NDIC: Advancing deposit insurance among Africa’s financial safety-net players

NDICRecently, the Annual General Meeting of the International Association of Deposit Insurers (IADI) Africa Regional Committee (ARC) IADI-ARC was hosted in Lagos. It was a prelude to the IADI Technical Assistance Workshop. CHIMA NWOKOJI in this report examines the outcome of the workshop, the pivotal position occupied by the Nigeria Deposit Insurance Corporation among financial safety-net players in Africa, and the sure way to financial stability in the region.

Be prepared,” is the Boys’ Scout motto, which refers to a state of readiness in mind and body to do ones duty at all times. In a similar connotation, ‘principle 6 ‘ of the IADI Core Principles for effective deposit insurance  systems underscores the importance of “ being prepared,” in the form of contingency planning for financial safety-net players. It highlights the idea that the role of the federal ministry of finance, the Central Bank of Nigeria, the Securities and exchange commission, the National insurance Commission, the National Pension Commission and the NDIC as financial safety-net-players in Nigeria, should go beyond regulation to include modern risk management. Modern risk management as supported by Mohamud A. Mohamud, Chief Executive Officer of the Kenya Deposit Insurance Corporation (KDIC) refers to risk management as a practice of assessing potential threats and finding the best ways to avoid those threats while crisis management involves “dealing with threats before, during, and after they have occurred.”

His words: “Crisis management is a discipline within the broader context of management consisting of skills and techniques required to identify, assess, understand, and cope with a serious situation,” especially in the financial system.

It is on this premise, that the Managing Director and Chief Executive of the NDIC, Umaru Ibrahim, posed a direct question to his colleagues at the workshop, “how prepared are we as regulators and supervisors in managing a systemic financial crisis should they occur now?”  In providing the answer, he said to be prepared like the Boys’ Scout, involves a system-wide approach to crisis management involving collaborative efforts of financial safety-net participants and regional deposit insurance systems.

Ibrahim who has just been elected the new Chairperson of the Africa Regional Committee of the International Association of Deposit Insurers(IADI), said the theme for this  year’s ARC workshop which is “ Financial Stability, System-Wide Crisis Preparedness and Effective Bank Resolution,” was carefully chosen. This is in view of emerging developments in the global financial landscape with Africa in focus.

The new Chairperson of the ARC therefore warned against, “growing risk of protectionism and ongoing trade wars between the United States and the rest of the world (China, North America, and Europe)” as likely to have “negative implications for the global financial system stability” if it degenerates. His warning also reinforces the call on stakeholders in Nigeria and Africa in general to be prepared. He said this is so because “increasing financial inter-connectedness has shown that banking crisis can have contagious effects.”

Highlighting other factors that can throw  the financial system into crisis, the NDIC boss listed monetary policy normalisation in some notable economies which may result into sharp volatility and disruptions in financial markets; partial dis-intermediation of the banking system arising from proliferation of digital currency, such as Bitcoin,  as well as the activities of FinTech in general; and the rising exposure of emerging market to reversal of foreign portfolio inflows and US Dollar appreciation.

The aforementioned issues he stressed present potent downside risks to achieving financial stability. Yet, they serve as signal to redesigning broad-based financial systems’ policies. When these policies are in place, regulators and supervisors can now be in position to answer the question as to how prepared they are “in managing a systemic financial crisis should it occur now.”

According to him, the secret to the relative financial stability witnessed in Nigeria lies in the smooth coordination and collaboration among the financial safety-net participants. For example the NDIC he said, is a member of the Financial Services Regulation coordination Committee (FSRCC) an organ established by the CBN to strengthen regulation and supervision in the financial system. This kind of collaboration is supported by principle 4 of the IADI Core principles for effective deposit insurance systems (DIS), which reinforces close coordination of activities and information sharing, on an ongoing basis.

