THE NIGERIA DEPOSIT INSURANCE CORPORATION

CHAPTER TWO

LITERATURE REVIEW

2.0      CONCEPTUAL ISSUES ON NIGERIA DEPOSIT INSURANCE CORPORATION (NDIC)

The Nigeria Deposit Insurance Corporation has its origin in the report of a committee setup in 1983 by the Board of Central Bank of Nigeria (CBN) to examine the operations of the banking system in Nigeria.

The committee in its Report recommended the establishment of a Depositors protection fund. Consequently, the Nigeria Deposit Insurance Corporation was established through the promulgation of Decree No 22 of 15^th June 1988. This was part of the economic reform measures taken by the then government to strengthen the safety net for the banking sector following its liberalization policy and the introduction of the 1986 Structural Adjustment Programme (SAP) in Nigeria.

The phenomenon increase in the number of banks from 40 in 1986 to 120 in 1992 led to increased competition amongst banks lending to sharp practices. People of questionable integrity becoming bank owners and managers. Inadequate manpower. The coming together of strange bedfellows due to the licensing requirement that banks maintain adequate geographical spread.

All these led to serious breakdown in corporate governance and Boardroom Squabbles. The unpredictable policy environment, downturn in the economy and political upheavals at the time, also exacerbated the difficult situation the corporation found itself in. The banking industry was therefore, already in distress by the time the Corporation commenced operation in March 1989 NDIC operated under a difficult terrain at the time and was immediately saddled with the management of distress in the banking industry, to avert the impending systemic crises and its resultant consequences. Some of the measures undertaken by the corporation at the time, to manage distress in the interest of the depositors and the system included:

Moral Suasion: Continuous interaction with bank managers/owners.

Imposition of Holding Actions on distressed banks to restrict operations and encourage self-restructuring-about 52 distressed banks had Holding Actions imposed on them at that time.

Rendering of financial Assistance to banks; in 1989 alone, NDIC in collaboration with the CBN granted facilities to the tune of N2.3 billion to ten banks with serious liquidity problems.

Takeover of management and control of 24 distressed banks between 1991 and 1996.

Acquisition and restructuring of seven (7) distressed banks which were handed over to new investors in 1999 and 2000.

Implementation of Failed Banks Decree No 18 of 1994. At the end of 1995, about one out of every two banks in Nigeria was distressed. The Decree was intended to assist distressed banks recover their classified assets and punish the malpractices that contributed to the distress. As at June 1996 the corporation had recovered about N3.3billion.

2.1      RATIONALE FOR THE ESTABLISHMENT OF DEPOSIT INSURANCE SCHEME (DIS) 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, Czech Slovakia which was the first country to establish a nationwide deposit scheme in 1924, used the scheme to revitalize the country’s banking system offer 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 liberalization 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 carpeted 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.

2.2   THEORETICAL LITERATURE

        A Deposit Insurance Scheme (DIS) is an arrangement whereby a designated agency (usually government owned) guarantees deposits in insured financial institutions. This guarantee is usually limited to discourage moral hazard, a situation where the financiers and deposits are fully insured. Also, most DIS act as liquidators of failed insured institutions whilst some in addition act as supervisors of the insured institutions as well. It is noteworthy that in a DIS unlike in ordinary insurance, the insured institution pays the premium for the benefit of the depositors.

2.2.1 What is Bank Distress?

        A bank is distressed when it cannot meet its commitments as they fall due. Such a bank either experiences illiquidity or insolvency.

        A bank is illiquid when it can no longer meet its liabilities as and when due: whereas a bank becomes insolvent when the value of its realizable assets is less than the total value of its liabilities. In such a case, owners’ capital becomes negative. An illiquid bank may not be insolvent immediately. However, both illiquidity and insolvency are source of worry for owners, management and the monetary authorities (Jimoh, 1992).

        According to Alashi, (2002) bank is said to be in severe crisis when a bank shows most or all of the following:

-       Gross undercapitalization in relation to the level and character of business.

