Address Delivered by Alhaji Umaru Ibrahim, mni, Managing Director and Chief Executive Officer, Nigeria Deposit Insurance Corporation, at the 1st International Conference and Doctoral Colloquium 2015,hosted by Bayero University Kano.
Distinguished Participants, Ladies and Gentlemen.
- I would like to congratulate Bayero University, Kano for organising this thought provoking conference with the theme “Development in Africa: Perspectives, Issues and Trends”. It gives me a great pleasure to be the Lead Speaker and to present a paper titled “The Role of Deposit Insurance in Enhancing Financial Inclusion and Promoting Financial System Stability in Africa” in a gathering of highly distinguished academics and participants at this Conference. I wish to thank Bayero University, Kano for making me part of this very important occasion.
- My remarks today will focus on Deposit Insurance System (DIS) in Nigeria and how it helps the African economy by promoting financial inclusion and ensuring the safety and stability of the financial system. Globally, banks dominate the financial system. . As you might be aware, Nigerian banks are opening branches all over the world engaging in businesses as well as partnering with other global banks. In order to set the tone, I will like to discuss the current state of banking systems across Africa as well as recent developments in the banking system and an insight into global deposit insurance.
Deposit Insurance and Financial Safety Net
- There are three (3) basic components of safety net during normal times. The 3 components are: lender of last resort , effective regulation and supervision and deposit Insurance. During crisis, the additional component is solvency provider of Last resort.
- While the lender of last resort function is the exclusive responsibility of central banks, DIS established as risk minimisers are heavily involved in effective supervision and deposit guarantee. A DIS is a financial guarantee to depositors, particularly the small ones in the event of a bank failure. It is a depositor protection scheme usually supported by insured institutions themselves and administered either through a government-controlled agency; a privately held one or one that is jointly owned and administered.
- Distinguished guests, the effectiveness of the DIS in enhancing financial stability was severely tested during the recent crisis. Globally Countries are rethinking the redesign of their DISs so as to build a safer financial systems.
- Deposit insurers now have increased regulatory and supervisory powers. These include the power to resolve Significantly Important Financial Institutions (SIFIs) ,. The mandates and responsibilities of deposit insurers are also evolving with more of them assuming responsibilities beyond a paybox function to include strengthened risk assessment duties and more involvement in the resolution process.
Banking and Access to Finance in Africa
- Africa as a continent has been the most underdeveloped in terms of finance. The continent is economically and culturally diverse, with different regional economic blocs. Based on 2012 World Bank supported assessment, Africa’s financial sector continues to be less developed compared to other emerging market. This study revealed that Africa countries perform weakest on the average in terms of financial system assess, efficiency and stability, in another study by ADB (2015) it was stated that African Banks are as competitive as those in Latin America,& Caribbean and OECD Countries. But depthless and less penetrated as it lags behind in innovations and technology.
- The report also stated that banking systems in Southern and Northern Africa are generally more developed than those in Eastern and Western Africa, driven by the more matured systems in South Africa and Mauritius in the case of Southern Africa and Tunis and Egypt in the case of Northern Africa. In particular, across the sub regions, North African banks are much deeper and efficient but they do not generally surpass the sub-regions in terms of innovation and competitiveness. Most regulatory and supervisory authorities in Africa are still using Basel I framework while other countries are implementing Basel III.
- Distinguished guests, the importance of banking and finance in an economy cannot be overemphasis. Effective banking systems expand financing opportunities for both large and small companies, while also supporting financial sector development and the expansion of access to funding among low-income retail customers and microenterprises. Beyond funding, banks also provide essential financial services to individuals and enterprises including the collection, custodianship, safeguarding of deposits and the provision of payment services. All African financial systems are dominated by banks, which remain at the core of financial sector development efforts in the continent.
- According to the Global Financial Inclusion indicators of the World Bank, 24% of adults in SSA have a formal account, ranging from less than 5% in the Central African Republic, Democratic Republic of Congo, Guinea, and Niger, to 54% in South Africa and 80% in Mauritius. With an estimated population of 170 million people, Nigeria’s rate of financial exclusion is currently at 39.7%, according to the 2012 survey conducted by Enhancing Financial Innovation and Access (EFInA).
