Commentary on NDIC’s Recent Review of the Maximum Deposit Insurance Coverage Level

DR KUBI UDOFIA info@kubiudofia.com

On 2 May, 2024, the Nigeria Deposit Insurance Corporation (NDIC) upwardly reviewed the maximum deposit insurance coverage level (coverage limit) for depositors in different categories of Nigerian banks. NDIC’s deposit insurance scheme, is a key component of Nigeria’s financial safety-net framework. It contributes to financial stability by guaranteeing payment of depositors (especially small savers), when banks are unable to pay due to insolvency or other reasons. The deposit insurance scheme provides a disincentive for such depositors to engage in panic bank runs, upon perceived or real signs of trouble in a bank. 

In setting coverage limits for different categories of banks, the NDIC had to counterbalance the objective of promoting financial stability with the risk of moral hazard. Moral hazard is incentive or tendency to engage in excessive and unreasonable risk-taking, due to guarantee of protection from adverse consequences of such risk-taking. An unlimited or excessively generous deposit coverage limit, would result in risk-shifting of the consequence of unreasonable risk-taking to the deposit insurer. The global best practice is for deposit insurance schemes to be limited in scope, in a manner that promotes financial stability whilst instilling market discipline.

Evaluation of the New Coverage Limits

Deposit insurance is a key statutory mandate of NDIC, and it is mandatory for all licensed banks and deposit-receiving institutions to insure their deposit liabilities with NDIC: Sections 21 of Nigeria Deposit Insurance Corporation Act 2023 (NDIC Act 2023). NDIC’s review of the coverage limit, is therefore in furtherance of its statutory mandate. The new coverage limits are as follows:

•Deposit Money Banks (DMBs)

Increase in coverage limit from N500,000 to N5,000,000

Increase in total depositors covered from 89.20% to 98.98%  

Increase in total value of deposits covered from 6.31% to 25.37% 

•Microfinance Banks (MfBs)

Increase in coverage limit from N200,000 to N2,000,000

Increase in total depositors covered from 98.76% to 99.27%

Increase in total value of deposits covered from 14.38% to 34.43%

•Primary Mortgage Banks (PMBs)

Increase in coverage limit from N500,000 to N2,000,000

Increase in total depositors covered from 97.98% to 99.34%

Increase in total value of deposits covered from 10.77% to 21.04%

•Payment Service Banks (PSBs)

Increase in coverage limit from N500,000 to N2,000,000

Total depositors covered 99.99%  

Increase in total value of deposits covered from 43.10% to 40.60%

•Mobile Money Operators (MMOs)

Increase in coverage limit from N500,000 to N5,000,000

Total depositors covered 99.99%  

Increase in total value of deposits covered from 43.10% to 40.60%

Although outside the scope of this discourse, a point worth highlighting from the above figures is the disturbing and significant gap between the small savers (the poor?) and large savers (the rich?). The figures show that just 1.02% of depositors in Nigeria have N5,000,000 or more in DMBs, and also collectively own 74.63% of the total deposits in DMBs. This should be of grave concern to governments, at all levels.

The previous coverage limits for deposit-taking institutions in Nigeria, are set out in Section 25(1)(a) and (b) of the NDIC Act 2023. Arguably, it would have been neater if the framers of the NDIC Act 2023 had simply empowered NDIC to set out coverage limits in or by regulation, considering the imperative and inevitability of periodic reviews of the coverage limits. Nevertheless, the NDIC Act 2023 empowers NDIC, subject to the approval of the NDIC Board, to “vary upwards” the coverage limit: Section 25(2) NDIC Act 2023. This ensures easy review of the coverage limits (as has been done by NDIC), without having to go the whole hog of the law making or amendment process at the National Assembly.

The International Association of Deposit Insurers (IADI) is the global standard-setting body for deposit insurance systems. It has 98 (ninety eight) members including the NDIC. The IADI has issued Core Principles for Effective Deposit Insurance Systems (Core Principles) which are minimum standards against which deposit insurance systems (including NDIC’s) are benchmarked. Principle 8 of IADI Core Principles requires a periodic review of the coverage limit (at least every 5 (five) years). The reason for this periodic review is to preserve the credibility of the coverage limit such that a large majority of depositors are insured to avoid bank runs, whilst leaving substantial amount exposed to market discipline. In Nigeria, prior to the recent upward review, the coverage limit for DMBs and MFBs had not been reviewed since 2011, whilst the coverage limit for PMBs and MMOs were fixed in 2016. 

