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Thursday,
May 14, 2020 / 5:18 AM / By NDIC / Header Image Credit: Twitter; @NDICNigeria
These
FAQs are meant to facilitate the understanding by all stakeholders,
particularly the depositors, of the nature and condition of deposit insurance
system and its implementation by the Nigeria Deposit Insurance Corporation.
Question 1: What Is
Deposit Insurance?
Answer: Deposit Insurance is a system established by the Government to
protect depositors against the loss of their insured deposits placed with
member institutions in the event a member institution is unable to meet its
obligations to depositors. Deposit Insurance ensures that the depositor does
not lose all his money in the event of a bank failure. It also engenders public
confidence in, and promotes the stability of, the banking system by assuring
savers of the safety of their funds. Deposit Insurance makes a bank failure an
isolated event, hence it eliminates the danger that unfounded rumours will
start a contagious bank run.
Question 2: Why is Deposit Insurance necessary?
Answer: Financial institutions differ from most industrial and commercial
enterprises in that they depend mainly on deposits mobilized from the public
for their working capital and are highly leveraged. If a financial institution
is unable to meet its obligation to depositors due to operational problems or
business failure, anxious depositors may cause a run on the bank as well as
other healthy institutions.
The stability of the financial system and social order in general would also be
at risk. Moreover, most depositors have small deposit amounts and therefore
cannot cost-effectively collect and analyze information on the financial
institutions they do business with. The government has therefore established a
deposit insurance mechanism, under which the NDIC is empowered to provide
protection for small depositors and contribute to financial and social order.
Question 3: How does
deposit insurance maintain financial system stability?
Answer: Financial institutions play an important role in regulating the supply
and demand of capital and promoting economic development. They accept deposits,
which are a highly liquid form of debt, yet most of their assets are tied up in
long-term illiquid vehicles. Financial institutions therefore have a hard time
realizing their assets for cash, when their business runs into problems, so depositors
may lose confidence, triggering a bank run.
The limited liquidity of financial
institutions also encourages a perception among depositors that making an early
withdrawal is the only way to get their money back. This sentiment can
exacerbate a bank run and also have a chain reaction that leads to runs on
other banks as well. Deposit insurance system is usually established to prevent
this by providing assurance of deposit repayment to the great majority of
depositors. In doing so, the system also prevents systemic risk and ensures the
stability of the financial system.
Question 4: Who
administers deposit insurance system in Nigeria?
Answer: The NDIC, a government - owned institution, established by Decree
22 of 1988 and now replaced with Nigeria Deposit Insurance Act No. 16 of 2006,
is the agency empowered to administer the deposit insurance system in Nigeria,
thereby protecting depositors.
The Corporation provides incentives for
sound risk management in the Nigerian banking system, and promotes as well as
contributes to the stability of the financial system. The NDIC manages two
deposit insurance funds, the DIF for universal banks and the Special Insured
Institutions Insurance Fund (SIIF) for licensed Microfinance Banks (MFBs) and
Primary Mortgage Institutions (PMIs).
Question 5: Is Deposit
Insurance The Same As A Conventional Insurance?
Answer: No. Deposit insurance is different from conventional insurance in
several respects. Some of the differences include the following:
a.
Different Purposes
The
purpose of deposit insurance is to protect the rights and interest of
depositors, maintain credit order, and promote the sound development of the
financial industry. It is designed to serve the public welfare with no
profit-earning motive. Conventional insurance companies providing property and
life insurance, on the other hand, are commercial types of insurance.
b.
Different Beneficiaries
Under
the deposit insurance system, insured institutions pay insurance premiums to
the NDIC, which uses these funds to protect the depositors of the insured
institutions. If an insured institution goes out of business or is unable to
pay its deposit liabilities, the NDIC will reimburse the depositors of the
failed institutions by law. The insured institution therefore is different from
the beneficiaries (the depositors). With property and life assurance policies,
the insured party can designate itself or another party as the beneficiary.
When an insurance incident occurs, the insured party or beneficiary of a
property or life assurance will claim compensation from the insurance company.
The insured party can also be the beneficiary.
c.
