Sokefun: Why Insider Loan Abuse Should Be Criminalised

The Chairman of the Nigeria Deposit Insurance Corporation, Mrs. Ronke Sokefun, in this interview during an online forum organised by Babalakin & Co Legal Practitioners, spoke about the regulatory roles of the corporations. She also called for a timeline for the existence of bridge banks, while speaking about other developments in the banking industry. Obinna Chima brings the excerpts:

Deposit insurance is NDIC’s most significant mandate. What type of financial institutions are presently insured by the NDIC and what is the maximum deposit rate for these insured institutions?

Currently, we insure deposit money banks, merchant banks and non-interest banks inclusive, the primary mortgage banks, microfinance banks and most recently we added to our portfolio mobile money operators (MMOs). As we all know, financial inclusion is currently a big trend and we can’t close our eyes to the fact that we are aware that these MMOs operate, even though they operate as agents for these banks. So, that is our purview. In terms of coverage, all three except microfinance banks, the maximum insurance coverage is N500, 000, but for microfinance banks, it is N200, 000.

What is the formula for fixing the monetary deposit insurance coverage for banks?

It is essentially the standard of living and per capita income of the average Nigerian that forms the basis for the monetary deposit insurance coverage.

Can someone increase his or her deposit protection if the funds of such persons are placed in two separate account in two different branches of same liquidated bank?

Unfortunately, because it is same bank with different branches, we consolidate all you have and you are still entitled to same amount as your deposit insurance coverage which is the N500, 000. We don’t pay per branch, we consolidate everything.

With the recent Global Standing Instruction (GSI) introduced by the Central Bank of Nigeria, which permits banks to debit loans and accrued interest from the account of loan defaulters, going forward, will the NDIC take this policy into cognisance when it comes to the settlement of claims of depositors?

First and foremost, we are still studying the GSI, even though it is a welcome development. On the board of the NDIC, the CBN has a very senior representative as a Director. We had a board retreat recently and it was one of the things we discussed. We are really studying it, essentially to look at its practicability. But, it appears that it might impact on pay-off of those affected during liquidation. So, I would say for now that it is work-in-progress. We would our own policy statement at the appropriate time regarding its practicability.

Current data showed that the NDIC has liquidated 425 financial institutions since 1988. Can you shed some light on the extent these claims have affected depositors in these banks and how they have been settled?

It is usually an ongoing process. We have a whole department dedicated to this at the corporation. We have a Claims’ Resolution Department whose job it is to verify claims in any institution. Their job is to collate the names of the depositors and of course, ascertain the claim made by each. Sometimes the process is slow because we don’t have access to records and data. Sometimes, because of the gap between when the bank goes burst and when its licence is eventually revoked. Before we step in, the licence must first be revoked by the CBN. So, during that time is when the access to records could become a challenge. So, like I said, it is an ongoing process. But I think that as at the first quarter of this year, we paid about N117 million owed to insured depositors and another over N300 million as dividend to insured depositors and shareholders of some of the banks. So, it is ongoing process and it depends on access and how quickly the stakeholders come forward for their claims.

When one hears of banking supervision, what comes to mind first is the Central Bank of Nigeria (CBN) whether rightly or wrongly. What is actually the statutory role of the NDIC in relation to the supervision of banks and how do ensure that when carrying out this role you don’t encroach into the area of the CBN so that there is no conflict?

Section 28 of the enabling Act of the NDIC speaks to bank examination and the appointment of examiners. That tells you that we do have a right to go into any insured institution to look at the books. We do not encroach on the role of the CBN. Over the years, what we agreed was to always collaborate. So, we jointly examine these banks. By doing that, there is no infringement on role. Each party goes in there and we compare notes. So, there is no conflict on roles whatsoever. Our Act permits us to examine the books of insured institutions and to appoint examiners. So, we do work together with the CBN. We work jointly to examine the insured institutions.

But during a recent public hearing by the Senate Committee on Banking and Insurance on the Amendment of the BOFIA, it was reported that the NDIC called for its involvement in the process of licencing new banks, can you shed more light on this?

All I can say is that the NDIC and CBN are talking behind the scene on this matter. But I think there was a misunderstanding on the intent behind this. What we sought to achieve was a situation whereby they would be a due diligence of sought before banks are licenced or before officers and directors are appointed. It was all in good fate. But the CBN saw it as undermining its role as the lead regulator. So, like I said earlier, we have a representative of the CBN on the board of the NDIC. So, both parties have decided to go back to the drawing board. Those discussions are already taking place, with the involvement of the Ministry of Finance and certainly we would articulate our position.

