Economic and financial experts have described the increase in the maximum deposit insurance coverage levels of deposit taking financial institutions by the Nigeria Deposit Insurance Corporation (NDIC) as a proactive measure to balance the risk component of Nigerian banks and enhance confidence in the banking system while ensuring financial stability.
The NDIC 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 experts said the measure will help ameliorate potential consequences of the exchange rate unification – Naira devaluation, high inflation rate with an attendant high interest rate as well as recapitalisation of the banks by the Central Bank of Nigeria (CBN).
With the latest review, the deposits coverage will provide full coverage for 98,98 per cent of DMB customers compared to the previous cover of 89.2 per cent; 99.27 per cent of MFB deposits as against the previous level of 98.76 per cent and 99.34 per cent of PMB deposits compared with the previous cover of 97.98 percent, while the new coverage will see 99.99 per cent of PSB deposits covered.
The review will also see the value of deposits covered by DMB deposit insurance increase 25.37 per cent compared to the current cover of 6.31 per cent of total value of deposits. Also the value of MFB deposits covered by deposit insurance will increase to 34.43 per cent compared with 14.38 per cent of total value of deposit, currently covered.
Similarly, the value of PMB deposits covered by deposit insurance to will increase to 21.04 per cent compared with 10.77 per cent of total value of deposit, currently covered, while the review would increase the value of PSB deposits covered by deposit insurance to 43.10 per cent of the total value deposits from the current cover of 40.60 per cent.
MD/CEO of the NDIC whilst announcing the review, noted that, the revised deposit insurance coverage has balanced the NDIC’s goals of deposit protection and financial system stability with incentives for depositors to practise market discipline and prevent banks from unnecessary risk-taking and moral hazard.
Hassan said the new policy decision takes immediate effect on all banks. He said the new policy will enhance supervision that would reduce the likelihood of bank failures, effective bank resolution frameworks and other funding arrangements provided by the NDIC Act No. 33 of 2023.
Addressing journalists yesterday, the NDIC MD said the new decision will not affect the premium paid by banks. “We transited to a risk-based premium. Each bank’s premium is going to be based on its risk perception. If a bank manages its risks properly, it will not pay more than the normal 35 basis points,” he stated at the media briefing on Thursday.
“Consideration was given to ensure that the coverage was limited but adequate enough to protect a large number of depositors and credible enough to prevent the destabilising effect of bank runs. The adoption of the revised maximum deposit insurance coverage is supported by the Corporation’s current funding, represented by the balances in the various Deposit Insurance Funds (DIFs), expected annual premium collection, enhanced supervision that would reduce the likelihood of bank failures, effective bank resolution frameworks and other funding arrangements provided by the NDIC Act No. 33 of 2023,” he pointed out.
Economic policy expert, Dr Justine Amase said the policy is long overdue. The former commissioner of information in Benue State said the NDIC has proactively taken a step to build confidence by raising the insurable limit of bank deposits such that there will be certainty in the system at international and local levels. “That confidence will also enhance financial inclusion,” he stated, adding that without increasing the insurable percentage, there is a bigger risk to the depositors to the extent that if there is any bank instability, a large proportion of their deposits will not be covered.
“For the banks, this will build confidence in their operation. Customers can feel more confidence dealing with them and sustaining their relationship. For the depositors, the uncertainties surrounding bank failure and instability would have been reduced, while it also helps the regulators to prevent bank failures,” Dr Amase said.
Other financial experts who commended the NDIC for taking the decision point to the fact that the international financial system (Nigeria inclusive) has faced many risks since the COVID-19 outbreak of 2020, compounded by the Russia/Ukraine conflict. “Though not directly, the risks have come to create financial instability both locally and internationally. These are the challenges that have a spillover effect on the local financial industry,” he said, pointing to the 2023 banks’ failure in the US and elsewhere.
The Nigerian banking is currently faced with three major risks: the risk arising from exchange rate unification which reduced the value of the Naira by about 90 per cent and triggered the erosion of capital of Nigerian companies; inflation which picked in 2022 and has eroded purchasing power of the consumers of manufactured goods which in turn affect the capital of the companies to repay their loan obligations to the banks, with potential impact on the banks’ non-performing loans.
The sector is also faced with the risk orchestrated by recapitalisation directive from the Central Bank of Nigeria. The experts say bank customers could be panicking over the possible collapse of some banks that could not meet the CBN’s recapitalisation requirement.
“That means there is potential for distress due to higher non-performing loans. That will be significant because the inflation rate in Nigeria is still over 30 per cent. So, there is a looming risk. Even the benchmark interest rate may still be adjusted upward. And that will trigger higher banks’ lending rates. The risk for the banking sector from failure of bad loans is very high,” Dr Amase stated.
