The Nigeria Deposit Insurance Corporation (NDIC) was established in 1988 to strengthen the safety and financial stability of the banking sector. Following phenomenal increase in the number of banks from 40 in 1986 to 120 in 1992, there was serious breakdown in Corporate Governance and excessive risk taking that threatened the stability of the banking system. Since then, the Corporation has evolved various strategies and initiatives in achieving success in its given mandates. These include both on-site and off-site surveillance of banks and proactively sound financial policies that safeguard both banks and its depositors. Sanya Adejokun here takes a look at some of the highlights of the 2015 Annual Report of the Corporation which further proved its resolve to strengthen public confidence in the Nigerian Banking system through regular risk assessment and reimbursing customers and investors of liquidated banks.
Deposit Insurance Scheme (DIS) has the objective of augmenting existing safety-net by protecting depositors, thereby boosting confidence of the banking public. In Nigeria, it is an additional framework to serve as a substitute to the government support policy (implicit insurance) which was in place before the establishment of Nigeria Deposit Insurance Corporation in 1988. With the establishment of NDIC the pains of bank failure, inevitable in a market environment, were reduced to a minimum while moral hazard associated with direct government support was eliminated.
Although NDIC has the mandate and powers to guarantee deposits, supervise banks, undertake failure resolution in banks and liquidate banks when it becomes inevitable, to the average depositor, deposit guarantee is its most significant function.
In addition, Section 2 of the NDIC Act 2006 stipulates the functions for the Corporation to include: Insuring all deposit liabilities of licensed banks and such other financial institutions (hereinafter referred to as “insured institutions”) operating in Nigeria within the meaning of Sections 16 and 20 of this Act so as to engender confidence in the Nigerian banking system; Giving assistance to insured institutions in the interest of depositors, in case of imminent or actual financial difficulties of banks particularly where suspension of payments is threatened, and avoiding damage to public confidence in the banking system; Guaranteeing payments to depositors, in case of imminent or actual suspension of payments by insured institutions up to the maximum as provided for in section 20 of this Act; Assisting monetary authorities in the formulation and implementation of policies so as to ensure sound banking practice and fair competition among insured institutions in the country; and pursuing any other measures necessary to achieve the functions of the Corporation provided such measures and actions are not repugnant to the objectives of the Corporation.
At the commencement of DIS scheme in Nigeria, maximum insurance limit was set at 50,000 per depositor and that was applied to insured depositors of all the 33 closed banks up to 2000. This limit has since been increased following an extensive study by the Corporation on the banking system in the country and to encourage cynical would-be depositors to embrace financial inclusion, which NDIC has promoted actively in recent years.
According to the Corporation’s 2015 Annual Report released recently, “following a study on coverage levels conducted by the NDIC in 2015, it reviewed upwards the coverage level for depositors of PMBs from 200,000 to 500,000 in 2015. The current coverage levels of 500,000 per depositor per DMB and 200,000 per depositor per MFB were found to be adequate and so remained unchanged.” In order to encourage Nigerians to embrace mortgage facilities by enhancing confidence in primary mortgage banks, NDIC in 2006 extended insurance coverage to their depositors at N100,000. This was increased to N200,000 in 2010.
And still as a way of further enhancing inclusiveness, the report indicated that during the year under review, the Corporation extended deposit insurance coverage to subscribers of mobile money operators (MMOs) via the concept of pass-through deposit insurance up to a maximum of N500,000 per subscriber.
In line with this assurance, the NDIC has continued to pay bank customers whose banks were liquidated even after the statutory number of years when such payments should have closed.
The 2015 Annual reports indicated that NDIC made a cumulative payment of N2.86 billion to 81,328 depositors of the closed MFBs as at the end of 2015 as against N2.77 billion paid to 80,178 depositors a year earlier. Also, the Corporation made a cumulative payment of N45.05 million to 595 depositors of closed PMBs as at 31st December, 2015 as against N2.02 million paid to 30 depositors in 2014.
Aside depositors whose money falls under the purview of deposit insurance scheme who must be paid full value of their deposits as at when the banks failed, the corporation nevertheless, has over the years, ensured that even uninsured depositors recoup their funds in liquidated banks. This has been made possible through prudent management of recovered assets.
The sum of N95.77 billion was paid as liquidation dividend to depositors of DMBs in 2015 compared to N94.74 billion as at December 31, 2014. That amount included the uninsured portion of private sector depositors of 11 out of the 13 banks closed post-bank consolidation which was funded by the CBN.
Similarly, the NDIC paid liquidation dividends to creditors of DMBs-in-liquidation in 2015 while the sum of N1,728.40 million was declared as dividends to 1,308 creditors of the ten DMBs. Out of that amount, the NDIC paid the sum of N1,261.73 million to the 965 creditors who filed their claims as at 31st December, 2015 as against N1,247.77 million paid to the 889 creditors as at 31st December, 2014.
