Sequel to your request via letter Ref. No. NASS/S/CBIFI/O45/42/12/6 of 24th May 2012, we hereby submit our memorandum on the subject.
2.0 THE NDIC AND ITS MANDATE
The Nigeria Deposit Insurance Corporation (NDIC) was established by Decree No. 22 of 1988, which was repealed and replaced with the NDIC Act No. 16 of 2006. The Corporation commenced operation in March 1989. The NDIC’s key role is to provide financial guarantee to depositors in the event of the failure of an insured institution and to administer the deposit insurance system in Nigeria. It has a broad mandate with powers to insure deposits of all licensed deposit-taking financial institutions, monitor their financial health status and ensure orderly resolution if they fail. Accordingly, the mandate of the Corporation is as follows:
2.1 Deposit Guarantee (Section 2 of the NDIC Act No 16 of 2006)
Deposit guarantee or deposit insurance is a key and distinct role of the Corporation. The NDIC guarantees payment to depositors of all participating institutions up to a maximum limit in accordance with its statute in the event of failure so as to engender confidence in the nation’s banking system. The present coverage level of N500,000 for DMBs fully covers over 96% of depositors. Similarly, the N200,000 coverage level for MFBs and PMBs fully covers about 99% of the depositors of the sub-sector.
2.2 Bank Supervision (Sections 27 – 32 of the NDIC Act No 16 of 2006)
The NDIC supervises banks to protect depositors, contribute to monetary stability and promote an effective payments system as well as competition in the banking system. Supervision, in addition to other objectives, seeks to reduce the risk of failure while ensuring that unsafe and unsound practices are minimised. The NDIC carries out this responsibility through both on-site examination and off-site surveillance in collaboration with the CBN.
2.3 Failure Resolution (Sections 37 – 44of the NDIC Act No 16 of 2006)
The NDIC may provide financial and technical assistance to eligible insured deposit-taking financial institutions, in the interest of depositors. The financial assistance could be in the form of loans, guarantee, or accommodation bills. In addition, the NDIC is empowered by Section 39 of its enabling Act, to establish a bridge bank to acquire the assets and assume the liabilities of a failing bank on a temporary basis pending the time a viable investor can be found.
2.4 Bank Liquidation (Section 40 of the NDIC Act No 16 of 2006)
The NDIC is solely responsible for the orderly and efficient closure of failed insured institutions. The closures are done with minimal disruption to the banking system. Since its inception, the NDIC has successfully closed 45 DMBs and 103 MFBs with minimal disruption to the nation’s financial system in particular and to the macro-economy in general.
3.0 THE RELATIONSHIP BETWEEN NDIC AND THE CENTRAL BANK OF NIGERIA
The NDIC is wholly owned by the Federal Government through the Central Bank of Nigeria (CBN) and the Federal Ministry of Finance (FMF) in the ratio of 60 : 40 shareholding structure. That implies that the CBN partly owns the NDIC with the FMF and it is in fact the majority shareholder of the Corporation.
Operationally, the NDIC’s major partner has been the CBN right from the inception of the Corporation. The supervision of the insured financial institutions has been the joint responsibility of the CBN and the NDIC in a manner devoid of needless overlap of responsibility. Based on the shared supervisory responsibility, both the NDIC and CBN jointly carried out Special Examination of banks in 2009 that revealed distress in the system.
In the area of distress resolution the NDIC over the years has effectively collaborated with the CBN to profer solutions to problem banks. Recently the Corporation collaborated with the CBN in the resolution of the 8 intervened banks whose grave financial condition was revealed in 2009 Special Audit. It would be recalled that the NDIC, after due consultation with the CBN and Federal Ministry of Finance, adopted the bridge bank failure resolution option to deal with the distressed condition of 3 banks in 2011 in order to guarantee the continuity of critical banking functions of the affected banks, including uninterrupted access to funds by depositors.