Different Functions
With
property and life insurance, claims are paid by the insurer after an insurance
incident. Deposit insurance claims are also paid after an insurance incident.
However, the deposit insurance system in Nigeria takes active measures to keep
such insurance incidents from occurring. When a financial institution
experiences trouble, the NDIC uses the Early-Warning System, Off-site
monitoring of insured institutions, assistance and other measures, to help the
insured institution return to sound operations. It is when the troubled insured
institution does not respond favourably to the measures that the insurance
incident is deemed to have taken place and claims are thereafter paid.
d.
Different Policy Role
Deposit
insurance also plays a policy role as part of the financial safety net. In
addition to fulfilling deposit insurance responsibilities toward the insured
institutions which are unable to perform their deposits payment obligations or
are non-viable, the deposit insurance system helps the government to establish
mechanisms for withdrawing problem financial institutions from the market in
order to effectively prevent the occurrence of systemic risk.
e.
Different Conditions for Participation
In
deposit insurance, best practice dictates that participation should be
compulsory. Participation in conventional insurance contract is generally
voluntary.
f.
Different Coverage Levels
Under
deposit insurance, best practice prescribes that the amount of coverage should
be limited, whereas in the case of conventional insurance, coverage may be
full.
Question 6: Who are the
Insured Institutions Under The Deposit Insurance Scheme in Nigeria?
Answer: Insured institutions are all deposit-taking financial institutions
licensed by the Central Bank of Nigeria (CBN) such as
Membership
is compulsory as provided under the NDIC Act No 16 of 2006.
Question 7: How can the
public find out if a financial institution is insured by the NDIC?
Answer: To identify insured financial institutions, look out for an NDIC decal
(sticker) displayed in the head offices and branches of all insured
institutions or call our Help Lines 09 460 1280; and 09 4601032 or visit our website
Question 8: Which
financial institutions are not covered by the NDIC?
Answer: Financial institutions not covered by the NDIC include:
Question 9: What types
of deposits are insured by the NDIC?
Answer:
All deposits of a licensed bank or any other financial
institution shall be insured with the Corporation with the exception of the
following:
i.
Insider deposits, that is, deposits of staff including directors of the insured
institutions;
ii.
Counterclaims from a person who maintains both deposit and loan account, the
former serving as a collateral for the loan; or
iii.
Such other deposits as may be specified from time to time by the Board
NDIC
deposit insurance covers the balance of each eligible account, Naira-for-Naira,
up to the insurance limit, including principal and any accrued interest up to
the date of the insured institution's closure.
Question 10: Whose
Deposits Does The NDIC Insure?
Answer:
The NDIC insures bank deposits of natural persons as
well as legal entities, no matter whether they are from Nigeria or from any
other country.
Question 11: How Does
The NDIC Assess Premium and Who Pays For The Insurance Premium?
Answer:
Participating institutions are required to pay annual
premiums to the deposit insurance system administered by the NDIC. The premium
is assessed based on participating institutions’ total assessable deposit liabilities
as at 31st December of the preceding year. The assessable deposit liabilities
are total deposits with the exception of some deposits listed in Section 16 of
the NDIC Act 2006.
The
NDIC Act 2006 (Section 16(2)), has given the Corporation the power to adopt any
premium assessment system to reflect developments in the industry in particular
and the economy in general.
Question 12: How Does
The NDIC Protect The Deposit Insurance Fund?
Answer:
The NDIC protects the Deposit Insurance Fund (DIF) by
investing the Fund in safe but liquid financial instruments such as Treasury
Bills, Federal Government Bonds and instruments of similar nature.
Question 13: Does The
NDIC Finance Its Operations From The DIF?
Answer:
No, the Corporation finances all its overhead and
administrative expenses from its investment income. The main sources of income
of the NDIC are the proceeds from investment of the DIF in securities issued by
the Federal Government.
The
DIF is used only for paying insured deposits when an insured institution fails
as well as for granting financial assistance to deserving participating
institutions.
Question 14: Does the
Supervisory Functions of the NDIC duplicate that of the Central Bank of Nigeria
(CBN)?
