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Introduction

In this interview, Bello Hassan, Managing Director/CEO, Nigeria Deposit Insurance Corporation (NDIC), speaks with Jide Akintunde, Managing Editor, Financial Nigeria publications, on the stability of the Nigerian financial market, changes to the NDIC Act, and the outlook of the banking sector.

Jide Akintunde (JA): The Nigerian banking sector has remained stable and resilient since the major regulatory interventions by the Central Bank of Nigeria (CBN) during the global financial crisis. What role has the NDIC been playing in ensuring the banks remain safe and sound?

Bello Hassan (BH): Taking you back a bit on the first part of your question, anytime there is a systemic bank failure in the financial sector, the CBN and NDIC jointly play intervention roles in ensuring stability in the system. This effort is enshrined in the relevant laws of both institutions, and even within the Financial Services Regulation Coordinating Committee (FSRCC) framework. We work complementarily to promote public confidence and ensure financial system stability.

Additionally, the NDIC, in line with its mandate as a risk minimiser, continues to ensure the safety and soundness of banks by minimising risks within the banking sector through proactive measures, such as risk assessment, early intervention in troubled institutions, among others. The NDIC is also saddled with other mandates, namely deposit guarantee, bank supervision, failure resolution, and bank liquidation, which instill public confidence in the banking sector.

NDIC provides deposit guarantee to depositors of all the insured financial institutions in operation, including 35 Deposit Money Banks (DMBs), 880 Microfinance Banks (MFBs), 35 Primary Mortgage Banks (PMBs), five Payment Service Banks (PSBs), and 30 Mobile Money Operators (MMOs) as of the end of 2023. This guarantee instills confidence in the banking system by assuring depositors that their funds are protected up to a certain limit in the event of bank failure. By doing so, NDIC helps maintain depositor confidence, which is essential for financial stability.

In terms of bank supervision, NDIC works closely with the CBN to ensure that banks operate prudently and adhere to regulatory requirements. Through on-site examinations, off-site monitoring, and risk assessments, NDIC identifies potential risks and vulnerabilities within the banking sector. In 2023, the CBN and NDIC jointly conducted Risk-Based Supervision (RBS) of 32 DMBs, Risk-Based examination of 98 MFBs and Risk-Based examination of six PMBs, as allotted by the CBN. In collaboration with the FSRCC, NDIC also conducted consolidated risk-based examinations of six financial holding companies (HoldCos) in 2023. Furthermore, the Risk-Asset Examination of 32 DMBs were jointly conducted by the CBN and NDIC in 2023. Also, the off-site surveillance of 35 DMBs, 34 PMBs, 880 MFBs, 30 MMOs, and five PSBs was conducted by NDIC. This examination enables NDIC to contribute to the early detection and mitigation of systemic risks, thereby promoting the safety and soundness of banks.

Furthermore, in cases of distress or failure, NDIC is responsible for implementing effective resolution strategies to mitigate systemic risks and minimise disruptions to the financial system. Not too long ago, the licenses of 183 insured financial institutions comprising 179 MFBs and four PMBs were revoked. As we have done in previous years, NDIC adopted relevant resolution options to manage the affected institutions in line with its mandate.

NDIC's role extends to bank liquidation, where necessary, to wind down insolvent institutions in a transparent and orderly manner. This process involves the realisation of assets to reimburse depositors and creditors, thereby facilitating the orderly exit of failed banks from the market. As of today, NDIC is managing the liquidation process of 650 insured financial institutions and has cumulatively paid N5.03 billion to 133,696 depositors of MFBs in-liquidation, N340.61 million to 2,625 depositors of PMBs in-liquidation, and N8.28 billion to 444,193 depositors of DMBs.

JA: But despite the general sense of banking stability, there are banks that have failed in the microfinance and primary mortgage bank subsectors recently. Size seems to be critical for institutional safety in the banking sector. Is this the case, and are there other factors that make the MFBs and PMBs more susceptible to risks?

BH: Size does indeed play a role in institutional safety within the banking sector as the limited scale of operations of MFBs and PMBs means that they operate within constrained resource environments, with smaller capital bases and narrower profit margins. This size constraint can limit their ability to absorb losses and diversify risks, thereby increasing their vulnerability to failure. However, size is not the sole determinant. There are other inherent causes of bank failure, which can be endogenous or exogenous.