Economic Growth and enhancing Financial Inclusion through Mobile Banking
- Financial inclusion can be regarded as the delivery of financial services at affordable costs to sections of disadvantaged and low-income segments of society. Financial inclusion is no longer a policy choice today but an inevitable policy. And, banking is a key driver for financial inclusion among several delivery mechanisms/channels.
- Financial authorities in most developing and transitional economies have in the past put a lot of emphasis on bringing formal financial services to poor who lacked adequate access. Over 60 countries have initiated financial inclusion reforms in recent years. A number of emerging economies, such as India, Malaysia and Mexico, have developed and adopted coordinated policies on financial inclusion, as key strategies to enhance economic growth and alleviate poverty. Increasingly, world leaders have realised the importance of financial inclusion, as a critical ingredient for a stable economic growth and poverty reduction. This has led to the formation of forums such as the Alliance for Financial Inclusion (AFI) and the G-20’s Global Partnership for Financial Inclusion.
1AFI is a member-based organization bringing together regulators from about 80 countries in the world to further financial
- Distinguish ladies and gentlemen, mobile payment system refers to payment services operated under financial regulation and performed from or via a mobile device. It is a convenient, secure and affordable way to send money to friends and family as well as make payments for goods and services using mobile phones. Mobile phones are an attractive way to promote financial inclusion given their extensive presence in the population and their global reach. Mobile phones can serve as a virtual bank card, point of sale terminal (POS), ATM or internet banking terminal. Mobile phones are recognised as the single most transformative solution for economic development by providing access to capital and information to the world’s unbanked at a very reasonable cost. The proof of this statement can easily be ascertained from the success of Kenya’s M-Pesa.
- M-Pesa reached about 40% of the adult population of Kenya in only two years, two-thirds of all households in Kenya used the service in four years. M-Pesa is the first mobile and most successful banking solution launched based on the Mobile Service Led Model in 2007 by the telecom operators Safaricom and Vodafone in Kenya. M-Pesa has made it possible to pay for anything in seconds with just a mobile phone and a registration with Safaricom, Kenya’s mobile service giant. The service allows customers and businesses to pay for anything without needing cash, a bank account, or even a permanent address.
African and Regional Effort to Enhance Financial Inclusion
- The African policymakers and regulators, as members of the AFI, met in Zanzibar, Tanzania on 15 February 2013 to launch and hold the inaugural Leaders Roundtable Meeting of the first African Mobile Phone Financial Services Policy Initiative (AMPI). The purpose of AMPI is to establish or extend existing Mobile Financial Services (MFS) policy and regulatory frameworks in order to expand penetration in to the African market. The AMPI comprises of central banks from the African region as members. The NDIC is an associate member whose membership was supported by the CBN.
- In Nigeria, the CBN, on behalf of the Federal Government of Nigeria, designed the National Financial Inclusion Strategy (NFIS) and it was subsequently launched by the President of the Federal Republic of Nigeria on 23rd October, 2012. The CBN had also developed a National Financial Literacy Framework that is now being implemented through a well structured approach, comprising Financial Literacy Steering Committee, Financial Literacy Implementation Committee and Consumer Education Division of CBN. Other laudable achievements include the introduction of Regulatory Framework for Mobile Payments Services and Agent Banking as well as Consumer Protection Framework. The CBN issued a regulatory framework for the operations of Mobile Payments Services in Nigeria in June 2009 and granted licenses to 21 Mobile Money Operators in Nigeria, comprising 14 non-bank operators and 7 bank operators as at Nov 2015.
Role of Deposit Insurance in Promoting &Restoring Financial System Stability
- Distinguished guests, a deposit insurer promotes financial system stability through
i) Deposit Guarantee
ii) Effective Banking Supervision
iii) Distress Resolution
iv) Bank Liquidation
v) Payment of Liquidation Dividend to Depositors and other eligible claimants such as General Creditors and shareholders
vi) Payment of Liquidation Dividend to General Creditors
I will discuss these functions in the next section.