The NDIC also paid N2.41 billion as total liquidation dividends to 550 shareholders of six deposit money banks (DMBs) -in-liquidation as at 31st December, 2015 as against N2.03 billion paid to 453 shareholders of DMBs-in-liquidation as at 31st December, 2014.
Financial experts also noted that this is quite significant and underscores the effectiveness of the Corporation in attending to its responsibilities. Paying liquidation dividend simply implies that adequate provisions has been made for every deposit both insured and uninsured and shareholders are even recouping their investment in institutions that were greatly mismanaged by their representatives (management and board).
Banking supervision is an essential element of the Nigeria deposit insurance scheme as it seeks to reduce the potential risk of failure and ensures the unsafe and unsound banking practices do not go unchecked.
As a bank supervisor, NDIC supervises banks so as to protect depositors; foster monetary stability; promote an effective and efficient payment system; and promote competition and innovation in the banking system.
During the year under review according to its annual report, the NDIC, in collaboration with the Central Bank of Nigeria (CBN), conducted the routine Risk Assessment of all the 24 DMBs while the NDIC conducted risk-based examinations of 205 MFBs and 6 PMBs. The examinations were with a view to providing reliable information on their financial health particularly as it affects the quality of risk assets, adequacy of loan loss provisions, capital adequacy level of compliance with banking rules and regulations, risk appetite and adequacy of risk management frameworks.
The routine Risk Assessment of all the 24 DMBs conducted during 2015 showed that “overall, the banking industry remained stable and sound during the period under review.”
Since mid-2014 when global oil prices plummeted, Nigerian banks have suffered significantly from the shocks. In recent months, banks have been offloading staff in reaction to reduced profitability and stress occasioned by these developments.
As a way to therefore reduce apparent stress, which could trigger distress in the industry, the Corporation during the 2015 fiscal year, reduced the premium paid by banks by N9.09 billion. This was achieved as a result of the reduction of the premium base rate from 40 basis point to 35 for each DMB/NIB under the Differential Premium Assessment System (DPAS).
The NDIC 2015 annual report indicated that “the banking industry total assets grew marginally by 1.36%, total loans and advances rose by 5.56%, shareholders’ funds unimpaired by losses increased by 14.02% while capital adequacy ratio stood at 17.66%. However, total deposit liabilities declined by 2.83%, unaudited profits decreased by 2.02% while non-performing loans increased by 82.87% in 2015.”
On Capital Adequacy of deposit money banks, NDIC reported that the banking industry capital base remained strong. The capital adequacy ratio (CAR) of the banking industry was 17.66% in 2015 compared with 15.92% in 2014, but exceeded the minimum threshold of 10% and 15% for national and international banks respectively. Two (2) DMBs had CAR below the prescribed threshold of 10% in 2015.
On Asset Quality, the report noted “Total loans and advances to the Nigerian economy stood at N13.33 trillion in 2015, showing an increase of 5.56% over the N12.63 trillion reported in 2014. The non-performing loans to total loans ratio for the industry increased from 2.81% in 2014 to 4.87% in 2015, but was within the regulatory threshold of 5%.”
Commenting on Earnings and Profitability, NDIC noted that the banking industry operated profitably, though earnings and profitability deteriorated. The Corporation reported that the unaudited profit-before-tax (PBT) of the banking industry stood at N588.86 billion as at 31st December, 2015 representing a decrease of 2.02% over N601.02 billion reported as at 31st December, 2014.
Although earnings and profitability deteriorated, the annual report noted that the industry continued on the track of prudent management of liquidity during the year under review. It noted “The banking industry’s liquidity position was strong as its average liquidity ratio rose slightly from 53.65% in 2014 to 58.18% in 2015. All the individual DMBs had liquidity ratios above the prudential minimum threshold of 30% as at 31st December, 2015.”
Although the Deposit Insurance Scheme (DIS) commenced in Nigeria with the establishment of NDIC through the promulgation of Decree No. 22 of 1988 now NDIC Act No 16 of 2006 as a vital component of the safety-nets to ensure the stability of the banking system as well as the macro economy, microfinance institutions were only admitted into the DIS on January 1, 2008. The measure became necessary because of the wide-spread banking distress and failures witnessed in the past by depositors of community banks, which made many Nigerians skeptical about putting their funds in what was perceived as successor institutions. And so from January 1, 2008, it became mandatory for licensed MFBs to insure their total deposit liabilities with the NDIC with the exception of insider deposits (i.e. deposits belonging to board members, management and staff), deposits used as collaterals and such other deposits the Board of NDIC may exempt from time to time.
As at August 31, 2014, the Corporation had paid N2.756 billion to 80,059 insured depositors of 186 closed Microfinance Banks. Managing Director of NDIC, Umaru Ibrahim said then that the payment followed revocation of the operating licenses of 103 Microfinance Banks (MFBs) in 2010 At the end of 2015 according to the NDIC annual report however, paid-up capital of the MFBs had increased by 54.40% from N54.52 billion in 2014 to N84.18 billion in 2015 while their average capital adequacy ratio (CAR) had stood at 43.75% as at 31st December, 2015.
