Strengthening Deposit Insurance to Protect Customers

Amid new challenges posed by global and domestic headwinds in the financial services sector, James Emejo writes on the need for effective deposit insurance system to further safeguard depositors

There is no gainsaying that deposit insurance remains a cornerstone of financial stability, particularly in times of economic hardship as currently witnessed in the country.
It remains a crucial role in maintaining public confidence in the financial system during challenging times such as economic crises, banking instability or global financial headwinds. The concept of deposit insurance refers to the protection offered to depositors by a government agency or regulatory body, ensuring that even if a bank collapses, depositors are guaranteed to get back at least a portion, if not all, of their funds, up to a certain limit.

By protecting depositors, deposit insurance fosters confidence in the banking system, helps prevent bank runs, and ensures that the economy can continue to function smoothly, even when financial markets are under stress.
However, balancing the provision of insurance with sound risk management in banks has become critical to prevent moral hazard and ensure long-term stability.

Assessing threats to financial stability
Notably, recent developments including foreign exchange crisis in Nigeria, currency devaluation and Naira floating amid other harsh operating environment had impacted the viability of banks and other financial institutions, leading to questions of whether they can continue to operate profitably as well as safety of deposits in their custody.
Managing Director/Chief Executive, Nigeria Deposit Insurance Corporation (NDIC), Mr. Hassan Bello, recently reaffirmed the commission’s mandate over three decades ago to protect depositors, especially the most vulnerable, and to contribute to the stability of the financial system.

The corporation had been commended for living up to expectations on its primary mandate over the years. According to him, the NDIC core mandate was to offer deposit insurance cover to depositors of licensed banks, supervising insured financial institutions, resolving distressed banks, and ensuring orderly resolution in the event of bank failure.
Bello stressed that confidence remained key factor in the maintenance of financial system stability, pointing out that the role of deposit insurance cannot be overemphasised, adding that as one of the safety-nets, it reassures depositors, thereby instilling trust in the banking system and prevents bank runs during times of uncertainty.

Speaking recently at 2024 NDIC Business Editors and Finance Correspondents Seminar with the theme, “Strengthening Nigeria’s Financial Safety-Net – The Role of Deposit Insurance,”in Lagos, the NDIC boss noted that over the years, the corporation had been instrumental in promoting stability by ensuring that whenever banks fail, depositors are protected, and their funds are reimbursed promptly.

He said NDIC remained dedicated to safeguarding depositors’ funds from the adverse effects of bank failure and complementing the CBN in effectively supervising insured deposit- taking financial institutions in formulating sound banking policies.
According to him, “The recent closure of Heritage Bank, following the revocation of its license by the CBN on June 3, 2024, underscores the NDIC’s critical role in safeguarding depositors. Acting in accordance with the relevant provisions of the Banks and Other Financial Institutions Act (BOFIA) 2020 and the NDIC Act 2023, the NDIC was appointed liquidator to manage the orderly resolution of the bank and oversee the payment of its depositors and other claimants.

“In the discharge of this critical role of depositor reimbursement, the corporation began the payment of the insured deposits of N5 million maximum per depositor within a record time of four days of the bank’s closure. This was achieved using Bank Verification Numbers (BVN) as a unique identifier to locate depositors’ alternate accounts in other banks without the need to fill forms or visits the NDIC offices.
“This innovative approach has indeed, enabled the payment of 84.98 per cent of depositors with BVN linked accounts to date. The prompt payment of depositors, coming at a time when the corporation had also recently increased the deposit insurance coverage from N500,000 to N5 million in Deposit Money Banks, significantly cushioned the negative impact of bank failure, especially during the current challenging economic climate. This achievement is consistent with the provisions of the International Association of Deposit Insurers (IADI) Core Principle 15, which emphasises timely payouts to depositors of failed bank.”