- Distinguished ladies and gentlemen, the broad roles of deposit insurance during crisis are to:
i) Prevent disruption to the payment system
ii) Maintain and reinforce public confidence
iii) Support solvent banks with temporary liquidity problem
iv) Provision of expertise for resolution and liquidation of failed banks
Similarly, the specific responses of deposit insurance during crisis are to:
i) Increase deposit coverage level
ii) Reduce the role of co-insurance arrangements
iii) Take steps to ensure timely access to insured deposits
iv) Increase number of guaranteed institutions
v) Expand range of deposit products covered
vi) Implement systemic stabilization measures, like establishment of bridge banks and advising the monetary and fiscal authorities to introduce blanket guarantee.
Functions and Roles of the NDIC in Financial System Stability and Enhancing Financial Inclusion
- The role played by the Corporation in promoting financial system stability and enhancing financial inclusion is deeply engraved in its numerous functions. The NDIC is mandated to insure all deposit liabilities of licensed banks in Nigeria. Bank supervision is jointly carried out by both CBN and NDIC. Deposit insurance is vital to financial inclusion because the poor need assurance that their deposits are safe and available at any times they desire. Sound and reliable deposit-taking institutions, backed by deposit insurance, are therefore essential for financial inclusion. This helps in attracting the unbanked to formal banking services. The NDIC as a risk minimizer enhances financial inclusion and promotes financial stability through its supervisory oversight and payment guarantee.
- In the case of consumers with bank accounts, deposit insurance provides guarantee of specified amount and in so doing enhances confidence in the banking system. That helps in attracting the unbanked to formal banking services. In particular, microfinance banks are recognised as one of the most useful tools for enhancing financial inclusion by the active low-income earners. NDIC provides guarantee to depositors of this category of banks and in so doing promotes patronage of the sub-sector. One of NDIC’s critical yardsticks of success is the extent of satisfaction of large number of small depositors.
- It is important to note that, the NDIC is extending the deposit insurance coverage to mobile money subscribers, with each subscriber guaranteed up to the sum of N500,000 (as applicable to depositors of DMBs) in the event of a bank failure. This is to further engender public confidence in the system thereby promoting financial stability and enhancing financial inclusion.
- As a bank supervisor, the Corporation provides consumer protection through ensuring that banks’ affairs are conducted in a safe and sound manner. This mandate has been effective in enhancing depositors’ confidence in the banking system which has had the effect of reducing the risk of bank runs and limiting contagion from banks in distress. By minimizing or preventing incidences of bank runs, the NDIC enhances macroeconomic and financial system stability.
- It should be noted that coverage level has to be limited to avoid moral hazard. While an unduly large coverage could encourage excessive risk-taking, a too low coverage limit could undermine the credibility of the scheme. I believe this particular design consideration of DISs helps in improving banking system stability. In 2006, the Corporation extended deposit insurance coverage level of N100,000to depositors of MFBs and primary mortgage banks (PMBs) which was increased in 2010 to N200,000 while that of depositors of DMBs was increased from N200,000 in 2006 to N500,000 in 2010. The new coverage level was used to settle claims of depositors of the 103 closed MFBs in 2010. The Corporation has just concluded a study on the review of the maximum coverage level to ensure that it is adequate and effective in promoting financial system stability.
- The NDIC is established to be a risk minimizer with other broad mandates that also include bank supervision, failure resolution and bank liquidation. Bank supervision in Nigeria is a shared responsibility of the CBN and NDIC. Effective supervision is carried out through on-site examination and off-site surveillance. The two institutions are also actively pushing for the implementation of Basel II/III by the Nigerian banks.
- It is important to consider the significance of the Bridge-Bank mechanism adopted by the NDIC and the CBN. As at December 2011, the total Deposits of Banks in the Nigerian banking system was N11.371 trillion while N2.984 trillion and N816.29 billion were the total deposits of the 8 intervened banks and the 3 Bridge Banks, respectively. A total of 6,667 jobs in the affected banks were saved. That intervention made it possible for banks to continue lending to the private and power sectors. The impact of this NDIC/CBN regulatory intervention cannot be overemphasized with respect to enhancing financial and economic stability.
