frequently asked questions
The purpose of this booklet is to facilitate the understanding by all our stakeholders, particularly the depositors, of the nature and condition of deposit insurance system and its implementation by the Nigeria Deposit Insurance Corporation.
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.
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.
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.
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).
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.
2) 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.
3) 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.
Answer: Insured institutions are all deposit-taking financial institutions licensed by the Central Bank of Nigeria (CBN) such as
- Universal Banks (deposit money banks);
- Micro-finance Banks – (MFBs); and
- Primary Mortgage Institutions (PMIs).
Membership is compulsory as provided under the NDIC Act No 16 of 2006.
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: www.ndic.gov.ng.
Answer: Financial institutions not covered by the NDIC include:
- Development Finance Institutions such as Bank of Industry, Federal Mortgage Bank, Nigeria Agricultural, Cooperative and Rural Development Bank and Urban Development Bank
- Discount Houses
- Finance Companies
- Investment Firms
- Unit Trusts/Mutual Funds
- Insurance Companies
- Pension Fund Administrators (PFAs)
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.
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.
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.
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.
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.
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.
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.
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.
Answer: The NDIC relies on deposit account records kept by a failed bank as well as on the proofs presented by the depositor.
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.
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.
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.
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.
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.
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
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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).
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.
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.
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 at: www.ndic.org.ng. You can also submit comments or questions through the web site.