The NDIC’s mandate of Deposit Guarantee is a critical component of depositors’ protection, as it guarantees the payment of deposits up to a maximum set limit in the event of bank failure.
Also speaking, president of Capital Market Academics of Nigeria, Prof. Uche Uwaleke, has applauded the Nigeria Deposit Insurance Corporation (NDIC) for the upward review of maximum deposit insurance coverage for deposit financial institutions.
Uwaleke described the move as a welcome development against the backdrop of elevated inflation and current Naira depreciation.
He said the increase would be a confidence booster in the country’s banking sector as well as enhance financial inclusion.
”The increase in the maximum deposit insurance coverage level from N500,000 to N5 million for Deposit Money Banks and from N200,000 to N2 million for Microfinance Banks is a welcome development.
”This is against the backdrop of elevated inflation and Naira depreciation,” Uwaleke said.
The deposit guarantee covers depositors of all deposit-taking financial institutions licensed by the Central Bank of Nigeria, which includes Deposit Money Banks (DMBs), Microfinance Banks (MFBs), Primary Mortgage Banks (PMBs), Non-Interest Banks (NIBs), Payment Service Banks (PSBs) and subscribers of Mobile Money Operators
Meanwhile, the head of Financial Institutions at Agusto & Co, Ayokunle Olubunmi, applauded the move by NDIC, saying it is in tune with current realities in the country. He noted that the review “means should a bank collapse, the average payment to affected depositors is N5 million for Banks and N2 million for MFB.
“The increase in the deposit insurance coverage is imperative given that inflation and persistent naira devaluation have eroded the value of the hitherto insured amount. The development will also strengthen the confidence in the Nigerian financial services sector, particularly the banking and Micro-Finance industries. This will support financial inclusion activities in the country.
“However, the premium paid by these deposit taking financial institutions might increase in line with the insured amount. This could further increase their operating expense and exert pressure on their profitability.”
On his part, the managing director/CEO of Arthur Steven Asset Management Limited, Mr Olatunde Amolegbe, noted that the move by the NDIC was appropriate and a positive one that saw more depositors funds covered.
Affirming his belief that regulations must change or keep up as the environment changes, Amolegbe said, “if you look at the mandate of NDIC it is meant to protect the financial system from damage by providing confidence to depositors and users that their investment are safe and that they are covered in the case of bank failure.
“Since the N500,000 level was set some years back it is clear that the landscape and other parameters within the system have changed significantly. For instance, we now have PSBs in the system serving a large number of people that weren’t there before.
“Recent CBN figures have also shown that money supply has risen significantly in the last few years just as inflation has also increased astronomically. All of this amongst other factors means the number of depositors covered by the previous levels has fallen below international standards that could engender confidence within the system.
“The NDIC data has shown that depositors’ coverage level had fallen to about 89 per cent of depositors but the new increase to N5 million will increase the covered depositors’ figure to about 96 per cent which is quite reassuring for anyone using the banking system. I therefore think this is an appropriate proactive move by the NDIC. If there is any sector that might have any qualms with this move it will be the banks who will have to bear the elevated risk premium payments.”
On his part, the Chartered stockbroker & investment banker, Mr. Charles Fakrogha stated that the policy is long overdue, saying, in a situation that somebody has over N50 million and if anything happens to the bank, the customers will be paid N500,000. Fakrogba said, NDIC initiative is in the right direction and this is going to attract more depositors, having confidence in the financial system.
According to him, this also shows that the government of the day is doing everything possible to ensure that we have stability in our financial system.
He called on the government to ensure that people have confidence in the banking system, saying, “with this initiative, I am very confident that if I have N10 million in any bank or financial institution in the country, and anything happens, I am sure of getting N5 million out of my money.
“This is a step in the right direction. But at the same time, what I will employ NDIC and CBN to do, because these are the two major regulators in that sector, to ensure that the banks are properly regulated, not only the commercial banks, merchant banks, mortgage banks, microfinance banks, that they are properly regulated so that we have people who are fit to run the institutions.
“This is very key as it will translate to good corporate governance. We should not wait for the banks to have issues before stepping in. We need to be proactive. Let us see all what can be done to ensure that our financial institution does not get to that situation where the government will intervene. So, the only way they can do this is through proper regulatory function.”
A bank customer, Chukuma Derek noted that the review was positive as more customers are now covered. Another bank customer and a banking agent, Johnson Okanlawon noted that, with more people having accounts with MMOs and PSB, it had become apparent to ensure that the depositors’ funds are adequately protected. He stated that the upward review is to help engender increased financial inclusion in the country.
