THE NIGERIA DEPOSIT INSURANCE CORPORATION

CHAPTER ONE

INTRODUCTION

1.1      BACKGROUND TO THE STUDY

The Nigeria Deposit Insurance Corporation (NDIC) the Decree No 22 establishing the Nigeria Deposit Insurance Corporation was promulgated in 1988. It seems to be an outgrowth of the fear that the unprecedented increase in the number of banking and non-bank institutions since the deregulation in 1986 the consequence intense competitions in its industry would provide incentives for abuses, malpractices and excessive risk taking by banks. The establishment of Nigeria Deposit Insurance Corporation (NDIC) was in apparent recognition of the consequence of any financial disruption, and the fact that bank failure with it obvious contagion effects is national problem and should be avoided.

The NDIC insures the deposits of licensed banks to a maximum of N50.000. It is the insured bank that pays the premium and investment income from it is constituted fund of the corporation.

All licensed banks are required to insure their deposits with the NDIC and thus has become a second supervisory authority over all banks in Nigeria.

The NDIC has been able to contribute significantly to the budget of the Financial Institutions Training Centre (FITC).

It has been helpful in the development of bank directors and management staff and assistance to insure bank liquidity problem. (The Nigeria Deposit Problem of bank failure in Nigeria) the reason for setting up this corporation is to check bank failure in Nigeria.

1.2      STATEMENT OF THE PROBLEM

The deregulatory approach to monetary management and the resultant proliferation of banking and financial institutions in the early 1990s brought about increased number of players far beyond what could be effectively managed by the Central Bank of Nigeria (CBN).

As a result the banking industry witnessed serious waves of distress that caused crisis of confidence in the industry. Since then, the CBN and the NDIC have intensified efforts towards achieving a healthy operating environment for in the banking sector. A prominent step taken by the CBN was the 2005 recapitalization exercise during which the minimum capital base requirement of all Nigeria Commercial banks has raised to N25billion from N2billion (Adegbaju & Olokoyo, 2008).

The success of the deposit insurance practice and the recapitalization exercise in ensuring financial stability in the banking sector has been a subject of debate among analysts.

Somoye (2008) analyzes the published audited accounts of twenty (20) out of twenty five (25) banks that emerged from the consolidation exercise and found that the consolidation programme has not improved the overall performances of banks significantly. The joint special examination of 24 deposit money banks conducted by the CBN and NDIC in 2009 to ascertain their true financial condition revealed serious weaknesses in corporate governance which manifested in poor risk management, inaccurate financial reporting, abuse and fraudulent use of subsidiaries, poor bookkeeping practices, non-compliance with banking laws, rules and regulations, and non-performing insider-related credits all the observed weaknesses culminated in huge non-performing loans degrees in many of the banks. The developments led to the removal of the executive management of 8 out of the existing 24 banks (oceanic bank, intercontinental bank, union Bank, fin Bank, Africa Bank, Bank PHB, Equatorial Trust Bank, and Spring Bank) and the injection of a bail-out some of N620 billion by the CBN as liquidity Support to the problem banks (NDIC, 2009). In August, 2011, the federal government through the NDIC assumed ownership of three of the problem banks: Afribank, Bank PHB and Spring Bank via the “Bridge Bank” mechanism following the Central Bank of Nigeria (Komolafe and Kolawole, 2011). Due to these developments, the NDIC has been under pressure to perform its responsibility of restoring stability to the banking sector. The effectiveness of the deposit insurance practice in ensuring stability in banking sector remains an open one both from a theoretical and from an empirical perspective. This study seeks to evaluate the effectiveness of deposit insurance practice in Nigeria.

1.3      GOALS AND OBJECTIVES

The general aim of this study is to examine the impact of the regulatory and supervisory functions of the Nigeria Deposit Insurance Corporation on the activities of Nigeria banks.

The specific objectives are:

i.      To examine the situation of the banking system in Nigeria precedent to the establishment of NDIC

ii.     To identify the causes of bank distress in Nigerian economy through its supervisory and regulatory functions

iii.    To examine the roles/impact of the Nigeria Deposit Insurance Corporation in the reduction of bank crisis in the country.

1.4      SCOPE OF THE STUDY

This study shall focus on the operations of the Nigeria Deposit Insurance Corporation (NDIC) this study shall evaluate the effectiveness of deposit insurance practice in maintaining financial stability in Nigeria by appraising the performance of the NDIC, in terms of deposit guarantee, bank supervision, distress resolution and bank and bank liquidation. Crucial issues relating to the deposit insurance, system in Nigeria shall be raised with major challenges identified.