-       High level of non performing loans to total loans.

-       Illiquidity as reflected in a banks inability to meet customers cash withdrawals and/or a persistent overdrawn of position with the central Bank.

-       Low earnings resulting in huge operational losses, and

-       Weak management as reflected by the poor asset quality, insider abuse, inadequate internal controls, fraud, including unethical and unprofessional conduct, squabbles, and a high level of staff turnover, among others.

In ordinary parlance, distress connotes being in danger or difficulty and in need of help. It is a state of ‘inability’ or ‘weakness’ which prevents the achievement of set goals and aspirations. Distress can also be associated with a cessation of independent operations or continuance only by virtue of financial assistance from the banking system’s safety net such as the supervisory regulatory agency or a deposit insurer. CBN/NDIC (1995) describes a distressed financial institution as one with severe financial, operational and managerial weakness which have rendered it difficult for the institution to meet its obligations to its customers, owners when due.

2.2.2 Symptoms of Distress

        Ogunleye, (1993) cited in Donli, (2004) gives the most common symptoms of bank distress in Nigeria as follows: late submission of returns to regulatory authorities, falsification of returns; rapid staff turnover, frequent top management changes, inability to meet obligations as and when due; persistent adverse clearing position, borrowing at desperate rate persistent contravention of laid-down rules; use of political influence; petitions/anonymous letters; and overdrawn current account position at the CBN.

i.      Bad Debt/Loan: When banks or a bank begin to have more irrecoupable loan popularly called loan debt, it is a sign of bank distress. And if the bank allows the percentage of the irrecoupable loan to increase, then such bank goes distress. All the banks should watch out when giving out loans.

ii.     Loss of customers (patronage) when a bank on a continual basis keeps losing its customer, it is a sign of distress for such a bank. For example any customer that leaves a bank (i.e. closes his/her account with the bank) the liquidity of such banks reduces and if the bank allow the percentage of losing customer to be great, it may be named a distressed bank.

iii.    Going to the capital market more than once in a year. All things being equal, a bank should not go to the capital market more than once in a year, so as to give investors and customers a great deal of confidence in the bank. Going to the capital more than once a year shows that banks do not have effective management and it is a sign of being distressed.

iv.    Loss of Good Staff: For any organization to strive well, it must be equipped with good working staff. Therefore, if a bank lacks good staff there is the possibility of an improper search before facility is given to any customer.

2.2.3 Causes of Banking Sector Distress

        CBN/NDIC (1997), amongst others, have clearly articulated various factors responsible for the high level of distress in the banking sector which came to a climax in 1998 with the liquidation of 26 commercial/merchant banks in one fell swoop. Prior to the liberalization of the financial sector in 1986, the Nigerian banking industry was highly regulated. Banks were expected to perform developmental roles by the CBN through the provision of subsidized credit to the priority sectors which some of them were ill equipped to perform. Moreover, most of the loans granted to the priority areas were not repaid; therefore, this worsened the liquidity position of these banks (Ebhodaghe, 1997). In addition, the series of government monetary policy measures in 1988 and 1989 respectively coupled with government directives of the withdrawal of public sector deposits from commercial and merchant banks to the central bank led to the liquidity crises in 1989. The implementation of the withdrawal of public sector deposits resulted in about N8.27billion deposit loss of the banking system (NDIC, 1989). This consequently exposed the weak banks and exacerbated their liquidity problems. These policy measures were counter productive and consequently led to the collapse of many banks in 1994, 1995 and 1996 respectively. A dramatic increase in uncertainty in the banking sector, due largely to the failure of a prominent bank or non-financial institution a recession, political instability, rumors of instability in the sector or stock market crash makes it difficult lender to separate good from bad risk. The rise in uncertainty therefore is capable of making information in the banking sector even more asymmetric and may worsen the adverse selection problem and these will make lenders unwilling to lend thereby precipitating to a decline in lending, investment and aggregate economic activity. Poor risk management procedures, ignorance and non-compliance with rules, laws and regulations, technical incompetence, violation of regulations, policies, procedures guidelines, unhealthy competition and weak internal control and operational procedure lead to banking crisis. Banks that have proper risk management and internal controls as well as a well focused strategic objective are likely to operate normally even in the face of turbulent situation. Weak corporate governance, particularly insider abuse and supervisory regulatory provisions and overbearing directors interest in loans and advances or any credit facilities are major causes of banking crisis, especially in a developing country like Nigeria. Fraud refers to an act of dishonesty, deceit and imposture. It includes embezzlement theft or an attempt to steal or unlawfully obtain, misuse or harm the asset of the bank (Bank Administration Institute, (1989) cited in Ogunleye (2000).