Compliance with regulatory standards is paramount for the stability of any financial institution, regardless of its size. Other causes of instability are weak corporate governance and the nature of operations of banks, in terms of the risk profile and business operations of the customers.

Additionally, exogenous factors such as economic downturns, regulatory changes, and socio-political instability can also trigger vulnerabilities of a financial institution. For instance, the performance and growth of small and medium-sized enterprises (SMEs), which are often the target clientele of MFBs, can be influenced by economic downturns, regulatory changes, and access to credit. Any adverse developments in SME performance can directly impact the asset quality and profitability of MFBs.

Furthermore, the attitudes of savers and depositors towards MFBs and PMBs can affect their stability. Depositors in these institutions may have limited financial literacy and awareness of depositor protection schemes, leading to a lack of confidence in the institutions and heightened sensitivity to perceived risks. Negative depositor sentiment can trigger depositor runs and undermine the liquidity and solvency of MFBs and PMBs.

MFBs and PMBs also face limitations in raising capital and diversifying their depositor base, which are critical for strengthening their financial resilience. Unlike commercial banks that have access to various capital-raising instruments and sophisticated funding sources, MFBs and PMBs often rely heavily on deposits for funding. This overreliance on a single funding source can expose them to liquidity risks and constrain their ability to expand operations and invest in risk management measures.

Addressing these challenges, however, requires a multifaceted approach, including enhancing regulatory oversight, promoting financial literacy, and strengthening risk management practices. All of which the NDIC is actively addressing with the aim of fostering a more resilient and inclusive financial sector that better serves the needs of all stakeholders.

JA: Would you like to elaborate further on the macroeconomic and industry risk factors that raise regulatory concerns at NDIC?

BH: At NDIC, we closely monitor a range of macroeconomic and industry risk factors that have significant implications for financial stability and depositor protection. On the macroeconomic side, we are concerned about high inflation. Persistent high inflation erodes the purchasing power of consumers, leading to reduced savings and increased financial strain on individuals and businesses. This can impact loan repayment capacity and asset quality, posing risks to banks' balance sheets.

Slow economic growth is yet another factor as it limits revenue generation opportunities for businesses, dampening credit demand and investment activity. Banks may face challenges in expanding their loan portfolios and profitability amidst weak economic conditions.

Then there is the depreciation of our currency, which increases foreign exchange risks for banks with exposure to foreign currency-denominated assets and liabilities. Fluctuations in exchange rates may impact asset valuations, liquidity, and solvency of banks.

We also have concerns regarding volatility in the stock market and fluctuations in capital flows. Sudden outflows of capital or sharp declines in stock prices can disrupt financial markets and pose systemic risks to banks and other financial institutions. Not to forget global economic conditions as we are in a ‘global village’. World events such as global recessions, sovereign debt crises, or geopolitical tensions can have indirect effects on our domestic banking system.

Within the banking industry, the NDIC is vigilant to risk factors such as fraud. Thankfully, the number of reported fraud cases in 2023 declined by 23.40 per cent to 132,057, from 172,396 in 2022, indicating a steady decline since 2021. Asset Quality, Liquidity Ratio, and Capital Adequacy Ratio are also indicators we monitor closely. With regard to these, the Nigerian banking sector has continued to maintain its resilience. At the end of 2023, the asset quality improved, as Non-Performing Loans (NPLs) ratio declined and remained below the regulatory threshold of 5 per cent; Liquidity Ratio continued to be above the minimum prudential limit of 30 per cent while Capital Adequacy Ratio remained within the prudential range of 10.00 – 15.00 per cent. These positive developments were driven by effective joint supervision of the CBN and NDIC, which led to enhanced risk management practices by banks.

JA: Would you like to identify the more recent successes of NDIC in executing its regulatory and supervisory mandates, especially since your leadership of the institution?