When he spoke to newsmen on the sideline of the workshop, the NDIC boss said the program in very important because it is an avenue of sharpening skills of insurance practitioners in Africa. It is a forum that equips them with skills and tools to think ahead, plan ahead and take necessary measures to forestall possible systemic financial crisis he explained.

“Discovering potential risk early enough and nipping it in the bud is important, but when crisis gets out of control, it is the duty of deposit insurers to find appropriate solution. One of the solutions that we have adopted recently in Nigeria is the bridge bank resolution mechanism. This has also been adopted in many jurisdictions. It seeks to protect depositors and engender confidence in the financial system,” Ibrahim told Journalists.

Following from the above, Kevin N.Amugo Director, Financial Policy and Regulation Department of CBN in discussing, “Crisis management, recovery and the role of financial safety-net players,” explained that the assignment of powers and responsibilities among these players is country-specific. This refers to the need to design homegrown policy and legal framework.

To operate effectively he said, the safety-net players require an effective legal framework to drive Prudential regulation and supervision, stressing that there are ongoing discussion to include the legislature among financial safety-net players given the recourse to state treasury in crisis management (including bail-out) activities and the role of the legislature in approving public expenditure.

Stakeholders are in agreement with the fact that information sharing by relevant agencies as well as suitable legal framework for bank supervision as highlighted above, are part of Basel Core Principles for effective banking supervision.

Corroborating the idea of being prepared, Amugo said, “authorities should have tool for early detection and resolution of potential threats to financial system stability. “Policy makers need to institute effective crisis management arrangement to address the build-up of vulnerabilities in a timely manner. The question for all of us as policy makers are not whether there will be crisis, but rather, when?

On collaboration, he confirmed that the CBN Act established the FSRCC, as an inter-agency committee of regulators and supervisors in the financial services industry and that all safety-net players indentified earlier are members of the FSRCC.

“The mandate of the FSRCC include co-ordinating the supervision of financial institutions and eliminating information gap encountered by any regulatory agency in its relationship with any group of financial institutions,” Amugo clarified.

 

Leading the IADI-ARC

This year’s ARC workshop is the 5th of its kind hosted by the NDIC. The Corporation first held the workshop in 2005, and subsequently held it in 2008, 2011, 2012, and now in 2018.

The election of Ibrahim marks the second time that Nigeria will lead the IADI-ARC. The immediate past MD/CE of the Corporation, Alhaji Ganiyu Ogunleye was earlier elected as Chairperson of the body.

In his address at the Four Points By Sheraton Hotel Lagos, venue of the workshop, Ibrahim told participants that public confidence plays important role in sustaining financial system stability; hence the need for regulators/Deposit insurers to be proactive in dealing with emerging risks that could lead to financial crisis.

The NDIC as one of the resolution authorities in Nigeria he stated has adopted different resolution mechanisms in resolving failure of distressed deposits taking financial institutions in the country. These include: deposit pay-out; purchase and assumption; open bank assistance; assisted mergers and bridge bank. Through these he observed, NDIC had so far closed 52 deposit money banks, out of which 49 are currently in liquidation while the remaining are involved in litigations challenging the revocation of their licence by the CBN. In case of other Deposit-taking financial institutions, a total of 187 micro-finance banks and 42 primary mortgage banks are currently in liquidation, he added.

However, these are not without challenges. Ibrahim said the absence of investment options other than government instruments pose a challenge to the corporation.

“This posture is the same in most African countries and is attributable to the depth of our domestic financial markets with limited range of financial instruments and products” he stated. There is need to deepen domestic financial markets he believes. The NDIC boss said the corporation also faces challenges posed by some inadequacies in the extant laws establishing the NDIC. As a result of this, he disclosed that an amendment bill is currently before the national assembly, which if passed would address most of the issues in line with IADI specifications.