        Bank frauds vary in nature character and methods of preparation. Fraud can be perpetrated by employees customers or others operating independently or in conjuction with others, inside or outside (see Ogunleye 2000 and NDC Quarterly 1991 for causes and types of fraud).

2.3   EMPIRICAL LITERATURE

        Empirical evidences have shown that many of the banks in liquidation have suffered a great deal of fraud. Some banks recorded monumental losses due to fraud, which rocked the foundation of these banks. For example, the sum of N8.2billion was involved in bank frauds between 1991 and 1996 (Umoh, 1997). In 1999 alone, the sum of N7.4billion was the reported fraud, while an actual loss of N2.7billion was expected (Ogunleye 2000). A great deal of the frauds perpetuated in 14 liquidated banks were due to insider abuse (Afolabi, 2002)

        Political interference and ownership structure is another source of distress in the banking industry. Ownership structure of a bank has a direct bearing to its survival. The overbearing influence of particular director of the board and management of a bank could result in frequent boardroom crisis and the breakdown of internal controls precipitation to banking crisis and may eventually lead to the failure of the bank (Kama, 2010).

2.4      THE NIGERIAN EXPERIENCE

The broad types of resolution options have been adopted in Nigeria so far by the regulatory/supervisory authorities to resolve the distress.

1.     Outright Liquidation (deposit pay-out) and

2.     The Purchase (P&A) Options (assisted mergers and acquisitions). Other resolution options adopted in Nigeria will also be discussed.

1.     Outright Liquidation (deposit pay-out)

        Under this option, the entire assets and liabilities of the affected banks are placed under the control of the liquidator (NDIC) who would arrange to physically close the bank. NDIC then verifies the assets and liabilities of the bank and exercises control over all its moveable assets. Under Nigeria’s deposit insurance scheme, each customer’s account is insured up to a maximum N200,000 (two hundred thousand naira) between 2006 and 2009. In 1998, 26 banks with 347 branches spread over 32 states and Abuja were closed down and faced liquidation under the NDIC.

2.     Purchase and Assumption (P&A) model: The basic characteristics of this option is the purchase of the whole or part (cheery-picking) of the assets of a failed bank by a healthy (assuming) bank and the assumption of the deposit liabilities of the failed bank by the same bank. The P & A option has featured prominently in the history of banking failure resolution in Nigeria. Following the conclusion of the bank consolidation exercise at end- December 2005, 13 banks that failed to make it were handed over to the NDIC for liquidation. The P & A model has since been adopted by the corporation for their liquidation. As at end December 2009, 11 out of the 13 affected banks had been assumed by some healthy banks.

        Other bank resolution options adopted in Nigeria included:

3.     CBN Bail-Out using Guarantees:

        This option was applied by CBN during the late 1990s for some of the willing banks.

        For instance, at the inauguration of one of the affected banks new board and management, the CBN gave a commitment that it was fully behind the bank and would honour all cheques drawn on it further guarantees were given to other healthy banks, which enabled those banks to provide life-boat facilities to the affected banks. Unfortunately, this option did not stop the run of these banks.