BH: Under my leadership, Nigeria Deposit Insurance Corporation has achieved significant milestones in fulfilling its mandates. One area where we have seen notable success is in ensuring the timely reimbursement of depositors' funds in distressed banks. During the revocation of licenses for microfinance and primary mortgage banks in May 2023, NDIC ensured prompt reimbursement of insured deposits within a record time of less than seven days, surpassing regulatory requirements and enhancing depositor confidence.

In terms of debt recovery and dividend payments, we have made considerable progress in maximising asset recoveries from failed banks. We have intensified our efforts in enhancing the recovery of non-performing loans, thereby increasing the dividend payouts to uninsured depositors and other creditors. In 2023 alone, liquidation dividends of N3.80 billion were paid to depositors of 23 DMBs in-liquidation while the sum of N177.45 million was paid to uninsured depositors of MFB in-liquidation. Also, the sum of N50.63 million was paid to uninsured depositors of PMBs in-liquidation, and NDIC has cumulatively paid N1.28 billion to 1,033 creditors of 49 DMBs in-liquidation at end-December 2023.

The NDIC Act 2023 has significantly improved the Corporation’s legal and regulatory frameworks, providing a platform for NDIC to rethink and redesign its operational framework consistent with its broad mandate of risk a risk minimiser.

Additionally, NDIC has developed and obtained approvals for various policy frameworks, including Maximum Deposit Insurance Coverage (MDIC), Target Funding Ratio, Differential Premium Assessment System (DPAS), and ESG and Sustainability Policy, thereby enhancing regulatory clarity and alignment with international best practices. The recertification of NDIC on three International Organisation for Standardisation (ISO) standards, namely ISO 27001 (Information Security Management System), ISO 20000 (IT Service Management System), and ISO 22301 (Business Continuity Management System) by the Management System Certification Body (MSECB), underscores the Corporation’s commitment to operational excellence and quality management practices.

Capacity building has been another priority area for NDIC under my leadership. We have invested in training programmes, workshops, and seminars to enhance the skills and expertise of our staff and stakeholders. We have provided technical assistance and capacity-building programmes to deposit insurance agencies in other African countries and beyond, fostering knowledge sharing and regulatory cooperation in financial stability efforts.

Also, the Corporation's active engagement in international fora, such as the International Association of Deposit Insurers (IADI)-Africa Regional Committee, underscores its leadership role in shaping global deposit insurance practices. We have also conducted capacity building programmes for the judges of various categories of courts. This is with a view to enhancing their understanding of the Corporation’s role and responsibilities in ensuring the stability of the financial system and to aid expedited dispensation of justice in cases involving banks in-liquidation.

Our commitment to excellence and innovation has been recognised through various organisational awards and accolades. We performed well at the third edition of the Federal Government’s National Service Innovation Competition during its first outing. NDIC’s entries – Presentli and SafeZone – came second and fifth, respectively. Also, the Corporation, in 2023, was awarded overall first in the Ethics and Compliance Score Card Rating by the Independent Corrupt Practices & Other Related Offences Commission (ICPC); 2023 Best Performing Ministerial SERVICOM Unit (MSU) in the Team “C” Category for Ministries, Departments, and Agencies (MDAs) by the SERVICOM Office of the Presidency; and “Best use of Social Media” and “Excellence in Adopting Emerging Technologies” for a Federal Regulatory Agency from the Nigeria Technology Awards (NiTA). These awards underscore our dedication to upholding high standards of service delivery in fulfilling our mandate to safeguard depositors’ funds and maintain financial stability.

JA: It is commendable that NDIC has been paying claims on deposit insurance to depositors in banks that have failed. Is there any scenario in which the Corporation may struggle to meet up with demand for this legal obligation?

BH: As noted earlier, NDIC timely pays depositors all verified claims to ensure their interests are protected. Besides immediately reimbursing depositors with their deposits up to the coverage limit when a bank fails, we ensure that all the remaining balances of their deposits are paid, subject to recovery from liquidation of the failed bank. This, in addition with other aspects of our mandate, enhances public confidence, which is a critical factor that underlies banking and financial system stability in any economy.