Answer:
No. There is no duplication of supervisory functions,
rather what exists is collaboration. For instance, there is a framework whereby
the Corporation collaborates effectively with the Central Bank of Nigeria
through a joint committee on supervision at which both organizations are
represented at very senior level.
Secondly,
in order to avoid duplication of supervisory functions, the two institutions
share banks for examination purposes on an annual basis and when such
examinations are concluded, the examination reports are exchanged. The
supervisory efforts of the two institutions are sometimes conducted jointly
when the need arises. Indeed, the involvement of the NDIC in bank supervision
has reduced the examination cycle from about once in two years to once a year.
The
Corporation supervises banks basically, to protect depositors. Banking
supervision is a core function of the Corporation as it seeks to reduce the
potential risk of failure and ensures that unsafe and unsound banking practices
do not go unchecked. It also provides the oversight required to preserve the
integrity of, and promote public confidence in, the banking system. The Corporation
carries out its supervisory responsibilities through on-site examination and
off-site surveillance of insured institutions.
Question 15: How Does
The NDIC Protect Bank Depositors Against Loss?
Answer:
The NDIC protects bank depositors against loss
through:
a.
Deposit Guarantee
This
is perhaps the most significant and distinct role of the Corporation. As a
deposit insurer, the NDIC Act 2006 guarantees payment of deposits up to the
maximum insured sum (N500,000.00 to a depositor in universal banks and N200,000
to a depositor in MFBs and PMIs) in the event of the failure of a participating
financial institution. Balances in all deposit accounts held in the same right
and capacity by a depositor in all branches of the closed insured institution,
net of outstanding debts, are aggregated to determine the maximum insured
amount.
b.
Bank Supervision
The
Corporation supervises banks to protect depositors, ensure monetary stability
and effective/efficient payment system as well as to promote competition and
innovation in the banking system. Banking supervision seeks to reduce the
potential risk of failure and ensures that unsafe and unsound banking practices
do not go unchecked. It also provides the oversight functions required to
preserve the integrity of and promote public confidence in the banking system.
c.
Failure Resolution
The
Corporation is empowered to provide financial and technical assistance to
failing or distressed banks in the interest of depositors. The financial
assistance can take the form of loans, guarantee for loan taken by the bank or
acceptance of accommodation bills. On the other hand, the technical assistance
may take the following forms: take-over of management and control of the bank;
change in management; and/or assisted merger with another viable institution.
Question 16: How Does
The NDIC Establish The Ownership Of A Deposit?
Answer: The
NDIC relies on deposit account records kept by a failed bank as well as on the
proofs presented by the depositor.
Question 17: As a
Depositor Must I Apply For The Deposit Insurance Coverage?
Answer:
No, a depositor does not need to. Under the Nigeria
deposit insurance system, eligible deposit accounts in insured institutions are
automatically insured at no charge to any depositor.
Question 18: When is
Insured Deposit Payable?
Answer:
Deposit insurance is payable only when an insured
institution has been closed as a result of action taken by the Central Bank of
Nigeria.
Question 19: What
Methods of Payment Does the NDIC Use In Meeting Its Obligations To Depositors
of a Failed Institution?
Answer:
The NDIC could pay depositors of a failed insured
institution either by transfer to a financial institution with instructions to
effect payments to depositors on its behalf, or directly by means of issuing
cheques up to the insured limit which will be collected at the NDIC's
designated centres, usually the closed bank's offices.
Payments
could also be made through Purchase and Assumption, whereby a healthy bank
assumes part or all of the deposit liabilities of a failed insured bank.
Question 20: What Does a
Deposit Transfer involve?
Answer: The
NDIC transfers an amount equivalent to the total insured deposits of a failed
insured institution to another financial institution under an agreement which
will enable depositors of the failed insured institution to collect their
entitlements from the financial institution.
Question 21: How are the
Insured Sums Collected?
Answer:
Insured sums are collected by depositors on filing
their claims through the completion of relevant forms provided by the
Corporation. In addition, they have to furnish the Corporation with account
documents such as unused cheque books, old cheque stubs, passbooks, fixed
deposit certificates, etc. Each depositor would also be required to identify
him/herself with a valid identification document such as National ID Card,
Driver's Licence or International Passport. After verification of ownership of
the account as well as the account balance, the depositor would be duly paid
the insured sum by cheque or deposit transfer through an Agent Bank or Acquiring
Bank.
