Against the concerns over rising currency circulation outside the banking system, attributable to low confidence in the financial system, finance experts have said that the revised insurance coverage could see the return of hoarded cash to banks, thereby improving their performance in the medium to long term, especially amidst ongoing banking sector recapitalisation efforts.
The Deposit Insurance Corporation (NDIC) recently announced an increase in the maximum deposit insurance coverage for banks in the country, a move that has been commended by industry watchers and bank customers.
The upward review of the coverage limit, which was announced by the Managing Director and Chief Executive of NDIC, Mr Bello Hassan, will see the coverage for depositors in deposit money banks (DMB), microfinance banks (MFB), primary mortgage banks (PMB), as well as payment system banks rise to N5 million and N2 million while the pass-through coverage for mobile money operators was raised to N5 million.
The recent adjustment in Nigeria NDIC deposit insurance protection coverage has elicited commendations from analysts, who believe it is a pivotal step towards protecting depositors and instilling confidence in the banking industry, thereby encouraging depositors to reverse the increasing trend of currency outside banks (COB).
Available data from the Central Bank of Nigeria (CBN) show that currency outside banks (COB) grew by 151 percent to N3.63 trillion in March 2024, compared to N1.45 trillion in March 2023.
This, according to analysts from CSL Research, indicates that 93.75 of the currency in circulation (CIC) was outside the banking system as of March 2024, a significant increase from 57.14 percent in January 2023, following a few months of implementing the CBN’s Naira redesign programme.
Historically, COB has averaged about 84.5 percent of the total CIC from 1960 to March 2024, contributing to the weak pass-through of monetary policy to macroeconomic indicators like inflation.
The different coverage limits for DMB, PMB, PSBs and MFBs have widened depositors’ coverage (89.20 percent for DMBs, 97.98 percent for MFBs and 98.76 percent for PMBs as of 2023).
On average, analysis by Proshare Research show that more than 90 percent of depositors were insured, with less than 10 percent uninsured before the newly announced review of maximum deposit insurance on May 2, 2024 (allocating N5 million for DMBs, N2 million for MFBs, PMBs and PSBs and N5 million for mobile money operators (MMOs)
According to Professor Uche Uwaleke of the Institute of Capital Market Studies (ICMS), the increase in deposit insurance coverage is primarily designed to protect depositors in the event of bank failure and, so, has the potential to boost confidence in the banking industry.
“Today, the CBN is concerned about the rising currency circulating outside the banks, which is largely due to waning confidence. So, the performance of banks in the medium to long term will improve with more cash returning to the banks on account of this timely development against the backdrop of the ongoing banking sector recapitalisation.
“A larger coverage level reduces the likelihood of bank runs, thereby strengthening financial system stability. I do not doubt that the overall economic impact will be positive. Don’t forget, the last time this was reviewed for DMBs from N200,000 to N500,000 was in 2011 and the impact of inflation and Naira depreciation over the years have made another review imperative.,”Prof. Uwaleke said.
Reviewing the NDIC’s new risk protection coverage, according to analysts, suggests that about 99 percent of bank depositors are covered. However, this also implies that 98.98 percent of Nigerians do not have more than N5 million in their accounts.
These depositors also make up only 25.37 percent of DMB deposits, while 1.02 percent of DMBs have deposits above N5 million and 74.63 percent of uncovered deposits.
“Observers believe it is commendable to see an improvement in the spread of depositors covered by the new deposit protection threshold but the implication for many deposits largely loaned to industrial enterprises is that they would remain unprotected beyond N5 million.
“The differential premium assessment system in computing insurance premiums should ensure that banks bear an appropriate share of risk, aligning with prudent banking practices and safeguarding the integrity of the financial sector amidst evolving economic dynamics,” Proshare Research stated in an emailed note.
However, analysts worry that regardless of the risk-based approach, the adjustment will increase the absolute value of NDIC charges and hit banks’ profits together with the Cash Reserve Ratio (CRR) (at 45 percent), AMCON charges (0.5 percent of assets and contingents), and Standing Lending Facilities (SLF) (at 24.75 percent MPR + 100bps).
Overall, analysts believe that the marginal increase in deposit insurance premiums, anchored on the differential premium assessment framework, is unlikely to significantly impact banks’ bottom lines.
Banks’ declaration of huge profits after tax means the incremental cost incurred through insurance premiums will probably remain manageable.
With only five percent of Nigerians having over N500,000 in their bank accounts, according to Nigeria’s Minister of Finance, Mr Wale Edun, the previous maximum deposit coverage (N500,000 for DMBs and PSBs, N200,000 for MFB and PMBs) seemed insufficient to cover a large proportion of depositors.
The remaining deposits belong to high net-worth individuals who are mostly consulted and notified before distress turns contagious. There has not been any bank collapse since 2019 as the CBN has embarked on a forbearance mechanism which swiftly intervenes in sight of fiscal distress.
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