There have been several instances when all depositors of failed banks were fully reimbursed 100 percent of their deposits, whether or not the balances were above the coverage limits. There are, however, other scenarios where full reimbursement beyond the coverage level has been limited due to a host of other factors, including (i) inability to fully realise the assets of the failed banks to pay depositors due to unspeakable practices of stakeholders. These include asset stripping by failed bank officials, compromise of title documents, very poor quality of risk assets and other investments. (ii) Legal impediments against recovery of loans from debtors, including weak legal framework (which is being addressed by the review of NDIC Act) that have led to delays in resolving cases of bad debts. (iii) Litigation by Managements and shareholders of a few failed banks, challenging the revocation of their licenses by the CBN, which delays liquidation processes. (iv) Poor information management systems, and the associated poor documentation of activities of some of the failed banks, were not supportive to the realisation of their assets and payment to depositors.

In addition, there are instances where the NDIC has adequate funds from recovery to pay depositors but could not proceed with the reimbursement due to the action of the other parties. For instance, payment of uninsured sum to depositors of over 80 MFBs was put on hold as their Managements have not rendered all required documents and other information needed by the NDIC to prepare deposit registers for payment to depositors. Also, some depositors, perhaps due to low balances in their accounts, are apathetic towards submitting their claims for payment.

Apart from these few instances, NDIC has been up and doing in paying claims on deposit insurance to depositors in banks that have failed. Payment of insured sum has been prompt, while recoveries have increased through effective and efficient conversion of the assets of closed banks to cash, recovery of risk assets (loans and advances), sale of physical assets, and realisation of investments. These achievements are aided by the review of the NDIC Act, which empowers the Corporation in achieving its mandate, and through the efforts of Management and staff in several aspects of NDIC’s activities.

JA: The new NDIC Act has come under some criticism. In what specific sense is the NDIC Act 2023 an improvement over the previous Act that it repealed.

BH: The enabling Acts of any institution, wherever in the world, are naturally reviewed in response to developments that render the existing Acts obsolete. The reactions to these developments that lead to the reviews are usually viewed as criticisms. In the words of Jeff Bezos, “if you can’t tolerate critics, don’t do anything new or interesting.” And as you know, criticism, especially constructive criticism, leads to improvements, and can be a powerful tool for growth and improvement in an organisation. It helps to identify weaknesses that might have been missed by understanding the shortcomings, which can address and improve the system in general.

The current NDIC Act 2023 repealed the NDIC Act 2006, when the Nigeria Deposit Insurance Corporation (Repeal and Re-enactment) Bill was passed into law by the National Assembly and assented by the President on 26 May 2023. The new Act aims to strengthen NDIC as a deposit insurer, address operational challenges, and enhance delivery on its broad mandate of deposit guarantee, bank supervision, distress resolution, and bank liquidation.

The major highlights of the NDIC Act 2023 centre on alignment with International Best Practices for Deposit Insurance Systems as enshrined in the IADI Core Principles for Effective Deposit Insurance Systems, 2014; modifications to the relationship between NDIC and CBN in alignment with Banks and Other Financial Institutions’ Act (BOFIA) 2020; and the miscellaneous amendments.

A few notable areas where the NDIC Act 2023 seeks to improve practice include, but are not limited to, the following:

i.    Operational autonomy: Subsections (3), (4), and (5), under Section ,1 have been introduced to guarantee the independence of NDIC and to accord operational autonomy to the Corporation in the discharge of its functions in accordance with international best practice, particularly IADI Core Principle (CP) 3, which recommends that a deposit insurer is to be insulated from interference by external parties and should have operational independence.

ii.    Conflicts of interest minimization: Section 12 brings the governance and staffing framework in compliance with IADI CP 3, which requires that members of the governing body and employees are subject to high ethical standards and comprehensive codes of conduct to minimise the potential for real or perceived conflicts of interest.

iii.    Improved capitalisation: Section 16 provides for an upward review of the Corporation’s Authorised Share Capital from N5 billion to N50 billion.