- In addition to the existence of deposit guarantee of all deposits in the rescued banks, the Federal Government of Nigeria also declared that no bank would be allowed to fail. This intervention, ladies and gentlemen, is a classic example of the additional component that I mentioned earlier which comes into effect during times of crisis. The Federal Government acted as solvency provider of last resort in this case.
- Distinguished participants, the Corporation has always been at the forefront of risk based supervision. In order to ensure that banks are monitored and regulated based on the risk they take, the Corporation adopted the differential-premium assessment system which tied the premium paid by banks with their risk profile. Furthermore, the Corporation reduced the premium basic rate to 3.5 basis points in support of Financial Stability Fund (FSF) established in 2010 by the Banker’s Committee. Premium calculation is now based on the risk profile of each bank.
- Financial inclusion, as we are all aware, is a major challenge to the Nigerian banking sector. The Corporation has therefore embarked on enhanced public awareness initiatives on benefits of banking and deposit insurance through several channels including the development of a new robust interactive website and translation of NDIC pamphlets to 3 major Nigerian languages. This is to attract the unbanked and further reinforce banking system stability while at the same time guaranteeing deposits, irrespective of the type of bank (whether DMB, PMB or MFB).
Banking in Africa and Nigerian Deposit Insurance Reforms – The Way Forward and Potential Research Areas for Academics
- Given the growing internationalization of banking and the recent experience of the global financial crisis, the African regulatory environment needs to better incorporate mechanisms for crisis prevention and resolution. In addition, there remains scope for better domestic regulation of the financial sector in the provision of clear supervisory guidance to help improve domestic banks’ risk management and stress-testing frameworks. These initiatives should also include regional shocks into stress-test scenarios. There is also a need for regulatory authorities to address constraints on the ability of banks to better hedge their balance sheet risks by helping to improve local markets for bonds and related hedging instruments.
- The regulatory environment for preventing potential financial system crises, bank failures and resolution regimes for financial institutions will require greater efforts and regional coordination to better address potential spill-over effects.
- African regional integration is weak, hence the need to strengthen the existing several currency unions in Africa, the Common Monetary Area and the CFA zones in francophone Africa. This is because of their important implications for financial services and trade. To researchers, despite the importance of this, there is relatively little empirical research on the issue.
- Given the rising prevalence of cross-border banking, African countries will need to consider establishing bank-specific supervisory colleges for Africa’s largest cross-border banks. They will also need to strengthen national and regional cross-border supervisory practices.
- African banks should aim to implement the Basel Core Principles for Effective Banking Supervision as they relate to cross-border activities. The standards, developed by the Basel Committee, constitute non-legally binding minimum standards mainly aimed at internationally active banks. It contains 29 principles focusing on powers, responsibilities and functions of supervisors of banks as well as on prudential regulation and bank supervision.
- We need to continuously supervise Nigerian SIFIs based on the recently designed regulatory framework for monitoring them.
- Our academic and financial training institutions have to step up by developing programs at bachelors and masters level that cater for the highly complex, demanding and very progressive banking industry. To this effect, the NDIC has introduced two (2) DIS Courses in Nigerian Universities titled “Fundamentals of DIS” and “Practice of DIS in Nigeria”. While these are taught courses, careful review of their contents will reveal a rich source of research areas for academia.
- Finally, we need more co-operations within African states and global institutions like Basel Committee, FSB, IADI etc. for enhanced regulation of SIFIs and effectiveness of our DIS.
- Distinguished ladies and gentlemen, I wish to express our sincere appreciation to all our resource persons who were very carefully selected based on their immense experience and who will share their knowledge and experience on financial and banking reforms especially in these trying moments of our economic transformation.
- With these brief remarks, distinguished participants, I once more, congratulate you for organising this conference.
- Thank you for your attention.