Transcript THE NIGERIA DEPOSIT INSURANCE CORPORATION: …

TRUST AND POLICY RENDERING: REWORKING THE NIGERIAN FINANCIAL
SYSTEM IN THE FACE OF GLOBAL
FINANCIAL REFORM
BY: U. Ibrahim, mni
Ag. MD/CEO
Nigeria Deposit Insurance Corporation
Presented at an Executive Seminar on Trust and
Policy Rendering (TPR) in the Nigerian
Financial Services Industry Organised by
AME&T Group and FITC Held at Eko Hotel,
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Lagos Nigeria on March 10, 2010.
Introduction
 The Seminar, being organised at the
most apposite time, broadly aims at:
 Restructuring
and
repositioning
the
banking, insurance, capital market, pension,
and other non-bank sub-sectors in the
financial system by Designing a framework
that will enhance restoration of confidence
and stability in the Nigerian financial
system.
 The seminar also aims at introducing TPR
Nigeria Financial Trust Index.
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IntroductIon ct’d
 My contribution will attempt
address two main issues, namely:
to
 How does a Deposit Insurance System
(DIS) contribute to the enhancement of
confidence in the financial system? and
 What factors should be considered in the
construction of the ‘TPR Nigeria Financial
Trust Index’?
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Definition of Deposit Insurance
 A Deposit Insurance Scheme (DIS) is a
financial
guarantee
to
depositors,
particularly the small ones in the event of a
bank failure.
 It has the following benefits:
 Protects depositors against full or partial loss of
their savings
 Reduces bank “runs” and contributes to financial
stability
 Can limit government fiscal and political exposure
 Creates a formal mechanism for addressing bank
failure
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Deposit Insurance and Public
Confidence
 The most important macro objective of a
DIS is to contribute to financial system
stability by primarily engendering public
confidence
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Introduction: Components
of the financial safety net
Strong & Robust
Banking System
Financial Stability
Depositor
Protection
FINANCIAL SAFETY NET
Prudential
Regulation &
Supervision
Lender-of-last
resort facility
Deposit
insurance
system
Deposit insurance enhances depositor confidence
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Enhancing Public confidence
 Confidence is achieved when a depositor believes
that N100 in his bank account is as good as N100
in his pocket
Protects
depositors’
savings
Prevents bank
runs
Maintains Public
confidence
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Enhancing Public confidence
 DIS Maintains and reinforces public confidence
through
 Ensuring adequate deposit coverage level.
 Extending DIS coverage to non-bank deposit taking
financial institutions.
 Expanding range of deposit products covered beyond
traditional bank deposit insurance products.
 Effective supervision where a DIS has the powers.
 Implementing systemic stabilization measures eg.
Blanket guarantee
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Enhancing Public confidence
 DIS can also contribute to the enhancement of
public confidence by:
Educating depositors in financial literacy and
deposit insurance issues as:
Knowledgeable depositors make informed financial
decisions
Financially literate depositors who know their rights
could impose additional market discipline on the
banking system by scrutinizing the conduct and
practices of banking institutions.
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THE NIGERIA’S EXPERIENCE
 Increased deposit insurance coverage from
N50,000 to N200,000 per depositor for
universal banks in 2006.
 Extended insurance coverage to MFBs & PMIs
at N100,000 per depositor in 2006.
 Already developing a framework for extending
DIS coverage to non-interest bearing deposit
products.
 Working out strategies on how to achieve
prompt depositor reimbursement.
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THE NIGERIA’S EXPERIENCE Ctd
 Supervision
 Conducted examination of universal banks,
MFBs & PMIs to determine their safety and
soundness.
 Participation of NDIC in bank examination
reduced examination cycle to once in a year
instead of once in 2 or 3 years that hitherto
obtained.
 Pursued a policy of zero tolerance for
unprofessional conduct and unethical practices
in the banking industry.
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Factors that make DIS Effective in
Enhancing Public Confidence
 Clearly defined mandate and powers
 Sound Governance/operational
independence
 Adequate funding
 Effective public awareness
 Flexibility in dealing with a crisis:
Comprehensive toolbox
Flexibility to call upon these tools
 Close cooperation with other safety net
players
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Mandate and Powers
Pay Box
Minimal Role
Main function: to make
disbursement to depositors
when banks fail
Cost Minimizer
Seeks least cost resolution once
bank is insolvent
Risk Minimizer
Assesses and monitors risk on
an on-going basis with wide
intervention powers (NDIC is a
risk minimizer)
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Sound Governance: A Key
Element of Trust Building
Carry out all
obligations
effectively
Well
managed
and well
governed
DIS
Build
credibility
in good
times
Build
Trust
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Operational Independence
Ability to Meet Mandate
Operational independence
Will and the power to
act
Strong
government
funding support
Sufficiently free from
interference from
politicians, supervisors
and industry
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THE NIGERIA’S EXPERIENCE
 GOVERNANCE
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NDIC has on its Board competent and experienced
individuals
The Board has effective Committees
NDIC has Comprehensive business plans with explicit
Key Performance Indicators (KPIs)
There is an effective enterprise risk management unit
with operational framework
NDIC has put in place sound accounting and internal
controls
NDIC publishes and widely circulates its Annual Report
and Statement of Accounts amongst its stakeholders and
members of the public.