4.     CBN/NDIC Controlled Restructuring (Open bank assistance)

        This option implies taking over the board and management of a bank by the CBN and NDIC in order to restructure the bank and run it profitably. The hope is that the cream of professionals selected jointly by the CBN and NDIC would be able to turn the bank around within a short period of time and return the bank to the owners. This was variously used by the Bank in the late 1990s and recently when about eight (8) banks had problems. In most cases, this option worked out as some of the affected banks were resuscitated, while in other cases the resuscitation efforts proved abortive. In most of the failed cases, the banks had forwarded falsified financial reports to the regulatory authorities to cover up its fraudulent practices which were already beyond redemption.

        One of the recent policy actions taken to strengthen the reform process was the creation of Asset management Corporation of Nigeria (AMCON) the AMCON as a resolution vehicle is to soak the toxic assets of the CBN-intervened banks and provide liquidity to them as well as assist their capitalization process.

2.5      SURVEILLANCE OF INSURED DEPOSIT TAKING FINANCIAL INSTITUTIONS IN 2012

During the year, the NDIC, in collaboration with the CBN carried out risk assessment of nineteen (19) Deposit Money Banks. They also monitored eleven (11) Deposit Money Banks (DMBS) with Composite Risk Rating of Above Average, to determine the level of their implementation of examiners recommendations in the previous risk based examined exercise. The two institutions conducted the Risk-Based Examination of Sixteen (16) Deposit Money Banks (DMBS) during the year. Twelve (12) out of the 16 DMBS had international banking licenses, two (2) were regional banks. The NDIC led the examination of six (6) of the banks while the CBN led in ten (10) furthermore, the NDIC in collaboration with the CBN conducted the maiden examination of the three (3) banks acquired by Asset Management Corporation of Nigeria (AMCON) namely: Keystone Bank, Mainstreet Bank and Enterprise Bank during the year to ascertain the level of their restructuring.

While the CBN led the examination of mainstreet Bank and Enterprise Bank, NDIC led the examination of Keystone Bank. The Corporation in collaboration with the CBN also conducted the maiden examination of Jaiz Bank Plc and the Stanbic-IBTC non-interest window during the year under review.

2.5.1 On-Site Examination of Micro Finance Banks (MFBS) and Primary Mortgage Banks (PMBS)

        The NDIC in 2012 conducted routine examination of 246 MFBS out of which six (6) where found to have closed shop. The NDIC also outline risk-based examination of forty (40) PMBS in 2012 out of which three (3) were found to have voluntarily closed shop.

2.6       RESOLUTION AND MANAGEMENT OF FAILED INSURED DEPOSIT-TAKING FINANCIAL INSTITUTIONS

This section gave information on claims administration and asset. Management activities carried out in 2012 by the NDIC in response of banks closed since 1994, including 103 MFBS and 24 PMBS that were closed in September 2010 and August 2012 respectively. By December 31, 2012 the NDIC paid cumulative sum of N6.82billion to 528,212 insured depositors as against N6.68billion paid to 527,942 insured depositors as at December 31, 2011. Similarly, a total sum of N2.505billion was paid to 75,322 verified depositors.

2.7      CORPORATE SOCIAL RESPONSIBILITY

Under corporate social responsibility, the NDIC assisted five (5) higher institutions of learning across the nation to the tune of N99.93million on various projects in Imo, Delta, Kebbi, Enugu and Kano States.

