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DEPOSIT INSURANCE AND CONSUMER PROTECTION

DEPOSIT INSURANCE AND CONSUMER PROTECTION. BEING A PAPER DELIVERED BY THE ACTING MD/CEO OF NIGERIA DEPOSIT INSURANCE CORPORATION, U. IBRAHIM, AT THE WORLD CONSUMER RIGHTS DAY HELD ON 15 TH MARCH, 2010. Introduction. Definition

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DEPOSIT INSURANCE AND CONSUMER PROTECTION

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  1. DEPOSIT INSURANCE AND CONSUMER PROTECTION BEING A PAPER DELIVERED BY THE ACTING MD/CEO OF NIGERIA DEPOSIT INSURANCE CORPORATION, U. IBRAHIM, AT THE WORLD CONSUMER RIGHTS DAY HELD ON 15TH MARCH, 2010

  2. Introduction • Definition • 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

  3. Introduction (cont’d) 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

  4. INTRODUCTION (cont’d) • DIS Policy Objectives • To protect small depositors in the event of bank failure • To contribute to financial system and macroeconomic stability • To provide formal mechanism for failure resolution • To contribute to orderly payment system • To redistribute the cost of failure • To promote competition amongst deposit-taking financial institutions • To facilitate transitioning from blanket coverage to limited coverage

  5. DEPOSIT INSURANCE SYSTEM IN NIGERIA • Establishment • The DIS in Nigeria is the explicit type with an enabling law • The organization running the DIS, the Nigeria Deposit Insurance Corporation (NDIC), is a separate entity from other agencies of government though is owned by two government agencies: Central Bank of Nigeria(60%) and Federal Ministry of Finance (40%) • The NDIC was created by Act No. 22 of 1988(now repealed) but commenced operation in 1989. • A new statute, Act No. 16 of 2006 has replaced the old Act

  6. DEPOSIT INSURANCE SYSTEM IN NIGERIA (cont’d) • Mandate of the Corporation • Deposit Guarantee • Banking Supervision • Failure Resolution

  7. THE ROLE OF DEPOSIT INSURANCE IN CONSUMER PROTECTION • Consumer protection by a DIS essentially involves the apportionment of losses arising from the failure of a set of existing contracts and the recognition of a fresh set of contracts. These can be broadly categorized into civil and Social contracts. • Civil Contracts: • First is between the depositor and the bank in which the bank borrows funds from the depositor and pledges to pay the nominal value of the deposit plus interest, in some instances, on demand or at a given date. This is called liability-side liquidity promising contract of unconditional withdrawal right of depositors. • Second is between the bank and the borrower on a loan in which the bank deploys depositors’ funds ( also known as asset-side loan contract).

  8. THE ROLE OF DEPOSIT INSURANCE IN CONSUMER PROTECTION • Social Contract: • This is a contract where the citizens expect that the state will protect individual property rights by enforcing the civil contract through regulatory agencies, in the same manner an impartial judiciary does. • The adoption of DIS is therefore to: • restore public confidence; • Preserve the sanctity of social contract; and • Provide an opportunity to build a banking system that can better provide an efficient services necessary to enhance the development of the economy. • Nigeria, like most countries with DIS, gives priority to the claims of “depositors” when the financial institution collapses. This, of course, is the narrowest of the role asof deposit insurance

  9. THE ROLE OF DEPOSIT INSURANCE IN CONSUMER PROTECTION(cont’d) • The other form of consumer protection is less direct. Depositors are seldom in a position to make an informed analysis of the financial stability of the financial institutions with which they deal as a result of what is known as ‘information asymmetry’. • DIS therefore exists to form a second layer of protection for depositors and reinforces the efforts of the primary regulator/supervisor in ensuring safety and soundness of the financial institutions.

  10. THE ROLE OF DEPOSIT INSURANCE IN CONSUMER PROTECTION(cont’d) • In the broadest sense, deposit insurance system offers consumers the greatest protection through its contribution to financial system stability. • How does the deposit insurance system contribute to the soundness and stability of the financial system and thereby protect consumers? • Instilling confidence in insured institutions. This can be achieved by • Supporting and contributing to an orderly or proper functioning of the payment system; and • Assuring the public that a naira in their bank accounts is the same as a naira in their pockets.

  11. THE ROLE OF DEPOSIT INSURANCE IN CONSUMER PROTECTION(cont’d) • Encouraging banks to manage risks responsibly and reducing moral hazard. This can be achieved through a number of ways including: • Providing incentives for sound risk management of banks • Allowing troubled banks to fail • Providing limited insurance coverage • Reducing the likelihood of bank runs and preventing banking panic from spreading quickly to other banks, the so-called contagious effect. This can be achieved by educating and assuring depositors that their deposits are protected from losses and that they would be repaid promptly, in the event of bank failure • Employing a formal mechanism for early bank resolution.