Still from that public hearing, the NDIC also proposed the criminalisation of insider loans and for the imprisonment of defaulters. Can you shed more light on this?

The bane of bank failures traditionally has always been as a result of non-performing loans (NPLs). We found out that a large chunk of this was attributable to insider loans. People take undue advantage of their positions in these organisations to take out loans which they never repay. So, we were of the view that there should be criminalisation. I was appalled recently when I found out that someone who was part of those that led to the failure of a bank, who also had unpaid loans, was entitled to deposit insurance payment. So, it has become imperative that we must take certain stringent steps to arrest this development. We need it to put people in check. Regulations like that would forestall such occurrences and reduce bank failures.

Can you please explain the bridge bank resolution approach, its merits and probably its demerits if any?

Bridge bank is a temporary arrangement. Essentially, it is operated by the deposit insurer. The bank is meant to acquire the assets and liabilities of a failed bank until a final resolution is achieved. The most recent we have had in that category is Polaris Bank. These banks are usually set up for a specific duration until we find interested investors that would take over fully, the assets and liabilities of such an organisation. It is to ensure stability in the financial system. If you allow a bank to go under, you may have a run on the entire banking system. Also, it ensures that the employees of such banks are not in panic of being thrown into the unemployment market. Of course, we also preserve the deposit of depositors in such institutions because they continue to have access to their deposits in such an institution. It also engenders confidence in the banking sector. Those are some of the merits of a bridge bank system. What are the demerits? Well, if banks tend to feel that a bridge bank would easily be created to resolve financial crisis – it may engender some form of laxity and instead of safeguarding depositors’ funds, there could be the tendency of thinking that once there is a problem tomorrow, you can fall back on the regulators to establish a bridge. Of course, government has to fund this and it therefore comes at a cost to government. I know how much, between the CBN and NDIC, was spent in the case of Polaris Bank. Again, more often than not, the insurer becomes responsible for the operation of the bridge bank. Like I said, it undermines market discipline and sometimes it becomes a road, as against a bridge because it then lasts longer, in certain cases, more than it was planned for. But again, the good thing about it is being able to preserve depositors’ funds. In time past if you recall, it was almost like a ten-year thing such that every ten years there seems to be a major burst in the banking sector. But, we have been able to prevent that.

Still on bridge banking, you mentioned that it is a temporary arrangement. Polaris Bank was set up in September 2018 and it is still a bridge bank till date. What is the status of that bank?

Polaris Bank remains a bridge bank until we find interested investors. The current management was put in place by the CBN. Of course, you have seen the results of their work which was why the bank recorded improved profit after tax. That intervention in the bank saved over 6,000 jobs. The bank had well over 200 branches and deposit was in excess of N940 billion, which depositors still had unhindered access to. So, again like I said, if that bridge does not achieve the purpose for which it was set up, we would run the risk of destroying the entire banking system. More importantly also, I think the CBN and NDIC must sit together and agree on a timeline for the operation of any bridge bank, because anything that doesn’t have time, can’t be measured. So, there must be a timeline within which a bridge bank ceases to be a bridge, so that it doesn’t become the norm.

There seems to be the perception that the CBN and NDIC do not have the appetite for rescuing microfinance banks and primary mortgage banks. Is this perception true?

Section 47 of the NDIC Act does say that we would give financial assistance under certain considerations. So, we have a right to prescribe under certain conditions and it is our prerogative to prescribe under those conditions. The truth of the matter is that most of the microfinance banks and primary mortgage banks don’t meet our conditions. As at the end of first quarter, 37 microfinance banks were listed for closure. Why? They could no longer pay their depositors, cessation of businesses and persistent non-rendition of monthly returns. So, the handwriting is always on the wall. You will always see it coming. And, there is also that need to protect ourselves so that all these institutions don’t just assume that the NDIC was set up just to fund their failings. Some, it’s almost like they set out to fail from day one. For instance, as at the end of first quarter this year, primary mortgage banks in Nigeria had a combined insured deposits of N112 billion. But guess what? Non-performing loans stood at N65 billion. What does that tell you? So, each time we have issues like this and always dip our hands into our deposit insurance funds, if we then have a major issue in the industry, how would we be able to fulfil our obligation? So, more often than not like I said, a lot of these MFBs and PMBs don’t meet the conditions which we set to enable us rescue them.