1.5      SIGNIFICANCE OF THE STUDY

The study is significant in that it will help depositors of funds in financial institutions to fully understand the mechanism of banking supervision and the provision of the law as it relates to the deposit insurance scheme it also provides a platform for the regulatory authorities to appreciate the impact of their activities on the banking industry and underscores areas for improvement.

It is also imperative to state that a study of this nature provides an independent platform via which the regulators can appraise fundamental tools of supervision in a bid to make reasonable adjustments where necessary.

The findings of this study will be of immense benefit not only to the Nigerian banking industry and its related institutions but also to those interested in understanding the inter-relationship between the actions of the regulators on one hand and the banking institutions of the other as well as providing a platform for promoting an efficient banking practice. The significance becomes more prominent when the effect of regulation and supervision is examined against the background of the consolidation exercise of the present policies of the central bank of Nigeria. It is worth mentioning that the present state of the nations financial industry precipitated out of the supervisory framework of the Central Bank, hence this study would attempt to examine what impact the present consolidation exercise would have on the regulatory framework.

1.6      FORMULATION OF HYPOTHESIS

Supervisory and regulatory authorities play a significant role in the financial system of any economy through the promulgation of policies aimed at ensuring the prudent management of banks assets and liabilities and there by guarantee the safety of depositors funds. They also promote compliance to safe and sound banking practices, encourage the institution of an efficient internal control system in individual money deposit banks in order to prevent the incidence of frauds forgeries and other financial malpractices as well as ensure the stability and engendering of public confidence in the system.

This study will therefore test the following three hypothesis.

Ho₁: The NDIC through its deposit guarantee has not significantly enhanced public confidence through deposit mobilization in the banking industry.

Ho₂: The NDIC through its supervisory and distress resolution functions has not significantly enhanced public confidence through deposit mobilization in the banking industry.

1.7      CORPORATE PROFILE

The Nigeria deposit insurance corporation was established by decree No 22 of 1988 and change with some basic responsibilities. The reason of establishing the NDIC is stated as follows.

Insuring all deposits liabilities of licensed banks and such other financial institutions operating in Nigeria so as to engender confidence in Nigerian banking system.

Giving assistance in the interest of depositors: in case of imminent or actual financial difficulties of banks particularly where suspension of payment is threatened and avoiding damage to public confidence in banking system, such assistant could be:

a.     Taking over the management of a distressed bank

b.     Specific changes recommended to be made in management of the distressed bank

c.     Merger with another bank

d.     Guaranteeing payment to depositors in case of actual suspensions of payment by insured bank or financial institutions.

e.     Assisting monetary authorities in the formulation and implementation of banking policies so as to ensure sound banking practice and fair competition among banks in the country.

1.8   CONCEPTUAL DEFINITIONS OF TERMS

        The insurance Corporation has some basic terms which shall be defined as follows:

        Assurance: This term has the same meaning with insurance but is generally used in reference to life assurance.

        Policy: The document containing written evidence of the contract between the insures and the insured.

        Premium: The monetary consideration paid by the insured to insurer for the instance granted by the policy.

        Reinsurance: An agreement made between the ceding company and the reinsurer where by the ceding officer agrees to and the reinsurer agree to accept a certain share of risk upon terms as set out in the agreement.

        Reinsures: An insurer who accepts insurance from insurer

        Special Peril: An extra risk added to policy not originally designed to cover that risk.

        Renewal: The continuation of policy beyond its original term.

        Subornation: The right which one person has of standing in the place of another, availing of right and remedies of that other.

        Indemnity: Security against financial loss. A policy of indemnity designed to place the insured in the same financial position as he was immediately before the occurrences of the event insured against.

        Insurable interest: Equitable or legal financial interest in property or in the happening of some events insurance: This is a process whereby the losses of the few are distributed.

        Claims: A demand by the insured for payment under his policy.

        Commission: The remuneration paid to an agent for the introduction of business usually in the form of percentage in the premium.

        Contract of insurance: An agreement between insurer and one or more parties called the insurer where by the insurer undertakes in return for a payment a certain contribution.

        Liquidity: Is the ability to convert assets into cash with minimum delay and minimum loss.

        Distress: It is a state if ‘inability’ or weakness’ which prevents the achievement of set goals and aspirations.

        Illiquidity: Is a situation where the value of liability is greater than volume of asset.

        Merger: The legal union of two or more corporations into a single entity, typically assets and liabilities being assumed by the buying party.

CHAPTER ONE:          CHAPTER TWO:          CHAPTER THREE:    
CHAPTER FOUR:          CHAPTER FIVE:          REFERENCES:
APPENDIX:          APPENDIX 1:          QUESTIONNAIRE:

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