About Deposit Insurance

Deposit Insurance is a financial guarantee instituted as a measure of safety for the banking system to protect depositors. Deposit Insurance ensures that the depositor does not lose all his money in the event of a bank failure. Deposit Insurance promotes the stability of the banking system. It assures the saver that his funds are safe, and that the failure of one bank does not mean that all banks are in danger of failing. Since Deposit Insurance makes a bank failure an isolated event, it eliminates the danger that unfounded rumours will start a contagious bank run.

The NDIC is an independent body and acts as an additional regulatory authority in the supervision of banks to ensure compliance with regulations aimed at ensuring bank solvency. The examiners of the NDIC will not only assess the bank’s condition and verify its compliance with bank regulations, they also counsel banks regarding management practices and suggest ways by which banks can reduce the risk of failure and loss to depositors. Ultimately, the Corporation has the power to restrict the activities of banks found not to be in compliance with regulations or to advise the shut-down of banks that are deemed to be insolvent.

The NDIC can also arrange for other banks to assume the deposit liabilities of a failing bank or take over the management of a bank where such action becomes necessary to protect depositors’ interest. Where the NDIC transfers the deposits, it will take over the non-performing assets of the failing bank.

Rationale for the Establishment of Deposit Insurance Scheme in Nigeria

The deposit insurance scheme was established in Nigeria in 1989 with the promulgation of an enabling legislation, Decree No. 22 of 1988.

There were at least five major reasons for establishing a formal bank deposit insurance scheme in Nigeria. The first was the lesson of history connected with the experience of prior bank failures in Nigeria. In the 1950s, many small depositors suffered untold hardship as twenty-one (21) out of the twenty-five (25) indigenous banks operating in Nigeria closed doors.

The establishment of the Corporation was also informed by the approach which some other countries adopted to ensure banking stability. For example, Czechoslovakia which was the first country to establish a nation-wide deposit scheme in 1924, used the scheme to revitalize the country’s banking system after ravages of the First World War. In addition, the scheme served to encourage saving, by increasing the safety of deposits and ensuring the best possible development of banking practice in that country. Similarly, the United States of America (USA) established the Federal Deposit Insurance Corporation (FDIC) in 1933 in response to a banking collapse and panic.

Also, the Structural Adjustment Programme (SAP) embarked upon by government in 1986 was aimed at deregulating the economy in the direction of market-determined pricing. It was envisaged that since deregulation would involve the liberalisation of the bank licensing process, there would be a substantial increase in the number of licensed banks to be supervised by the CBN. The establishment of an explicit deposit insurance scheme with supervisory powers over insured institutions was expected to complement the supervisory efforts of the CBN. Indeed, since the establishment of the Corporation in 1989, it has been possible for both institutions (CBN and NDIC) to carry out routine and special examinations of licensed banks more frequently than before, despite the increase in the number of banks. The banks are now examined more frequently prior to the establishment of the Corporation.

Finally, prior to the establishment of the Corporation, government had been unwilling to let any bank fail, no matter a bank’s financial condition and/or quality of management. Government feared the potential adverse effects on confidence in the banking system and in the economy following a bank failure. Consequently, government deliberately propped up a number of inefficient banks over the years, especially those banks in which state governments were the majority shareholders. Thus, government established the Corporation to administer the deposit protection scheme on its behalf and to serve as a vehicle for implementing failure resolution options for badly managed insolvent banks.

The Practice of Deposit Insurance in Nigeria

The practice and implementation of the Deposit Insurance Scheme (DIS) in Nigeria is fashioned very much after the US model. The NDIC has the mandate to insure deposits of all deposit-taking financial institutions in the country. However, as at now the NDIC only insures deposits in conventional banks, while steps are being taken to insure deposits of other financial institutions (Community Banks and Mortgage Institutions). The participation is made compulsory for all deposit-taking financial institutions so as to minimise the problem of banking instability associated with voluntary participation. More so, when some banks had been identified to be insolvent even before the establishment of the NDIC.

In terms of the insurance coverage, the insured amount per depositor which was pegged at a maximum of -N-50,000.00 in 1988 is being reviewed upward. However, insurance does not cover deposits of insiders defined in this case to include staff and directors of the insured institutions and counter-claim from a person who maintains both a deposit and loan accounts, the former serving as a collateral for the loan.

The flat rate of 0.9375% or 15/16 of 1% is used in the determination of premium payable by each of the insured financial institutions.

Essentially, the Nigeria deposit insurance scheme is designed to target small savers who may not be in a privileged position to obtain or interpret technical market information relating to the state of health of a banking institution. This category of depositors are usually in the majority in the nation’s banks. This has been clearly manifested in the deposit pay-off exercise in the 34 banks that have so far been closed.

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