1.0   INTRODUCTION

A Non-Interest Bank means a bank which transacts banking business, engages in trading, investment and commercial activities as well as the provision of financial products and services without the conventional interest charges. Such banks may operate either in accordance with or without Shari’ah principles and rules of Islamic jurisprudence.

The establishment of Non-Interest Banks has necessitated the extension of Deposit Insurance coverage to the depositors of such banks in order to provide a level playing field for all deposit-taking financial institutions and ensure that holders of Non-Interest Banking products are adequately protected.

2.0   PUBLIC POLICY OBJECTIVES

The essence of the Framework is to specify the public policy it is expected to achieve as well as the basic features of Deposit Insurance for Non-Interest Banks. The principal objective for the Insurance of the Deposits of Non-Interest Banks is based on Public Interest and aims at providing equivalent protection similar to that of conventional banks. The objectives include the following:

  • Depositor protection against loss in the event of failure of any Non-Interest bank;
  • Engender public confidence and enhance resilience of Non-Interest Financial Institutions;
  • Encourage competitiveness of Non-Interest Financial Institutions;
  • Help contain the cost of resolving failed Non-Interest Banks and provide an orderly Failure Resolution Mechanism.


3.0   MANDATE AND POWERS

The Nigeria Deposit Insurance Corporation (NDIC) protects deposit of Non-Interest Banks and Deposit Money Banks, provides incentives for promoting sound risk management principles and contributes to the stability of the Financial System in Nigeria. NDIC is to fulfil its mandates in an efficient and effective manner, having regard to the interests of its employees and other stakeholders.

NDIC’s mandate, as set out in its enabling Act, is a Risk Minimizer with powers to guarantee deposits of insured institutions, carry out supervision of insured institutions, partake in problem/failing banks resolution process and liquidate failed/closed financial institutions.

The roles of the Corporation in the Financial System are essentially to:

  • Administer a Deposit Insurance System
  • Provide Insurance against the loss or part or all of deposits of a member Institution.
  • Provide incentives for Sound Risk Management in Financial Institutions.
  • Promote and contribute to the stability of the Nigerian Financial System


4.0   MEMBERSHIP AND COVERAGE

4.1    Compulsory Membership
Participation in the Non-Interest Deposit Insurance Scheme (DIS) is compulsory for the following types of Institutions:

  • Full-fledged Non-Interest bank or full-fledged non-interest banking subsidiary of a conventional bank.
  • Full-fledged non-interest Microfinance bank.
  • Non-interest branch or window of a conventional bank.
  • Full-fledged non-interest merchant bank or full-fledged non-interest banking subsidiary of a conventional merchant bank.

Compulsory membership for all Non-Interest banking Institutions is essential for the promotion of Public Confidence in the Financial System. Voluntary participation has an inherent tendency to worsen instability in the Banking System during financial crises. Another major consideration in support of compulsory membership is the need to avoid the problem of adverse selection.

Adverse selection is the tendency whereby mainly Financially Weak or High Risk Institutions opt for the Deposit Insurance Scheme when it is voluntary.

4.2    Maximum Insurance Coverage
The Maximum Deposit Insurance Coverage (MDIC) for all Non-Interest Banking Institutions shall be the same as the Deposit Money Banks, which is presently ₦500,000 per Depositor per account and 200,000 per Depositor per account for Microfinance banks.


5.0   FUNDING

Funding of the Non-Interest Deposit Insurance Scheme (NIDIS) shall be ex-ante. The ex-ante funding is the most acceptable internationally because of its advantages of building up a Deposit Insurance fund to assist the Banking System in times of illiquidity, capital deficiency or liquidation.

The Framework takes into consideration:

  • NDIC’s role in the Financial Safety Net
  • Legislative powers relating to Sources of Funding
  • Internal and External Sources of Funds
  • Non-interest principles relating to the Sources of Funding

5.1    Sources of Funds
There are Internal and External Sources of Funds.
Internal Sources are made up of:

  • Contributions (Premiums) collected from Non-Interest Financial Institutions (NIFI)
  • Investment Income from the Non-Interest Deposit Insurance Funds (NIDIF)

External Sources include:

  • Borrowing from the Government/CBN for the NIDIF is interest-free and if interest based, it must be under extreme circumstances of necessity.
  • Raising of Funds from the Non-Interest Capital Markets (Sukuk)
  • Special contributions by the insured Non-interest Financial Institutions (A call for additional premium by the Corporation when the circumstance arises, inline with section 17, subsection 5 of the NDIC Act, 2006 as amended)

5.2   Insurable Deposits under NIDIS
The following Non-interest Deposits are eligible for Deposit Insurance Coverage:

  • Safe Keeping Deposit (Wadi’ah)
  • Interest free Deposit for Investment (Qard)
  • Profit Sharing /Loss Bearing Deposit (Mudarabah)
  • Any other Deposit-type that is Non-interest based and approved by the Central Bank of Nigeria (CBN).