2.8       REVIEW OF NDIC ENABLING ACT, RESEARCH ACTIVITIES AND INSTITUTIONAL RELATIONSHIPS

This section highlighted the proposed amendments to the NDIC enabling act. It also provided information on research activities undertaken to improve the corporations operations as well as efforts geared towards developing and strengthening existing links with NDIC’s local and international partners in year 2012. Areas/Issues being proposed for review by the National Assembly included: correction of typographical as well as fundamental errors in the extent Act, errors in the drafting of the provision in the Act resulting in confusion in the composition of the Management Committee; powers for the corporation to review books of subsidiaries of banks, independent enforcement powers, protection of the corporation’s assets, powers to pay insured amount to depositors in the event of imminent or actual suspension of payment by an insured institution even before the revocation of its licence; statement of the public policy objectives of the Deposit Insurance System (DIS) in Nigeria in the NDIC Act; tenure of part time Members, formalizing NDIC’s commitment to transparency, accountability and probity; remove NDIC from inclusion in Fiscal Responsibility Act; powers to enforce recommendations contained in its Examination Reports, establishment of the insured institutions Resolution fund; Power of NDIC as conservatory to stated in the NDIC Act, appointment of the NDIC as liquidator simple cita rather than as provisional liquidator in the event of the revocation of license; payment of insured Deposit Even when Action Challenging Revocation is pending in court.

Some of the amendment proposed above will facilitate the corporation’s full compliance with all the AIDI Core Principles of effective Deposit insurance.

It is noteworthy that the National Assembly had, once again, confirmed their continued support of the process to amend the NDIC Act to facilitate effective discharge of the corporations mandate while complying the best practices and standards. During the year, Research, policy and International Relations Department Consistently monitored developments in banking, finance and the economy with a view identifying areas of contemporary research. Also during the year a number of research studies were embarked upon or continued with. They included: Development of 27 case studies on Bank Failures in Nigeria (thirteen (13) case studies were ready for publication, while the rest were being edited): Book Project on “Bride Bank: The Nigeria Experience”; Research Study on “Early warning System of Bank Distress in Nigeria”; and a study of the framework for credit management in Nigeria Banks in Collaboration with financial institutions Training centre (FITC).

During the year, the NDIC continued to strengthen existing relation and links with its local and international partners. At the national level, the NDIC continued to interface with other financial safety-net players through its membership of the financial services Regulation Coordination Committee (FSRCC) and its membership of CBN/NDIC Joint Executive Committee on supervision. At the international level, the corporation participated actively in the various activities of the international Association of Deposit Insurers (IADI)

2.9      CORPORATE GOVERNANCE

This section discussed the mandate, composition and achievements of the NDIC Board in the year under review. This section indicated the activities of various board committees through which various policies were fine tuned/ formulated and executed. The major achievements of NDIC Board in 2012 were also highlighted and they included: six (6) meetings held by the Board; operating within the provisions the Board’s Charter, review of the Board’s key performance, indicators for the effective discharge of its responsibilities; approval of financial support to some institutions of higher learning to enhance quality of education; sporting activities in the six (6) geo-political zones as well as in the Federal Capital Territory; approval of the promotion of qualified staff, and employment of additional staff to strengthen the corporations workforce. Other major achievements were the deployment of the performance management system and increased Public Awareness Programmes. In order to enhance the effective discharge of its oversight responsibilities, members of the Board participated in some capacity building programmes during the year under review.

The NDIC adhered to the guidelines issued by all relevant Federal Government Agencies.

2.10 FINANCIAL CONDITIONS OF INSURED DEPOSIT MONEY BANKS IN 2012

This section narrowed down on the specific happenings in the banking industry in the year ended 2012, sequel to the banking reforms introduced in 2009, the banking industry in 2012 continued in a good state of health while its performance remained relatively stable during the period under review as depicted by relevant indices.

2.11 CAPITAL ADEQUACY

The Capital Adequacy Ratio (CAR) of the Deposit Money Banks (DMBS) improved by 0.36 percentage points from 17.71% in 2011 to 18.07% in 2012. During the period under review, only one out of the twenty (20) DMBs failed to meet the minimum prudential CAR of 10%.

2.11.1 Asset Quality

        The Asset Quality of the banking industry significantly improved during the period under review.

2.11.2 Earnings and Profitability

        The industry recorded a profit-before-tax of N525.34 billion in 2012, representing a significant improvement over the loss of N6.71billion reported in 2011. Return on Assets (ROA), return on equity (ROE) as well as yield on caring assets all showed significant improvements. Return on Equity (ROE) was 22.20% which was a significant improvement over the negative 0.28% position as at the end of 2011.