An IADI global survey of coverage limits in 2023 showed that the median deposit insurer covered about 41% of eligible deposits. In comparison, NDIC data indicates that 89.20%, 98.76% and 97.98% of deposits were insured in DMBs, MFBs and PMBs respectively under the old coverage limit. When viewed against this backdrop, it seems Nigeria was not doing so badly in this regard despite years of non-review of the coverage limits. Instructively, some leading jurisdictions have not reviewed their coverage limits for longer periods. In the United States of America, the $250,000 coverage limit set by the Federal Deposit Insurance Corporation in 2008 has remained unchanged till date. In Canada, the C$100,000 coverage limit set by Canada Deposit Insurance Corporation in 2005 has remained unchanged. Similarly, in the European Union, the €100,000 coverage limit set in 2011 has remained unchanged till date.

Nevertheless, there is no gainsaying that the real value of NDIC’s coverage limits had deteriorated over the years due to several factors including spiralling inflation and depreciation in the value of the Naira. The composition and size of deposits which are fully covered by the deposit insurance scheme do not provide a true reflection of the real value of the coverage limits. To ascertain the real value of the coverage limit (as opposed to mere face value), a number of macroeconomic and other factors must be taken into cognisance including the inflationary rate, depreciation of the legal tender, expectations of stakeholders, changes in real income, availability of funding, development of new deposit products etc. These factors are crucial for the proper setting or adjustment of the coverage limits.

As may also be deduced from Principle 8 of IADI Core Principles, in fixing coverage limits, the goal is to ensure that majority of depositors are adequately protected. In reality, small savers usually constitute the majority of depositors in banks. As previously noted, these small savers are the primary target of deposit insurance schemes. Invariably, the small percentage of savers and depositors not fully covered by the deposit insurance scheme are usually large depositors or savers who have the leverage and incentive to monitor the risk-taking activities of their banks and exercise market discipline. The coverage limit is therefore a two-edged sword. On one hand, it demotivates small savers or depositors from engaging in panic-runs, on the other hand, it leaves minority large depositors uninsured to minimise moral hazard and instil market discipline.

Implications of Bank Recapitalisation (Via Mergers and Acquisitions) on Coverage Limits

One of the three options which the Central Bank of Nigeria (CBN) has suggested to banks as a means of meeting the new minimum capital requirement, is the option of mergers and acquisition. For the reasons explained below, the merger of two or more banks or the acquisition of one bank by another, will not improve the coverage limit of a depositor with separate accounts in the banks involved in the merger or acquisition. Under NDIC’s deposit insurance scheme, two or more accounts which are held by a single individual or entity in the same right and capacity in the same bank, are merged and treated as a single account: Section 25(3) of NDIC Act 2023. This is the case regardless of whether or not the accounts are in different branches and cities of the same bank. 

Accordingly, where there is a merger or an acquisition, a depositor with separate accounts in the affected banks will not become entitled to a cumulative or increased coverage limit. Rather, a depositor’s accounts in the different merged or acquired banks will be merged and treated as a single account for the purpose of coverage limit. For instance, a depositor with accounts in Bank X and Bank Y (both DMBs) will not become entitled to a “cumulative” coverage level of N10 million in the resulting Bank XY, as a result of a merger of Bank X and Bank Y or an acquisition of Bank X by Bank Y. Rather, upon a merger or acquisition, the depositor will still have a coverage limit of N5 million in the resulting Bank XY.

Principle 8 of the IADI Core Principles stipulates that in the event of a merger or amalgamation of banks, depositors of the merged or amalgamated banks should enjoy separate coverage for each bank for a limited but publicly stated period as defined by law or regulation. It further requires merging banks to inform affected depositors of the date on which the separate coverage will expire. The NDIC Act 2023 does not have provisions on temporary post-merger or post-amalgamation coverage as described. However, NDIC may employ its statutory powers under Section 96(1)(b) of the NDIC Act 2023 to make regulations for such temporary coverage limits. Section 96(1)(b) empowers NDIC to make regulations to give full effect to the provisions of the NDIC Act 2023, including “power to make different provisions for different circumstances guiding the operations of the Deposit Insurance Scheme”.

Postscript

Savers/depositors may “increase” their coverage limits by placing their deposits in different banks. For instance, rather than place N10,000,000 in Bank X (a DMB) and be entitled to a coverage limit of N5,000,000 from the NDIC in the event of the failure of Bank X, a saver/depositor may place N5,000,000 Bank X and N5,000,000 in Bank Y. In the event of the failure of either or both banks, the saver/depositor will be fully insured. Another means of increasing or boosting the coverage limit is by maintaining deposits in accounts under different ownership categories such as joint accounts, trusts or business accounts.