How NDIC mitigates risks in financial institutions
The evolving trends in the global financial system, particularly in payments system and technologies driving them, surely have predisposed financial institutions to several risk factors. There is also the case against best practices, which is closely associated with corporate governance- training and retraining, as well as promulgation of Acts to give legal backing. All over the world, these have been the trends and wherever it is put in place, there have been positive results.
The Nigeria Deposit Insurance Corporation (NDIC), in its mandate of protecting depositors by providing an orderly means of compensation in the event of failure of their insured financial institutions; contributing to financial system stability; and enhancing public confidence, has desired and pursued these virtues in its jurisdiction- Nigeria.
An analysis of the commission’s 2014 yearly showed that it committed more to its objectives insuring all deposit liabilities of licensed banks and such other deposit-taking financial institutions; giving assistance to insured institutions in the interest of depositors; guaranteeing payments to depositors; assisting monetary authorities in the formulation and implementation of banking policy; and pursuing any other measure necessary to achieve the functions of the corporation during the period under review.
For example, the commission held on to its 2011-2015 strategic along with its implementations, to be efficient and effective in the discharge of its mandate under the leadership of Alhaji Umaru Ibrahim.
The nation’s Deposit Insurance Fund (DIF) recorded a 20.88 per cent increase to ₦614.2 billion in 2014 representing ₦106.1 billion increases from ₦508.1 billion in 2013.
The disclosure was contained in the PricewaterhouseCoopers audited yearly report and statement of account of the Nigeria Deposit Insurance Corporation (NDIC) for 2014.
DIF, also known as cumulative premium by insured institutions, is a pool of fund set aside to pay back money or deposits lost due to failure of financial institution and mobilised by insurance payments by banks.
The NDIC report also showed a 3.01 per cent growth in insurance coverage to the total number of depositors of deposit money banks between 2013 and 2014, while the number of depositors fully covered in 23 banks increased by 3.05 per cent from 60.6 million in 2011 to 62.5 million in 2014.
NDIC, in calculating the applicable premium, said it used 40 basis points as the premium base rate before the add-ons for banks under the Differential Premium Assessment System (DPAS) and a flat rate of 50 basis points to compute the premium payable by PMBs and MFBs in 2014.
However, the maximum, minimum and mean rates paid in 2014 were 0.58 per cent, 0.40 per cent and 0.48 per cent compared to 0.60 per cent, 0.45 per cent and 0.50 per cent in 2013, respectively.
The assessed reduction in the maximum, minimum and mean rates paid by banks in 2014 was attributable to the reduction in base rate to 40 basis points, which was aimed at reducing the premium burden on banks as well as the improvement in the risk profile of banks.
NDIC had earlier this year, announced the reduction in the deposit insurance premium rate to DMBs as part of efforts toward contributing to financial system stability, public confidence in the banking industry, as well as the consolidation on the gains achieved by its migration from Flat Rate Premium System (FRPS) to Differential Premium Assessment System (DPAS).
The safety net agency explained that DPAS approach takes into consideration the risk each bank poses to the system and encourages banks to adopt sound risk management practices.
In the same vein, the Special Insured Institutions Fund (SIIF) rose by 23.39 per cent from ₦57.71 billion as at December 31, 2013 to ₦71.21 billion as at December 31, 2014.
Also, the Non-Interest Deposit Insurance Fund (NIDIF) increased by 594.11 per cent from ₦0.017 billion as at December 31, 2013, to ₦0.118 billion as at December 31, 2014.
SIIF and NIDIF, like the DIF for deposit money banks, are also pool of insurance premiums by Microfinance Banks (MFBs) and Primary Mortgage Banks (PMBs) respectively, aimed hedging losses that may be incurred in the case of operational failures.
Meanwhile, out of the 882 MFBs in operation during the period under review, 679, representing 77 per cent, rendered returns to the NDIC, with 203 others, which is 23 per cent, failing the rendition rule.