In terms of asset quality, NDIC reported that “total loans and advances of MFBs increased by 46.34 percent from N114.70 billion in 2014 to N167.85 billion in 2015. The quality of risk assets deteriorated further as the NPL increased from 18.54% in 2014 to 23.13 percent in 2015, which exceeded the prudential maximum threshold of 5 percent”.
Concerning Earnings and Profitability, the report noted that unaudited profit before tax (PAT) decreased by 77.63 percent from N7.51 billion in 2014 to N1.68 billion in 2015 while return on assets (ROA) and return on equity (ROE) for the subsector declined from 3.39 percent and 14.70 percent in 2014 to 0.47 percent and 13.74 percent in 2015, respectively.
The liquidity position of the microfinance subsector was strong as average liquidity ratio rose from 80.37 percent in 2014 to 119 percent in 2015 and compared favourably with the minimum prudential threshold of 20 percent. Overall, the performance of the MFB subsector improved compared to the previous year as they had strong capital base and liquidity.
Primary Mortgage Banks
The report indicated that out of 42 PMBs in operation, a total of 14 failed to render returns to the NDIC and outstanding premiums from nine (9) PMBs amounted to N238.30 million as at December, 2015.
On Capital Adequacy, it stated that the shareholders’ funds of the PMBs increased by 93.91 percent to N138.92 billion in 2015 from N71.64 billion in 2014. Capital adequacy ratio for the subsector stood at 74.04 percent as at December 2015, which exceeded the prudential threshold of 10 percent.
“Asset Quality: Total loans and advances extended by the subsector declined significantly by 31.87% to N168.96 billion in 2015. There was a significant improvement in the quality of assets as the NPL ratio decreased from 44.14% in 2014 to 15.40% in 2015. Despite that improvement, the NPL ratio of 15.40% exceeded the prudential maximum threshold of 5%.
“Earnings & Profitability: Unaudited Profit before tax rose from N2.79 billion in 2014 to N3.31 billion in 2015 due to significant rise in interest income and non-interest income by 90.75% and 321.05% in 2015, respectively.
“Liquidity: The PMBs liquidity position was strong during the period under review as the average liquidity ratio was 72.63% in 2015 as against 80.37% in the previous year and exceeded the prudential minimum threshold of 20%.
Overall, the performance of the PMB subsector improved in almost all indices in comparison with 2014. The improvement in the operations of the PMBs was due to the recapitalisation of the sector, enhanced compliance by PMB operators and improved supervisory oversight”, the report indicated.
For years, the NDIC has insisted that slow legal processes have been a very serious impediment to the successful recovery of funds from debtors of liquidated banks. At a point, there was a national advocacy for the establishment of special courts to deal with bank loan defaulters. According to Alhaji Umaru Ibrahim, aside excessive litigations, the Corporation also faces the problem of execution of court judgments against its assets as the liquidator of failed banks based on the misunderstanding of its role as a liquidator. In addition, lack of proper understanding of the distinction in the legal status of NDIC as a liquidator and deposit insurer by legal practitioners, courts and the general public were other constraints. There are also difficulties in recovering debts owed to failed banks due to inability to trace the debtors and lack of collaterals. It is nonetheless believed that the introduction of Bank Verification Numbers will help to remove some of these problems.
These cogs in the wheel notwithstanding, the 2015 annual report stated that the cumulative amount of loans recovered over the years stood at N27.41 billion as at December 31, 2015 compared with N26.75 billion as at December 31, 2014. Similarly, the cumulative risk assets recovered from closed MFBs amounted to N125.61 million as at December 31, 2015 compared with N124.38 million as at December, 31, 2014 while the debt recoveries from the debtors of PMBs in-liquidation amounted to N24.73 million as at December 31, 2015.
Corporate Social Responsibility
During the year under review, the NDIC sponsored several corporate and community-based projects, which were aimed at promoting its visibility and presence in the public domain. Some of these projects were education-support and community health care related. In this regard, the Corporation spent the sum of N236.15 million on eighteen (18) such projects spread across the country.
The Fiscal Responsibility Act 2007 mandates select government corporations and agencies to remit a percentage balance of their annual operating surplus to the Consolidated Revenue Fund of the Federation not later than one month, following the statutory deadline for publishing such corporation’s annual accounts. The Fiscal Responsibility Commission (FRC) in its annual reports has consistently indicted many big agencies and corporations of consistently failing to declare profits and refusing to remit excess profits to the consolidated fund. NDIC is different.
In the 2015 Annual Report, the NDIC fully complied with the provisions of the Fiscal Responsibility Act and so, remitted the sum of N24,185,762,000 to the Consolidated Revenue Fund of the Federation in 2015 as against N15.38 billion in the previous year. Overall, the NDIC’s operating surplus for 2015 stood at N30.23 billion as against N15.52 billion in 2014.