2.11.3 Liquidity and Funds Management

        The banking industry liquidity position remained favourable and relatively stable as the average liquidity ratio stood at 68.01% as at December 31, 2012 showing a marginal decline of 1.28% points over the 69.29% attained in 20111. All the DMBs met the minimum liquidity ratio requirement of 30% as at the end of December 2012.

2.11.4 Level of Soundness of DMBs in 2012

        The banking industry performance and level of soundness in 2012 indicated that ten (10) bank were rated sound, nine (9) satisfactory and only one (1) bank was rated marginal. Thus, the industry could be considered to be relatively stable in 2012.

        There was no in sound bank in the banking industry as at 31^st December 2012.

2.11.5 Summary of Financial Condition of Banks in 2012

        The banking industry was adequately capitalized with capital adequacy ratio of 18.07%. all the DMBs also met the minimum liquidity threshold of 30%.

        The asset quality recorded significant improvement during the year as the ratio of nonperforming loan decreased to 3.51% in 2012 from 4.95% in 2011. The assets quality was strong due to the purchase of DMBs non-performing loans by AMCON and the enhanced credit risk management by DMBs. Unlike the previous year, the banking industry recorded a profit before tax of N525.34billion in 2012 as against loss of N6.71billion in 2011.

2.12   INSURED BANKS REPORT ON FRAUDS/FORGERIES AND FIDELITY BOND INSURANCE COVER

The report on cases of frauds and forgeries in the banking industry in 2012 is presented in this section. This section further provides information on the nature of cases reported as well as the number and categories of staff involved as well as insured DMBs compliance with fidelity bond insurance cover during the year 2012.

The DMBs reported 3,380 Fraud cases involving the sum of N17.97billion with expected/contingent loss of about N4.52billion in 2012. The expected/contingent loss had increased by N455million (10.9%) over N4.072billion reported in 2012.

Notwithstanding the 43.7% increase in the number of fraud cases from 2,352 in 20111 to 3,380 in 2012, the amount of fraud cases decreased by 36.4% from N28.40billion in 2011 to N18.4billion in 2012.

2.13 MAJOR DEVELOPMENTS IN OTHER INSURED DEPOSIT-TAKING FINANCIAL INSTITUTIONS

This section summarized the major developments in other insured deposit-taking financial institution in 2012 as follows:

As at December 2012, 310 out of the 323 MFBs that rendered returns had met the minimum paid-up capital of N20million. A total of 302 MFBs had capital adequacy ratio of more than 10%.

The Taskforce on insider abuse in microfinance banks established by NDIC continued to work closely with the financial malpractices intelligence unit (FMIU) and the Nigeria police during the year to bring to book all directors/insiders involved in any of wrong doing in the 103 MFBs in-liquidation as at 2010 and PMBs in-liquidation.

The microfinance sub-sector was faced with a number a challenges. Some of which included the following: Weak Capital Base, Poor Asset Quality, High Operating Costs, Scarcity of Microfinance Skills and Experience, inadequate Management information system, and poor corporate Governance practices.

On May 2, 2012, the licenses of twenty-four (24) PMBs which had hitherto closed shop and were unable to meet obligations to their depositors and creditors were revoked in line with the provisions of BOFIA 1991 as amended.

The challenges that faced the primary Mortgage Banks sub sector in 2012 included: Delay in accessing NHF/Dearth of long term Funds, Difficulties in Mobilizing Deposits, land use Act, Undeveloped Mortgage-Backed Securities Market, High Cost of Building, and Poor Corporate Governance and Risk Management Practices.

CHAPTER ONE:          CHAPTER TWO:          CHAPTER THREE:    

CHAPTER FOUR:          CHAPTER FIVE:          REFERENCES:

APPENDIX:          APPENDIX 1:          QUESTIONNAIRE:

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