The election of the NDIC boss was a unanimous decision of the body following the expiration of tenure of the Chairperson and former Chief Executive Officer of the Deposit Protection Corporation of Zimbabwe, Mr John Chikura. According to members, the unanimous decision to elect the NDIC Boss was in recognition of his achievements, requisite knowledge and experience in the Deposit Insurance System (DIS) which they believe will impact positively on the other members from Africa. They expressed optimism in his qualities and wealth of experience to effectively provide desired leadership for the ARC. With the election of Ibrahim, the secretariat of the body effectively relocates to Nigeria until the end of his tenure.

Also elected as the ARC Vice-Chairman during the AGM was Mohamud A. Mohamud, the Chief Executive Officer of Kenya Deposit insurance corporation (KDIC). The AGM also discussed other important issues relating to the growth of the DIS in the African Region and financial system stability.

Updates from African countries that recently established DIS as well as those currently in the process of setting up the scheme were also presented at the forum. Apart from Nigeria, the host country, other nations in attendance at the AGM include Ghana, Kenya, Zimbabwe, Uganda, Swaziland, Rwanda and the West Africa Monetary Union Deposit Protection Board (WAMUDPB) based in Senegal.

Umaru Ibrahim was earlier elected unopposed to take the reserved seat of the Africa Regional Committee on the Executive Council of IADI at its 12th AGM and 2013 Annual Conference held in Buenos Aires, Argentina. In recognition of the NDIC’s outstanding contributions toward the development of the association and deposit insurance practice in Africa as a whole, Alh. Ibrahim was re-elected into the IADI Executive Committee for another term of three years at the 2016 Annual General Meeting (AGM) of the association held in Seoul, South Korea.

It is against this background that the NDIC became the training hub for IADI member countries in the African Sub-Region. Therefore, the recent accreditation of the NDIC Academy as a training service provider for its staff and the banking industry by the Council of the Chartered Institute of Bankers (CIBN) did not come as a surprise.

One thing that had given impetus to the phenomenal growth of DIS was the formation of the International Association of Deposit Insurers (IADI) with headquarters in Switzerland which currently comprises 83 member countries from 77 jurisdictions. The association was established in May 2002 as an the umbrella body of deposit insurance agencies worldwide for knowledge and experience sharing through international cooperation, research and guidance on matters related to deposit insurance for members.

 

Cross-boader crisis management

Cross-border issues are treated in IADI Core principle 5. For instance, the IADI Secretary -General, Mr.David Walker in explaining essential criteria under this principle said, “in circumstances where a deposit insurer is responsible for coverage of deposits in a foreign jurisdiction, or where more than one deposit insurer is responsible for coverage in a jurisdiction, bilateral or multilateral agreements exist to determine which deposit insurer ( insurers) is (are) responsible for the reimbursement process, setting levies and premiums, and public awareness.”

In his presentation titled: “Cross-border Arrangements for Systemic Crisis management, “identified liquidity, solvency, market shocks, malfeasance, business continuity and other factors as different shapes and forms in which a crisis can come.

Walker noted that a wide range of cross-border arrangements have been established at the individual member level. One of such is the need to conduct cross-border crisis simulation and develop regular information exchange in normal times to allow for rapid sharing of information in times of difficulty.

In the quest for financial stability, he believes that the importance of preparedness cannot be over emphasized. Citing the case of Lehman Brother’s failure which occurred a day after one of the IADI’s workshops about a decade ago, Walker said, “the deposit insurer should have in place effective contingency planning and crisis management policies and procedures, to ensure that it is able to effectively respond to the risk of, and actual bank failures and other events.”

In the second presentation during the technical session, a consultant from Augusto & Co, Mr Jimi Agbobine advised deposit insurers to consider investment in international bonds that are guaranteed by the government, while ensuring that investments can repay depositors their lost monies.

In his own submission, former ARC Chairman, John Chukura disclosed that ARC membership is increasing and that his vision is for ARC to be the biggest bloc inside IADI as a global umbrella for deposit insurers. Chukura was full of appreciation to members for their commitments to the ARC success and support during his tenure.

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