The history of Nigeria Deposit Insurance Corporation (NDIC) has its origin in the report of a committee set up in 1983 by the Board of Central Bank of Nigeria (CBN), to examine the operations of the banking system in Nigeria. The Committee in its Report recommended the establishment of a Depositors Protection Fund. Consequently, the Nigeria Deposit Insurance Corporation was established through the promulgation of Decree No. 22 of 15 th June 1988.
This was part of the economic reform measures taken by the then government, to strengthen the safety net for the banking sector following its liberalization policy and the introduction of the 1986 Structural Adjustment Programme (SAP) in Nigeria.
The phenomenal increase in the number of banks from 40 in 1986 to 120 in 1992 led to:
- Increased Competition amongst banks leading to sharp practices
- People of questionable integrity becoming bank owners and managers
- Inadequate Manpower
- The coming together of strange bedfellows due to the licensing requirement that banks maintain adequate geographical spread.
All these led to serious breakdown in Corporate Governance and Boardroom squabbles. The unpredictable policy environment, downturn in the economy and political upheavals at the time, also exacerbated the difficult situation the Corporation found itself in. The banking industry was therefore, already in distress by the time the Corporation commenced operations in March 1989. NDIC operated under a difficult terrain at the time and was immediately saddled with the management of distress in the banking industry, to avert the impending systemic crises and its resultant consequences. Some of the measures undertaken by the Corporation at the time, to manage distress in the interest of the depositors and the System included:
- Moral suasion; continuous interaction with bank managers/owners
- Imposition of Holding Actions on distressed banks to restrict operations and encourage self-restructuring – about 52 distressed banks had Holding Actions imposed on them at that time.
- Rendering of Financial Assistance to banks; In 1989 alone, NDIC in collaboration with the CBN granted facilities to the tune of N2.3 billion to ten banks with serious liquidity problems
- Take over of Management and Control of 24 distressed banks between 1991 and 1996.
- Acquisition and restructuring of seven (7) distressed banks which were handed over to new investors in 1999 and 2000
- Implementation of Failed Banks Decree No. 18 of 1994. At the end of 1995, about one out of every two banks in Nigeria was distressed. The Decree was intended to assist distressed banks recover their classified assets and punish the malpractices that contributed to the distress. As at June 1996, the Corporation had recovered about N3.3 billion.
Rationale for the Establishment of Deposit Insurance Scheme in Nigeria
- The deposit insurance scheme was established in Nigeria in 1989 with the promulgation of an enabling legislation, Decree No. 22 of 1988.
- There were at least five major reasons for establishing a formal bank deposit insurance scheme in Nigeria. The first was the lesson of history connected with the experience of prior bank failures in Nigeria. In the 1950s, many small depositors suffered untold hardship as twenty-one (21) out of the twenty-five (25) indigenous banks operating in Nigeria closed doors.
- The establishment of the Corporation was also informed by the approach which some other countries adopted to ensure banking stability. For example, Czechoslovakia which was the first country to establish a nation-wide deposit scheme in 1924, used the scheme to revitalize the country’s banking system after ravages of the First World War. In addition, the scheme served to encourage saving, by increasing the safety of deposits and ensuring the best possible development of banking practice in that country. Similarly, the United States of America (USA) established the Federal Deposit Insurance Corporation (FDIC) in 1933 in response to a banking collapse and panic.
- Also, the Structural Adjustment Programme (SAP) embarked upon by government in 1986 was aimed at deregulating the economy in the direction of market-determined pricing. It was envisaged that since deregulation would involve the liberalisation of the bank licensing process, there would be a substantial increase in the number of licensed banks to be supervised by the CBN. The establishment of an explicit deposit insurance scheme with supervisory powers over insured institutions was expected to complement the supervisory efforts of the CBN. Indeed, since the establishment of the Corporation in 1989, it has been possible for both institutions (CBN and NDIC) to carry out routine and special examinations of licensed banks more frequently than before, despite the increase in the number of banks. The banks are now examined more frequently prior to the establishment of the Corporation.
- Finally, prior to the establishment of the Corporation, government had been unwilling to let any bank fail, no matter a bank’s financial condition and/or quality of management. Government feared the potential adverse effects on confidence in the banking system and in the economy following a bank failure. Consequently, government deliberately propped up a number of inefficient banks over the years, especially those banks in which state governments were the majority shareholders. Thus, government established the Corporation to administer the deposit protection scheme on its behalf and to serve as a vehicle for implementing failure resolution options for badly managed insolvent banks.