5.3   Uninsured Deposits under NIDIS
The deposits that do not qualify for deposit Insurance are mainly Partnership or Joint venture contract-types which include:

  • Insider Deposits – Deposits of staff including Directors of Non-interest Banks or Financial Institutions
  • Profit and Loss Sharing Partnership (Musharakah)
  • Counter-claims from one person who maintains both a Deposit Accounts and a Non-interest Bearing Loan Account and/ or a loan based on Murabahah financing where the Deposit account serves as a collateral for either or both of the loans accounts.
  • Inter Bank Takings
  • Borrowings
  • Such other Deposit as may be specified from time to time by the Board

5.4   Determination Of Contribution By Insured NIBs
The Differential Premium Assessment System (DPAS) presently in use for the Deposit Money Banks which focuses on the Risk-profile of each Non-Interest Financial Institution would be applicable. Thus, the higher the risks of any financial institution, the higher the applicable contribution rate.

5.5   Segregation of Funds
The Corporation will ensure that the Non-Interest Deposit Insurance Fund are clearly segregated by establishing a Non-interest Deposit Insurance Fund (NIDIF) separate and distinct from the Deposit Insurance Funds (DIF) of the Deposit Money Banks and Special Insured Institutions Fund (SIIF) of Special Insured Institutions.

5.5.1  Guidelines for Segregation of Funds
The Corporation would have a mechanism to trace the Funds that are segregated for the NIDIS to ensure that the Funds are not only properly separated but also not involved in any transaction involving interest charges.

5.5.2  Deficit Financing
In the event of the need to raise additional funds for the NIDIS, the Corporation will:

  • Raise the funds from other Non-Interest Financial Institutions. (this is a call for additional premium by the Corporation when the circumstance arises, inline with section 17, subsection 5 of the NDIC Act, 2006 as amended)
  • Borrow from the Government/CBN on an interest-free basis
  • Raise funds from Non-interest Capital Markets (Sukuk)

5.6    INVESTMENT OUTLETS
Legislative provisions, CBN-Advisory Council of Experts, Investments Guidelines and Board approved Investments Policy Guidelines will guide the investment of the NIDI-Funds. In addition, the NIDIF will be invested in safe and liquid instruments to enable easy access when the need arises e.g. Government and Central Bank Instruments and other Non-Interest Instruments.


6.0   FAILURE RESOLUTION

In the event of the failure of a Non-interest Financial Institution, the following Failure Resolution Options are available to the Corporation:

  • Open Bank Assistance
  • Assisted Merger & Acquisition
  • Purchase & Assumptions
  • Bridge Bank
  • Reimbursement/ Pay out of Insured Deposits
  • Asset Purchase

6.1   Intervention Thresholds

S/N CONDITION OF A BANK RESTRICTION/SUPERVISORY ACTION
1 Under capitalised Banks (i.e. Banks with Capital Adequacy Ratio (CAR) greater than or equal to 5% but less than the prescribed minimum of 10%.
  1. Conduct Special Examination
  2. Restrict Dividend distribution
  3. Restrict Investment in other subsidiaries/related companies
  4. Restrict investment in Fixed Assets
2 Significantly Under Capitalised Banks (i.e. Banks with Capital Adequacy Ratio (CAR) less than 5% but equal to or greater than 2%.
  1. Restrict new Investment to recoveries (Zero based Investment)
  2. Request for business plan on how fresh funds are to be injected into the bank
  3. CBN to review business plan within two weeks and communicate to the bank its acceptability or otherwise
  4. The CBN should make the final Capital call on the Bank within FOUR (4) months from time of acceptance of the business plan
  5. Within two (2) months after the final capital call, the CBN may take over management and control of the Bank and hand it over to NDIC
  6. The CBN may appoint the NDIC which may consider the following option;
  • Recapitalisation and Restructuring by new investors
  • Create incentive for healthy Banks to take over the sick one
  • Sale of Assets to AMCON
  • Recommend the revocation of licence
3 Critically Under Capitalised Banks (i.e. Banks with Capital Adequacy Ratio (CAR) less than 2%.

