JOSEPH INOKOTONG reports that as Nigerian workers continue to clamour for wage increases, and rightly so, they should equally laud the recent increase in maximum deposit insurance coverage level aimed at protecting their meagre savings and contributing to the financial system stability.
Nigeria’s economy has not emerged from the woods, despite the various measures taken by the government to revamp it. Adjunct to this lies the financial system, which the people have been repeatedly assured is in sound stead.
However, a financial system encumbered by a struggling economy that is fuelled by dwindling macroeconomic fundamentals may portend a bad omen, implying that the unexpected can unfold unannounced. Presently, Nigeria’s economy cannot be said to be healthy as inflation and exchange rates seem to spiral out of control.
The resultant effect of the twin evil of heightened inflation and unstable exchange rate has manifested in a high cost of living for the citizens, and the financial system, being one of the engine rooms of the economy cannot be insulated from the happenings in the entire economy. Already, signs of desperation have emerged, with people trying to save for the rainy days, while struggling to accumulate more wealth, in addition to other sharp practices in the economy. These could spell doom to the financial system, and by extension, those saving their hard-earned incomes in Deposit Money Banks (DMBs) if adequate measures are not instituted.
To prevent the unexpected from happening, the Deposit Insurance System (DIS) role has become a critical component of the financial safety net. It has continued to play a critical role in complementing the drive of the Central Bank of Nigeria (CBN) effort in promoting stability in the financial system.
This bestows enormous tasks on the Nigeria Deposit Insurance Corporation (NDIC) that has a broad mandate of risk minimiser.
Indeed, the Deposit Insurer has always borne the challenges that confront the financial system at various times. Though some of the challenges are universal, others are, however, peculiar. The desire to strengthen the banks through prudential thresholds and other regulatory instruments calls for collaboration with all relevant stakeholders in the Nigerian financial system.
As the Nigerian workers continue to clamour for an increase in their wages, and rightly so, what happens to their meager savings should concern them as well.
It is, therefore, profound and instructive that the NDIC has risen to the occasion by reviewing upwards the Maximum Deposit Insurance Coverage Level, haven worked assiduously to share thoughts, knowledge, and experiences with critical stakeholders, to define a brighter and insightful future for the practice of DIS in Nigeria.
In addition, the NDIC under the leadership of Bello Hassan, Managing Director/Chief Executive, has laid out the key focus of the management team to scale up the deposit insurance framework; provide timely support to insured institutions as and when required; ensure faster and orderly resolutions of liquidated insured institutions; as well as assist the monetary authority in promoting the stability of the banking system. This will enhance the stability of the financial system.
The Nigeria Deposit Insurance Corporation (NDIC) began operations in March 1989 with the primary objective of protecting depositors and contributing to financial system stability. The Corporation has four core mandates of Deposit Guarantee, Bank Supervision, Distress Resolution, and Bank Liquidation.
The NDIC’s mandate of Deposit Guarantee is a critical component of depositors’ protection, as it guarantees the payment of deposits up to a maximum set limit in the event of bank failure. The deposit guarantee covers depositors of all deposit-taking financial institutions licensed by the Central Bank of Nigeria, which includes Deposit Money Banks (DMBs), Microfinance Banks (MFBs), Primary Mortgage Banks (PMBs), Non-Interest Banks (NIBs), Payment Service Banks (PSBs) and subscribers of Mobile Money Operators.
The maximum deposit insurance coverage is determined through periodic research-based studies, to ensure its adequacy and credibility. Various factors considered in setting the coverage level are deposit distribution, impact of inflation, per capita GDP, exchange rate, and other statistical models, among others.
The maximum deposit insurance coverage for depositors of DMBs was set at N50,000 at the inception of the Corporation in 1989 through a research survey. The amount was set in a manner that up to 85 percent of the total depositors in the nation’s insured banks would be 100 percent covered. Subsequently, 96 percent 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. 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.
Hassan said 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. This, he noted, is in line with 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 covers a large majority of depositors to prevent the risk of bank runs, but leave a substantial amount of deposits exposed to market discipline.
According to him, findings indicate that high percentages of depositors ranging from 89.20 percent to 99.99 percent were fully insured under the maximum deposit insurance coverage levels across different bank categories (DMBs, PMBs, MFBs, and PSBs), meanwhile, a substantial portion of the total value of deposits, remain uninsured. “We need to stress at this juncture that, high level of uninsured deposits posed a risk of bank runs”, Hassan pointed out.
Indeed, the International Association of Deposit Insurers (IADI) Brief No. 9 of 2023 examined the recent bank failures in the United States of America and Switzerland and concluded that high levels of uninsured deposits in insured institutions might increase the likelihood of bank runs with dire impact on the stability of the financial system.
Based on these considerations, and in line with the NDIC’s commitment to enhancing depositors’ protection, public confidence, financial inclusion, and stability of the financial system, Hassan announced that the NDIC’s Interim Management Committee (IMC), during its 18th meeting held on April 24th and 25th, approved an increase in the maximum deposit insurance coverage levels for all licensed deposit-taking financial institutions with immediate effect.
Consequently, early last month, Hassan announced the adjustments as follows – Deposit Money Banks (DMBs): The increase of the maximum deposit insurance coverage from N500,000 to N5,000,000, which he said would provide full coverage of 98.98 percent of the total depositors compared with the current cover of 89.20 percent. In terms of the value of deposits covered, the revised coverage would increase the value of deposits covered by deposit insurance to 25.37 percent compared with the current cover of 6.31 percent of the total value of deposits.
For Microfinance Banks (MFBs), the increase of the maximum deposit insurance coverage from N200,000 to N2,000,000 would provide full coverage of 99.27 percent of the total depositors compared with the current level of 98.76 percent and would increase the value of deposits covered by deposit insurance to 34.43 percent compared with 14.38 percent of the total value of the deposit, currently covered.
In the case of Primary Mortgage Banks (PMBs), the increase of the maximum deposit insurance coverage from N500,000 to N2,000,000 would provide full coverage of 99.34 percent of the total depositors compared with the current 97.98 percent and would increase the value of deposits covered by deposit insurance to 21.04 percent compared with 10.77 percent of the total value of the deposit, currently covered.
Payment Service Banks (PSBs): The increase of the maximum deposit insurance coverage from N500,000 to N2,000,000 would provide full coverage of 99.99 percent of the total number of depositors and would increase the value of deposits covered by deposit insurance to 43.10 percent of the total value deposits from the current cover of 40.60 percent.
Subscribers of Mobile Money Operators were not left out in the increase. The increase of the maximum Pass-through deposit insurance coverage from N500,000 to N5,000,000 per subscriber per MMO as the applicable coverage level for depositors of DMBs was announced.
“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”, Hassan disclosed.
In taking these measures, 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.
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, and 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.
“I will 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 reflects 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”, Hassan reassured.
Perhaps, the recent increase in the maximum deposit insurance coverage level to reflect the changing landscape of the financial industry, and assure bank’s depositors of the safety of their monies, can be listed as one of the achievements of President Bola Tinubu administration’s one year in office.
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