Question 22: What Should
A Depositor Of A Failed Bank Do If He or She Loses Passbook or Savings
Documents?
Answer:
The depositor would be required to present a Police
report along with a sworn affidavit duly certified by the Court. The depositor
would also be required to identify himself/herself with a valid identification
document like National ID Card, Driver's Licence or International Passport
Question 23: Can a
Depositor Leave His/Her Deposit With The Transferee Institution?
Answer: Yes,
a depositor, if he/she wishes, can open an account with the transferee
institution for the full amount or part of his/her deposit.
Question 24: Does The
NDIC Protect The Interests Of Creditors Or Shareholders Of A Bank?
Answer:
The primary mandate of the NDIC is to protect
depositors. However, through supervision to ensure safety and soundness of
banking institutions, the interest of creditors and shareholders are also
protected. In the event of bank failure, creditors and shareholders could be
paid liquidation dividends after depositors had been fully reimbursed.
Question 25: What is
Liquidation Dividend?
Answer:
This is a payment made to depositor of a failed
insured institution in excess of the insured sum. While the insured sums are
paid from the Corporation's Deposit Insurance Fund (DIF) or Special Insured
Institutions Fund (SIIF), liquidation dividends are paid from funds realized
from the sale of the assets and recoveries of debts owed to the failed insured
institution.
Question 26: What is the
Current Insured Limit And Why Is It Limited To A Fixed Sum?
Answer:
The insured limit is currently a maximum of N500,000
for each depositor in respect of deposits held in each insured universal bank
and N200,000 for each depositor in Microfinance Bank and Primary Mortgage
Institutions in same right and capacity. The amount to be reimbursed has to be
definite. Limited coverage is to minimize moral hazard through excessive risk
taking by bank management and depositors. Unlimited coverage could constitute a
perverse incentive for excessive risk-taking.
Question 27: If a Depositor Has an Account in the Main Office of a
Participating Institution And Also At a Branch Office, Are These Accounts
Separately Insured?
Answer:
No. The main office and all branches are considered to
be one institution. Therefore, the accounts would be added together and covered
up to the maximum insured sum.
Question 28: If A Depositor Has Deposit Accounts In Different Insured
Banks, Will The Deposits Be Added Together For The Purpose Of Determining
Insurance Coverage?
Answer:
No. The maximum insurance limit is applicable to
deposit in each of the participating banks. In the case of a bank having one or
more branches, the main office and all branch offices are considered as one
bank. In summary, if a person has many accounts in one bank, all the deposits
are taken together as one account even if the deposits are in various branches
of the same bank. On the contrary, however, if a depositor has accounts in more
than one bank, they are insured independently up to the maximum insured sum per
bank.
Question 29: Is The Insurance Protection Increased By Placing Funds In
Two or More Types of deposit Accounts in the Same Participating Institution?
Answer:
No, Deposit insurance is not increased merely by
dividing funds held in the same right and capacity among the different types of
deposits available. For example, demand, time and savings accounts held by the
same depositor in the same right and capacity are added together and insured up
to the maximum insured sum.
Question 30: If A Husband And Wife Or Any Two Or More Other Persons,
Have, In Addition To The Individually-Owned Accounts Of Each, A Valid Joint
Account In The Same Insured Bank, Is Each Account Separately Insured?
Answer:
Yes. If each of the co-owners has personally signed a
valid mandate card and has a right of withdrawal on the same basis as the other
co-owners, the joint account and each of the individually-owned accounts are
separately insured up to the insured maximum sum.
Question 31: If A Person Has An Interest In More Than One Joint Account,
What Is The Extent Of His Or Her Insurance Coverage?
Answer:
As long as the combination of the joint accounts is
not the same, the account will be insured separately up to the maximum insured
limit. Where the joint accounts are owned by the same combination of
individuals then the accounts will be added and the total insured up to the
maximum insured sum.