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Adequate Funding
Ex-Ante
Premium
Government
Funding
Support
public
Confidence
Powers to
raise fund
from the
market
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Nigeria’s Experience :
Funding
 Premium
contribution
by
insured
institutions is the major source of funding
 The aggregation of the premium collected
constitutes Deposit Insurance Fund (DIF).
 The Funds are used to meet the primary
obligations of the Corporation
 The operations of the Corporation are
financed from the proceeds of investment
of the DIF.
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Nigeria’s Experience :
Funding Ctd.
 The basic statistics on the Fund and insured
deposits in the industry as at December 2009
are given as follows:
 DIF = N240.7 billion
 Total insured deposits = N1.594 trillion
 Evidently, there remains a wide funding gap of
about N1.353.3 trillion. That is one of the
critical challenges facing the Corporation.
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Effective Public Awareness
Programme
Information
• Timely and
accurate
information/finan
cial education
• Strong antidote
to unwarranted
fear
Public
Understanding
of Deposit
insurance
• Functions
• Benefits
• Limitations
Well informed
depositors
• No incentive to
withdraw funds
• Less susceptible
to
unsubstantiated
rumours
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Nigeria’s Experience :
Public Awareness.
 Has an improved web-site
 Already completing work on Help Desk Facility that
will facilitate response to enquiries.
 Published
information
booklets
on
deposit
insurance and distributed widely to all insured
institutions. Work is on in translating the materials
to Hausa, Igbo and Yoruba.
 Organises annual Depositor Awareness Week
 Organises
annual
Seminar
for
Financial
Correspondents of Nigeria (FICAN) and their
Editors.
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Flexibility in dealing with a
crisis
 Access to ready and comprehensive stabilization toolbox
without going through legislative process in times of
crisis
 Comprehensive toolbox includes powers to:
 Increase coverage limit (NDIC Act 2006 has granted
such powers to NDIC Board)
 Broaden range of deposit products insured (NDIC also
has the powers)
 Extend coverage to non-bank deposit taking financial
institutions as in the case of MFBs and PMIs; and
 Restructure troubled insured institutions – NDIC has
powers to adopt failure resolution options such as:
Open Bank Assistance, depositor reimbursement, P & A
and Bridge Banking.
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Close Cooperation With
Other Safety Net Players
 Smooth
cooperation
and
goodwill
amongst safety net players essential
 Information sharing, clear division of
powers
and
responsibilities
and
coordination are particularly relevant
 Formal arrangements essential to avoid
or minimize potential conflicts
 Coordinated actions most important
when handling troubled banks
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Close Cooperation With Other
Safety Net Players: Nigeria’s
Experience
 NDIC collaborates actively with CBN,
SEC, FMF, NAICOM, PENCOM and CAC
 NDIC is an active member of Financial
Services
Regulation
Coordinating
Committee (FSRCC)
 FSRCC has launched its web site to
facilitate information sharing amongst
its members as well as the public.
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THE NIGERIA’S EXPERIENCE:
Challenges
 Low-level Public Awareness of the Deposit
Insurance System.
 The Fiscal Responsibility Act which requires
that 80% of the Corporation’s operating should
be remitted to the Federation Account
constrains rapid build-up of DIF
 Long
drawn-out
litigation
by
erstwhile
shareholders/directors of closed banks and
cumbersome judicial process
 Poor corporate governance of insured
institutions.
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Factors to consider for
Constructing Trust Index
 In my view, I believe that the
following factors/parameters are
critical in the construction of a
financial Trust Index. The factors
include:
 Sound and Effective Legal Regime that
stipulates and enforces right of contract
 Strong
Prudential
Regulation
and
Supervision
with
appropriate
institutional and policy framework
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Factors to consider for
Constructing Trust Index
 Sound Accounting and Financial Reporting
Regimes;
 Comprehensive Disclosure Regimes that will
guarantee transparency and promote market
discipline;
 Sound governance with all the required
ingredients
of
Independence,
integrity,
transparency and accountability on the part of
both the regulators and operators;
 Effective risk management practices by both
regulators and operators; and
 Effective financial literacy.
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Factors to consider for
Constructing Trust Index
 In addition to some other factors that could be
found relevant, it is my view that the ‘Trust
Financial Index’ could evolve when all the
factors are assigned weights that reflect the
peculiarities of the Nigerian environment and
are calibrated.
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CONCLUSION
 Deposit insurance system is an integral part
of an effective safety-net framework
 A deposit insurance system is always
designed to promote confidence and
contribute to financial stability.
 Effectiveness of a deposit insurance system
depends on mandates and powers, capacity
and flexibility to act promptly before banks
are insolvent
 NDIC’s case presents a remarkable experience
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Conclusion Ct’d.
 Finally, I believe that factors such as
sound and effective legal regime, strong
prudential
regulation/supervision,
effective legal regime and other factors
listed above could be found useful in the
construction of the proposed Financial
Trust Index.
 Thank you for your attention.
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