banking Supervision
 Engage in the on-site examination and off-site surveillance of universal
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banks since inception
creation of Special Insured Institutions Department to supervise MFBs
and PMIs;
adoption of Risk-Based Supervision in collaboration with CBN;
development of electronic Financial Analysis Surveillance System (eFASS) in collaboration with CBN;
establishment of NDIC enhanced supervisory capacity in the banking
sector;
adoption of a policy of zero tolerance for unethical practices in insured
institutions.
EFFORTS OF THE NDIC AT
CONSUMER PROTECTION(cont’d)
 Distress Resolution
 In the area of Bank Resolution, three mechanisms had been applied
namely Open Bank Assistance, Depositor Reimbursement and
Purchase & Assumption
 Open Bank Assistance
 NDIC accommodation bill was used to resolve liquidity crisis in the
banking system in 1989;
 7 distressed banks were acquired, restructured and sold to new
investors;
 Take-over of 28 banks to safeguard their assets.
EFFORTS OF THE NDIC AT
CONSUMER PROTECTION(cont’d)
•
Depositor Reimbursement
 Payment of N3.3 billion out of N5.2 billion insured deposit of 34
banks that failed before consolidation;
 Declaration of N12 billion dividend in favour of uninsured depositors
of 34 banks that failed before consolidation;
 100% dividend in favour of depositors of 11 banks that failed pre-
consolidation;
 Payment of dividend to shareholders of three liquidated banks: Alpha
Merchant Bank, Pan African Bank and Nigeria Bank;
EFFORTS OF THE NDIC AT
CONSUMER PROTECTION(cont’d)
•
Purchase & Assumption (P&A)
 P & A was introduced as a novelty in 2006;
 Resolution of 11 out of 13 banks that failed post consolidation;
 Payment of N3.9 billion insured deposit and N48.8 billion uninsured
deposit of 11 out of 13 failed post-consolidation
EFFORTS OF THE NDIC AT
CONSUMER PROTECTION(cont’d)
 Others
 The Corporation played a pro-active role in the promulgation and
implementation of the Failed Banks Act. Substantial debt recoveries
achieved through the instrumentality of the Failed Bank Act. A
substantial portion of the recoveries were used to pay uninsured
depositors, creditors and in some cases shareholders of liquidated
banks
 Apart from executing its core mandate, the Corporation has published
several well-researched journals and books to educate numerous
stakeholders and promote financial literacy and consumer education.
THE NIGERIA’S EXPERIENCE:
Challenges
 Low-level Public Awareness of the Deposit Insurance
System.
 The Fiscal Responsibility Act which requires that 80%
of the Corporation’s operating should be remitted to the
Federation Account constrains rapid build-up of DIF
 Long
drawn-out
litigation
by
erstwhile
shareholders/directors
of
closed
banks
and
cumbersome judicial process
 Poor corporate governance of insured institutions.
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CONCLUSION
 Deposit insurance system is an integral part of an
effective safety-net framework
 A deposit insurance system is always designed to
promote confidence and essentially protect depositors,
among other stakeholders.
 NDIC’s case presents a remarkable experience
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