The inability to obey rules may not be far from the corporate governance issues so far assessed to be bedeviling the sub-sector, alongside weak capital base, poor asset quality, lack of microfinance banking knowledge and experience, high operating costs, scarcity of loanable funds, low literacy level and inadequate Management Information System.
During the year, NDIC, in collaboration with the CBN, carried out the risk assessment of all DMBs as at December 31, 2014, with a view to providing reliable information on the banks’ risk assets quality, adequacy of loan loss provisioning and capital adequacy positions. The objective was to consider the DMBs’ 2013 annual accounts for approval by the CBN.
Both institutions also monitored 15 DMBs with Composite Risk Rating (CRR) of ‘High’ and ‘Above Average’ to determine the level of their implementation of previous Examiners’ recommendations.
The joint CBN and NDIC maiden Examinations of FBN Holding Company Plc, FCMB Group Plc and Stanbic-IBTC Holding Plc were conducted during the year under review.
Furthermore, the joint CBN/NDIC risk-based supervision examination of 15 DMBs with Component Risk Rating (CRR) of ‘High’ and ‘Above Average’ was conducted as at June 30, 2014, while the remaining eight DMBs with CRR of “Low” and “Moderate” were examined as at September 30, 2014, bringing the total number of DMBs examined using the risk-based approach to twenty-three (23).
The examinations were conducted to determine the financial health of the insured institutions, their level of compliance with banking rules and regulations, their risk appetite and the adequacy of their risk management frameworks.
The NDIC, in collaboration with CBN also conducted the Foreign Exchange Examination of the 24 DMBs as at March 30, 2014 and September 30, 2014, to ascertain their level of compliance with foreign exchange laws and regulations as well as the risk based supervision examination of Jaiz Bank Plc and Stanbic-IBTC Non-interest Window as at September 30, 2014.
The NDIC in 2014, in collaboration with the CBN, conducted compliance/risk-based examination of all the 882 MFBs in Nigeria. Out of the 250 MFBs allocated to NDIC, 118 and 132 were examined using the Risk-Based and Compliance approaches, respectively.
With regards to the supervision of Primary Mortgage Banks (PMBs) in the system, NDIC conducted routine examination of three PMBs in 2014, while the decrease in the number of PMBs examined was attributed to the recapitalisation exercise embarked upon by the institutions.
The banking licence of African International Bank Limited, formally revoked by the CBN in 2013, was in January 2014, taken over by NDIC as the liquidator to recover the debts owed the closed bank and realise the other assets of the bank, with over 6,000 loan customers owing a total sum of ₦11.8 billion as at closure.
Though the court cases instituted by the shareholders of Fortune International Bank Plc and Triumph Bank Limited challenging the revocation of their banking licences were still undecided, NDIC continued with the payments of the insured amount to insured depositors of the two banks, which began in August 2011, using Access Bank Plc as the agent bank.
Similarly, the litigation in respect of the revocation of the licence of Peak Merchant Bank Ltd was yet to be resolved as at December 31, 2014. From the foregoing, the total number of closed DMBs increased to 49 in 2014 from 48 in 2013, while the number of banks in-liquidation increased to 46 in 2014 from 45 in 2013. The increase was due to revocation of the operating licence of African International Bank (AIB) Limited by the CBN.
NDIC, during the period under review, commenced the process of extending coverage to the subscribers of Mobile Payment Systems. The draft framework was developed and was being fine-tuned. As part of the process to enhance the quality of the framework, it initiated inquiries from other deposit insurance agencies with regards to “Pass-Through Deposit Insurance Model” framework for the extension of deposit insurance coverage to subscribers of Mobile Payment Systems in their jurisdictions.
Also in the period, NDIC strengthened institutional relationship building aimed at developing and strengthening existing links with its local and international partners. It took advantage of its membership of the International Association Deposit Insurers and engaged in knowledge exchange through various visitations, participation at seminars, workshops and conferences.
Already, there is a mutual cooperation between NDIC and Bank Guarantee Fund, Poland on issues target funding; prompt reimbursement – single-customer view; risk assessment process; stress testing; early warning model; cross border supervision; macro prudential policy; and cross border resolution colleges.
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