  12. THE ROLE OF DEPOSIT INSURANCE IN CONSUMER PROTECTION(cont’d • Reducing the severity of an economic downturn by mitigating the consequences of failures of insured institutions for depositors. For example , adjusting the level and scope of coverage during the time of crisis • Instilling discipline on member institutions and elicit responsible behaviour through • Demanding higher premium payment from riskier banks • Imposing sanctions for non-compliance with regulatory rules • Threat of termination and cancellation of membership or even the removal of directors and/or officers

  13. THE ROLE OF DEPOSIT INSURANCE IN CONSUMER PROTECTION(cont’d) • Enhancing bank operational standards by enforcing good governance and sound banking practices which ensure prudent risk management practices, integrity and fair/equitable consumer treatment • Actively promoting financial literacy because increased financial literacy could enhance market discipline. Financially educated clientele are likely to take more rational decisions . Ability to appreciate the trade-offs between risk and rewards could contribute to financial stability • Finally, a DIS should help put in place in collaboration with other safety-net players, other infrastructure for consumer protection such as avenues for redress , for example, a Financial Services Ombudsman to provide alternate dispute resolution mechanism such that all consumers may have access to fair treatment.

  14. EFFORTS OF THE NDIC AT CONSUMER PROTECTION • Basically, the NDIC has made tremendous efforts over the years to protect consumers of financial services . Essentially, the Corporation has been able to do this through fulfilling its core mandate : deposit guarantee, banking supervision and distress resolution • Deposit Guarantee • Coverage of all deposit liabilities in universal banks and extension of deposit insurance coverage to Microfinance Banks (MFBs) and Primary Mortgage Institutions (PMIs);

  15. EFFORTS OF THE NDIC AT CONSUMER PROTECTION(cont’d • Adoption of differential premium assessment system which resulted in reduction of premium burden on universal banks. (35% and 36% reductions were achieved in 2008 and 2009 respectively); • Insurance coverage was increased from N50,000.00 to N200,000.00 for depositors of universal banks and N100,000.00 for depositors of MFBs and PMIs; • 90 days target was set for payment of depositors of failed banks after appointment as liquidator (barring litigations)

  16. EFFORTS OF THE NDIC AT CONSUMER PROTECTION(cont’d) • Banking Supervision • Engage in the on-site examination and off-site surveillance of universal banks since inception • creation of Special Insured Institutions Department to supervise MFBs and PMIs;  • adoption of Risk-Based Supervision in collaboration with CBN;  • development of electronic Financial Analysis Surveillance System (e-FASS) in collaboration with CBN; • establishment of NDIC enhanced supervisory capacity in the banking sector;  • adoption of a policy of zero tolerance for unethical practices in insured institutions.

  17. EFFORTS OF THE NDIC AT CONSUMER PROTECTION(cont’d) • Distress Resolution • In the area of Bank Resolution, three mechanisms had been applied namely Open Bank Assistance, Depositor Reimbursement and Purchase & Assumption • Open Bank Assistance • NDIC accommodation bill was used to resolve liquidity crisis in the banking system in 1989; • 7 distressed banks were acquired, restructured and sold to new investors; • Take-over of 28 banks to safeguard their assets.

  18. EFFORTS OF THE NDIC AT CONSUMER PROTECTION(cont’d) • Depositor Reimbursement • Payment of N3.3 billion out of N5.2 billion insured deposit of 34 banks that failed before consolidation; • Declaration of N12 billion dividend in favour of uninsured depositors of 34 banks that failed before consolidation; • 100% dividend in favour of depositors of 11 banks that failed pre-consolidation; • Payment of dividend to shareholders of three liquidated banks: Alpha Merchant Bank, Pan African Bank and Nigeria Bank;

  19. EFFORTS OF THE NDIC AT CONSUMER PROTECTION(cont’d) • Purchase & Assumption (P&A) • P & A was introduced as a novelty in 2006; • Resolution of 11 out of 13 banks that failed post consolidation; • Payment of N3.9 billion insured deposit and N48.8 billion uninsured deposit of 11 out of 13 failed post-consolidation

  20. EFFORTS OF THE NDIC AT CONSUMER PROTECTION(cont’d) • Others • The Corporation played a pro-active role in the promulgation and implementation of the Failed Banks Act. Substantial debt recoveries achieved through the instrumentality of the Failed Bank Act. A substantial portion of the recoveries were used to pay uninsured depositors, creditors and in some cases shareholders of liquidated banks • Apart from executing its core mandate, the Corporation has published several well-researched journals and books to educate numerous stakeholders and promote financial literacy and consumer education.

  21. 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.

  22. 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 essentially protect depositors, among other stakeholders. NDIC’s case presents a remarkable experience

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