Question 32: Are Accounts Held By A Person As Executor, Administrator,
Guardian, Custodian, Or In Some Other Similar Fiduciary Capacity Insured
Separately From His Or Her Individual Account?
Answer:
Yes. If the records of the bank indicate that the
person is depositing the funds in a fiduciary capacity such funds are insured
separately from the fiduciary's individually-owned account. Funds in an account
held by an Executor or Administrator are insured as funds of the deceased's
estate. Funds in accounts held by guardians, conservators or custodians
(whether court-appointed or not) are insured as funds owned by the ward and are
added to any individual accounts of the ward in determining the maximum
coverage.
Account
in which the funds are intended to pass on the death of the owner to a named
beneficiary, are considered testamentary accounts and are insured as a form of
individual account. If the beneficiary is a spouse, child or grand-child of the
owner, the funds are insured for each owner up to a total of the maximum
insured sum separately from any other individual accounts of the owner. In the
case of a Revocable Trust Account, the person who holds the power of revocation
is considered the owner of the funds in the account.
Question 33: When An Account Is Held By A Person Designated As Agent For
The True Owner Of The Funds, How Is The Account Insured?
Answer:
The account is insured as an account of the principal
or true owner. The funds in the account are added to any other accounts owned
by the owner and the total is insured to the maximum sum.
Question 34: Is An Account Held By Either A Company Or Partnership,
Insured Separately From The Individual Accounts Of Shareholders Or Partners?
Answer:
Yes. If the Company or Partnership is engaged in an
independent activity, its account is separately insured to the maximum insured
sum. The term Independent activity means any activity other than one directed
solely at increasing insurance coverage.
Question 35: If A Depositor Has More Than The Maximum Insured Amount As
Deposit In A Closed Bank, Is He Entitled To Any Further Claim For The Amount Of
His Deposit In Excess Of The Maximum Insurance Paid By The NDIC?
Answer:
Yes. In a situation where the amount of depositors' fund in a closed bank exceeds the maximum insured amount, the owners of such
accounts will share, on a pro-rata basis, in any proceeds from the liquidation
of the bank's assets with other general creditors, including the Corporation.
Question 36: Will The NDIC Offset a Deposit Balance held By a Customer
Against The Balance Due On the Loan?
Answer:
The NDIC will offset the balance on a deposit account,
including any uninsured portion, against a loan if the loan and deposit are
held by the same person or persons.
Question 37: Does the Borrower's Obligations to the Institution Continue
After the Institution is Closed?
Answer:
Yes. When acting as Liquidator of a closed
institution, the Corporation is acting on behalf of all creditors of that
institution and its obligation is to collect all loans promptly and efficiently
along with other assets of the institution.
Question 38: What Does Purchase And Assumption (P & A) Mean?
Answer:
Purchase and assumption (P & A) is a merger-type
transaction which involves purchasing the assets of a failed bank and assuming
its liabilities by another insured bank(s).
Question 39: What Does Open Bank Assistance (OBA) Mean?
Answer:
Open Bank Assistance (OBA) is a situation where a
failed insured institution is allowed to continue to operate in the same name
as a going concern. It may involve change in ownership and management of the
bank; injection of fresh funds in the form of equity and/or loan capital; and
re-organisation and overhauling of the bank including rationalization of staff
and branches.
Question 40: What Is A Bridge Bank?
Answer:
This is a situation whereby a failed bank is turned
over to a new bank specifically set up to assume the assets and liabilities of
the failed bank. The bridge bank would permit continuity of banking services to
all customers and fully protect all the depositors and creditors of the failed
bank.
Question 41: How can the public contact NDIC about Questions and
suggestions regarding deposit insurance?
NDIC
has set up the following contact channels to provide customer service to the
public:
For
obtaining quick answers to your questions, call our help-line service: 09 460
1280; and 09 4601032.
Personnel
working in the financial services industry can send comments to NDIC by mail
to: The Managing Director/Chief Executive Officer, Nigeria Deposit Insurance
Corporation, Plot 447/448 Constitution Avenue, Central Business District,
P.M.B. 284, Abuja.
Information
on NDIC and the deposit insurance system can be accessed from our website . You can also submit comments or
questions through the web site.
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