iv.    Specialised funds for different categories of deposits insured by the NDIC: Against the old practice of maintaining a single Deposit Insurance Funds (DIF) for deposits of all insured financial institutions, Section 17(a)-(e) of the new Act establishes different and specific DIFs for deposits of different categories of banks. These include DIF for Deposit Money Banks and Mobile Money Operators, Non-Interest Deposit Insurance Fund (NIDIF) for Non-Interest Banks and Windows, Special Institutions Insurance Fund (SIIF) for Microfinance Banks and Primary Mortgage Banks, the Non-Interest Special Institutions Insurance Fund (NISIIF) for non-interest Microfinance and Primary Mortgage Banks, and Payment Service Bank Insurance Fund (PSBIF) for Payment Service Banks.

v.    Application of global standing instruction scheme and statutory right to funds of obligors in insured institutions: The new provisions of Section 27(1) and (2) were introduced to enable the Corporation take benefit of the Central Bank’s Global Standing Instruction (GSI) scheme for obligors of insured institutions in Nigeria. This provision will aid NDIC in the realisation of non-performing loan portfolios of the failed or failing insured institutions, upon which the Corporation is a liquidator or in the rescue of a failing insured institution.

vi.    Reduction of pay-out time of insured deposits and insured deposit transfer: In line with IADI CP 15, Section 28(1a) of NDIC Act 2023 now provides for a shorter timeline for payment of insured deposits from 90 to 30 days. The timeline of 30 days has also been adopted for insured deposit transfer to another insured institution, under Section 28(5).

vii.    Widened powers of NDIC as liquidator: Section 55(2) of the extant Act has been enhanced to broaden the capabilities of the Corporation in its role as liquidator. It grants the Corporation, acting as the liquidator, all powers of a liquidator under the Act as well as such other powers of a liquidator under the Companies and Allied Matters Act 2020 (CAMA) – giving primacy to the powers of a liquidator under the NDIC Act. However, subsection (2) retains the language of appointment as a “Provisional Liquidator”.

viii.    Strengthened special powers to expedite liquidation activities for NDIC: Sections 63 to 71 have been introduced to create an enabling legal framework for aiding and expediting asset realisation and pursuing debtors of failed banks. The powers include, but are not limited to, power to take interim custody of movable and immovable property of an obligor of a failed insured institution (Section 63); power to require the freezing of the bank account of an obligor of a failed insured institution (Section 64); and special powers in bankruptcy (Section 65), which confers the Corporation with special powers in pursuing recoveries from a defaulting debtor.

JA: What is your outlook for the banking sector and the economy in general?

BH: The global economic recovery is projected to continue in the medium- to long-term, amid downside risks. The optimism is on the back of greater-than-expected resilience demonstrated in the United States, major emerging market and developing economies (EMDEs), as well as fiscal support in China.

In addition, global headline inflation is estimated to moderate downward from an estimated 6.8 per cent in 2023 (annual average) to 5.8 per cent in 2024. The faster-than-expected decrease in core inflation in major economies, with long-term expectations, may endure on the back of favourable global supply developments, diminishing effects of energy supply shocks, and improving labour market conditions.

According to the International Monetary Fund, in its January 2024 World Economic Outlook forecast, the projected global growth for 2024 remains at 3.1 per cent, compared with the 2.9 per cent earlier estimated in its October 2023 WEO edition. The improvement is stemmed from favourable conditions in the United States, China, and major EMDEs. In contrast, the latest growth forecasts for South Africa and Nigeria fell below the earlier projections of the IMF in October 2023.
 
Notwithstanding, the macroeconomic outlook for Nigeria for 2024 and 2025 appears firmer relative to the preceding years as Nigeria is set to achieve better economic outcomes on the back of the macroeconomic reforms of the current administration of President Bola Ahmed Tinubu in the next few years. This is expected to support the financial and prudential performance of the banking sector and shape the regulatory and supervisory approaches to financial services regulation over the medium- to long-term.

The prevailing economic challenges notwithstanding, the Nigerian banking sector is expected to remain resilient, safe, and sound on the back of the collaborative efforts of NDIC, the CBN, and other components of the financial safety participants, especially members of the FSRFCC, to strengthen prudential regulation and supervision. With this cooperation, financial risk management of the banks is expected to improve, with positive implication for financial system stability in Nigeria.

Also, with the passage of the NDIC Act 2023, the Corporation is further empowered to deliver on its mandate, protect depositors, improve public confidence in the banking system, and promote financial stability.