Take over management and control and /or revoke the licence.

4 Insolvent Banks (i.e. Banks with negative Capital Adequacy Ratio (CAR). Take over management and control and /or revoke the licence
7.0   DEALING WITH PARTIES AT DEFAULT

In the event of failure, the under-listed measures will be imposed on those responsible for the failure (and proven guilty) in addition to the provisions of the NDIC Act, CBN Act and CAMA.

Blacklisting of:

  • Members of the bank Advisory Council of Experts (ACE)
  • Members of the Board and Management of the bank


8.0   REIMBURSEMENT OF DEPOSITORS

All cost/losses incurred will be first charged to the Non-Interest Deposit Insurance Fund (NIDIF) before any other payments. Payments are prioritized based on the deposit-type or nature of contract of NIB-products. Priorities of claim payments upon liquidation are as follows:

  • NDIC’s insured Non-Interest Deposits
  • Uninsured Non-Interest Deposits
  • Uninsured Non-Interest claims
  • Priority of payments of Insured Non-interest Deposits is sequenced below:
  • Safe Custody Deposits (Wadi’ah)
  • Interest free Deposits for Investment (Qard)
  • Profit Sharing/Loss Bearing Deposits (Mudarabah)


9.0   RECOVERIES

In the event of the failure of a Non-Interest Financial Institution, the following will be included as part of the measures to ensure recovery of Investments owed by customers of the NIFI:

  • Disposal of pledged collateral
  • Restructuring of the Facility


10.0  GLOSSARY OF TERMS

The following terms have the following meanings:

S/NO TERM MEANING
1 Safe Custody Deposit  (Wadi’ah) Safe custody deposit which is based on trust and only the principal amount is obligated to be repaid to customer.
2 Interest free deposits for Investments (Qard)

This is a loan contract whereby the borrower is only obligated to repay the principal amount of the loan.

3

Profit Sharing/Loss Bearing Deposits

(Mudarabah)

This is like a form of partnership where one party provides funds (investor) while the other provides expertise and management (entrepreneurship). Profit is shared between the two parties on a pre-agreed profit sharing ratio, while any loss is borne by the Fund Providers, except in the case of proven negligence or breach of investment mandate on the part of the fund manager.

4

Profit & Loss Sharing  (Musharakah)

This is a partnership where profits are shared on agreed ratio basis while losses are shared in proportion to the capital of each partner. In a musharakah, all partners of the business undertakings contribute funds and have the right, but not obligation, to exercise executive powers in that project, which is similar to a conventional partnership structure and the holding of voting stock in a limited company. 

5 Cost Plus (Murabahah) A sale on mutually agreed profit. Under this arrangement, the seller charges the buyer the cost plus a profit. Technically, Murabahah means a contract made for acquisition of an asset between the purchaser and the seller through a third party Non-Interest Financial Institution (NIFI). For instance, Mr. A may wish to purchase a computer from Mr. B, and then Mr. B seeks the financier (NIFI) to finance the purchase of the product as the third party.
6

Leasing

(Ijarah)

This is a form of leasing in which there is a transfer of ownership of a service for a specified period for an agreed upon lawful consideration. Instead of lending money and earning interest, ijarah allows the Non-Interest Financial Institution to earn profit by charging rentals on the Asset leased to the customer.
7

Sale with Advance Payment

(Salam and Parallel Salam)

Is a differed delivery contract in which advance payment is made for goods to be delivered at a future date. The seller undertakes to supply some specific goods to the buyer at a future date in exchange for an advance price fully paid at the time of contract. Parallel Salam is where the buyer in a Salam contract sells what he bought by the Salam contract to a third party in another parallel Salam contract. Islamic banks use parallel Salam to avoid the market-risk of holding on to a Salam product.

8.

Islamic Bonds

(Sukuk)

Certificate of equal value representing undivided share in ownership of tangible assets of particular projects, or specified investment activity, usufruct and services.
9.

Project finance (Istis’na)

A manufacture/construction contract of assets where one party places an order for the manufacture/construction of an Asset/Assets from the second party to be delivered at a future date according to the specifications given in the Istis’na contract, while allowing for cash payment in advance.

NIGERIA DEPOSIT INSURANCE CORPORATION [NDIC]

September 2011