By Tony Obiechina
In most countries, banks are the most important financial institutions for intermediating between savers and borrowers, assessing risks, executing monetary policy, and providing payment services.
At the same time, the configuration of their portfolios makes them especially vulnerable to illiquidity and insolvency. In particular, by law, bank deposits have to be repaid at par; in addition, banks are highly leveraged and often maintain liquid assets to meet withdrawals only in normal times.
In the light of this vulnerability, government officials realize that the demise of one bank, if handled poorly, can spill over to others, creating negative externalities and causing a more general problem for other banks in the system.
For these reasons, many governments provide a safety net for banks that generally includes deposit protection and lender-of-last-resort facilities, in addition to a system of bank regulation and supervision. Recognizing that financial stability is a public good with regional, and even global, implications, the international community is showing an interest in deposit protection.
Buoyed by the dire need to address the concerns of depositors of failed banks in the country, the Nigeria Deposit Insurance Corporation (NDIC) penultimate Thursday announced upward review of the maximum deposit insurance coverage level.
As promounced by the Managing Director/Chief Executive of the Corporation, Mr Bello Hassan announced during a press conference, that the maximum deposit insurance coverage for Deposit Money Banks was increased from N500,000 to N5m.
Hassan had argued that the move is in line with the Corporation’s commitment to enhance depositors protection, public confidence, financial inclusion and stability of and stability of the financial system.
Deposit insurance is the government’s guarantee that an account holder’s money at an insured bank is safe up to a certain amount.
Adducing reasons for its action, the Corporation eventually took the bold step to up the maximum deposit Insurance coverage level to align with International best practices and to building confidence in the system.
Besides, it was being proactive in line with global trends in Deposit insurance because once a banks fails it creates rippling effects among the depositors.
The NDIC which began operation in March 1989 with the primary objective of protecting depositors contributing to financial system stability, has core mandates of Deposit Guarantee, Bank Supervision, Dissolution, and Bank Liquidation.
Additionally, the NDIC provides counsel to the CBN in the liquidation of distressed banks and effectively manages the assets of such banks until their complete liquidation.
At inception of the Corporation, the maximum deposit insurance coverage for depositors was set at N50,000. The amount was set in such a way that of the total depositors in the nation’s insured banks would be covered. Subsequently, 96% of all depositors were protected when the coverage ceiling was raised from N50,000 to N200,000 in 2006. The coverage limit of N100,000 was also set, for the first time, for MFB and PMB depositors in the same year.
However, in 2011, the coverage limits for DMBs increased from N200,000 to N500,000 and from N100,000 to N200,000 for depositors of MFBs and PMBs. The coverage level was further adjusted to N500,000 in 2016 for PMB depositors as well as subscribers of licensed Mobile Money Operators (MMOs). Coverage of N500,000 was equally extended to depositors of Payment Service Banks (PSBs) in 2020. Meanwhile the coverage for DMBs remained at N500,000.
In line with International best practices, and and as part of the periodic evaluation of the effectiveness of the deposit guarantee, the Corporation conducted a Study in 2023, to determine the adequacy of the Maximum Deposit Insurance Coverage.
Similarly with the Principle 8 of the International Association of Deposit Insurers (IADI) Core Principles for Effective Deposit Insurance, which advised jurisdictions, to periodically review their deposit insurance coverage, to ensure that, it is credible and cover large majority of depositors to prevent risk of bank runs, but leave a substantial amount of deposits exposed to market discipline.
Justifying the raise, Hassan enthused: ” I must emphasise that, the revised deposit insurance coverage has balanced the NDIC’s goals of deposit protection and financial system stability with incentives for depositors to practice market discipline and prevent banks from unnecessary risk-taking and moral hazard Consideration was given to ensure that the coverage was limited but adequate enough to protect a large number of depositors and credible enough to prevent the destabilizing effect of bank runs”.
Against the backdrop of the international best practices, the NDIC is cocksure that “the adoption of the revised maximum deposit insurance coverage is supported by the Corporation’s current funding, represented by the balances in the various Deposit Insurance Funds (DIFs), expected annual premium collection, enhanced supervision that would reduce the likelihood of bank failures, effective bank resolution frameworks and other funding arrangements provided by the NDIC Act No. 33 of 2023”
Besides, the Corporation had also reaffirmed it’s “unwavering commitment to protecting depositors and contributing to the stability of the financial system, arguing that “These adjustments to the maximum deposit insurance coverage reflect our dedication to adapt and evolve in response to the changing landscape of the financial industry,”
The adoption of the revised maximum deposit insurance coverage is supported by the corporation’s current funding, represented by the balances in the various Deposit Insurance Funds, expected annual premium collection, enhanced supervision that would reduce the likelihood of bank failures, effective bank resolution frameworks in 2023 and other funding arrangements provided by NDIC Act No. 33 of 2023.
He assured depositors of NDIC’s commitment to ensuring the stability of the financial system in the country.
“I would like to reaffirm the NDIC’s unwavering commitment to protecting depositors and contributing to the stability of the financial system.
“These adjustments to the maximum deposit insurance coverage reflect our dedication to adapt and evolve in response to the changing landscape of the financial industry, and we remain steadfast in our pursuit of a secure and resilient banking environment for all,” he said. READ ALSO:
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As expected, the Corporation’s action has received the backing of financial and economic experts, as enunciated by erudite professor of Capital market, Uche Uwaleke who posited thus:
“The increase in the maximum deposit insurance coverage level from N500,000 to N5 million for DMBs and from N200,000 to N2million for Microfinance Banks is a welcome development against the backdrop of elevated inflation and naira depreciation. This would no doubt boost confidence in the nation’s banking sector as well as financial inclusion”.