Bello noted that having largely reimbursed depositors their insured deposits, the corporation remained committed to ensuring that depositors with balances exceeding N5 million are also paid the balance of their deposits.
He pointed out that these uninsured deposits represented a significant portion of the total deposits in Heritage Bank, stressing that the corporation was already working assiduously to ensure that, all depositors with amounts in excess of the maximum insured amount of N5 million are paid through liquidation dividends from the realisation of the defunct bank’s assets and recovery of debts.
He said: “The corporation has already initiated the process of debt recovery and realisation of investments and physical assets of the defunct bank to ensure timely payment of the uninsured deposits of the defunct bank.

“Additionally, the NDIC’s responsibilities extend to the creditors of the defunct bank, who will receive payments after all depositors have been fully reimbursed. This orderly process, based on asset realisation and priority of claims, is essential in maintaining public trust in the banking system and promoting financial stability.
“The handling of the Heritage Bank liquidation illustrates the broader role of the NDIC in ensuring that even in times of financial disruption, depositors can be rest assured that their funds are protected.”
The NDIC chief executive further emphasised the critical role of the media and civil society groups, alongside corporate affairs managers of banks, in advocating for the effective implementation of the deposit insurance system.

Among other things, deposit insurance is particularly crucial because during a banking crisis, deposit insurance prevents panic and bank runs, and minimises systemic risk by reassuring the public that their savings are protected, maintaining liquidity in the banking system.
It stands as safety net for individuals and small businesses given that in times of financial uncertainty, the protection encourages people to keep their money in banks rather than hoarding cash, which could otherwise weaken the economy.
Also, in her paper presentation on “Effective Bank Closure: the NDIC’s Experience and Current Innovations,” the corporation’s Deputy Director, Enugu Zonal Office, Pamela Roberts, said corporation had been able to make concerted efforts to ensure effective bank closure and prompt payment to depositors.

She, however, clarified that the issue of prompt payment was not the function of the corporation alone as depositor apathy had been a major impediment to successful failure resolution in the country.
Pamela pointed out that current innovations of the NDIC could be complemented by the active response of the depositors who should come forward to make their claims.
Essentially, she noted that banks play a crucial role in the development of the economy of any nation, ensuring that excess and idle resources are channeled to growth sectors of the economy by mopping up idle funds from the firms and households for lending to all sectors of the economy.
Banks further facilitate an effective payment system, thus, well capitalised and efficient banks are a prerequisite for a nation’s growth and development.

According to her, “The fiduciary nature of banking business exposes banks to the risk of failure with attendant consequences capable of undermining public confidence in the banking system and adversely affecting the economy. Deposit insurance forms part of the safety-net that works to ensure the stability of the nation’s financial system through depositor protection scheme and failure resolution mechanisms.
“In fulfilling its mandate of protecting depositors and ensuring financial system stability, the Nigeria Deposit Insurance Corporation (NDIC) with the Central Bank of Nigeria (CBN) had resolved several bank failures through many resolution options.
“It commenced the liquidation of failed deposit money banks (DMBs) in 1994 with the closure of four banks. Over the years, several banks have been closed either singly or in multiples depending on the prevailing circumstance.”

Enhanced deposit coverage
In the same vein, NDIC Director, Research Department, Mr. Kabir Katata, while presenting his paper on “Insurance Coverage: The Past, Present & Future,” disclosed that on average, 95 per cent of accounts are fully covered.
He said based on global best practices and after careful consideration of its funding sources, the NDIC had established maximum coverage levels.

He said: “For the DMBs, the MDIC of N5,000,000, implies that 98.98 per cent of total number of depositors were fully covered with the corresponding 25.37 per cent of value of total deposits.
“For the MFBs, the MDIC of N2,000,000, implies that 99.27 per cent of total number of depositors were fully covered with corresponding 34.43 per cent of value of total deposits, based on end-June 2023 data.

“For the PMBs, the MDIC of N2,000,000 implying that 99.34 per cent of total number of depositors were fully covered with corresponding 21.04 per cent of value of total deposits, based on end-June 2023 data.
“For the PSBs, the MDIC of N2,000,000 implies that 99.99 per cent of total number of depositors were fully covered with corresponding 42.7 per cent of value of total deposits, based on end-June 2023 data.”