4.0 OVERVIEW OF THE ROLE OF CENTRAL BANKS
Central banks, the world over, share certain basic functions and goals in common. The primary responsibility of most central banks all over the world is to formulate and implement monetary policy with its twin goals of promoting price stability and stimulating real growth. Thus, central banks have the sole right to issue bank notes of all denomination, manage the nation’s currency, control money supply, and act as the lender-of-last-resort to the banking system in the event of insolvency or financial crisis. In addition, a central bank plays other developmental roles in the economy. In recent times, the trend, in line with best practices in both the developed and developing countries, has been to have central banks that are statutorily independent. In Nigeria, the provisions governing the operations of the Central Bank of Nigeria (CBN) are similar to what obtain in other jurisdictions.
5.0 THE CENTRAL BANK OF NIGERIA (CBN)
The Central Bank of Nigeria (CBN) was established by the Central Bank of Nigeria Act of 1958 and commenced operations on 1 July 1959. The CBN Act of 2007 charges the Bank with the overall control and administration of the monetary and financial sector policies. In addition to its developmental role, the principal objectives of the Bank as stipulated in the CBN Act of 2007, as amended, are to:
- Ø issue legal tender currency in Nigeria;
- Ø maintain the external reserve and value of the legal tender in order to safeguard the international value of the currency;
- Ø promote monetary stability and a sound financial system; and
- Ø act as the banker and financial adviser to the Federal Government.
6.0 PROPOSED AMENDMENT TO THE CBN ACT
6.1 Section 26A (Power to buy/sell Nigerian Currency and Prohibit Transactions in Foreign Currencies)
The CBN has the sole responsibility for the issuance of legal tender currency in Nigeria. As such, it is the duty of CBN to manage and protect the currency that it has issued as is done in other jurisdictions. All monetary transactions in Nigeria should be based on the local currency, the Naira. The practice where some transactions are quoted in foreign currencies is alien to best practices. Consequently, we strongly support the proposed amendment as contained in Section 26A.
6.2 Section 54A (Submission of Annual Budget to the National Assembly)
6.2.1 Central bank independence is an essential component of modern monetary systems. It is a very important issue, especially in times of financial crisis. In Western democracies, there has been a long-standing tradition to grant their respective central banks functional, administrative as well as financial and budgetary independence so as to ensure their effectiveness in the formulation and execution of monetary policy.
6.2.2 The CBN clearly uses public resources to perform its functions. Any increase in its expenditures reduces its profits and so reduces its annual payment to the consolidated revenue account. These expenditures include the administrative costs of developing and implementing monetary policy, providing financial services to the Federal Government of Nigeria (FGN) and the banking system, among others. The National Assembly should therefore, naturally be interested in the amount of economic resources used in these activities and in whether the CBN is using these resources efficiently. However, the critical issue to be considered in this matter is whether the budgetary control tools adopted for exercising controls over other government agencies should be applied to the CBN.
6.2.3 At first sight, it may appear imperative for the CBN to use the budget process being adopted by Federal Agencies/Parastatals. This method would include the use of the following common budgetary devices: displaying both gross receipts and operating expenses; its asset transactions; and projecting outlays of expenditures and receipts for five years into the future and from there generate a budget for the fiscal year for accountability and control purposes, among others.
6.2.4 While the foregoing may be feasible, its application to the CBN major problems for its operations because many of the asset transactions of the CBN result from its efforts to influence the pace of growth of the economy through its control over money supply and these are not comparable to the asset transactions of other agencies. Projecting cash flows that include asset transactions would pose special problems for the CBN because they cannot be easily pre-determined. Moreover, the separation of monetary policy expenses from other expenses cannot be easily accomplished because of shared support and overhead costs.
6.2.5 Also, exercising control over fiscal policy authorities such as Federal Ministry of Finance and other MDAs, may be easier than doing same for monetary policy authorities. While fiscal policy strategies tend to be developed within the context of an overall plan debated at specific times, monetary policy decisions have to be made continuously throughout the year. It would not be practical for the legislature to exercise its oversight function over those day-to-day decisions. Moreover, disclosure of some policies like banking and financial policies through the legislative procedures could disrupt financial markets as they may send wrong signals to the public.
6.2.6 In addition, the central banks of most jurisdictions, including Nigeria, regulate the activities of their respective financial sectors, particularly their banking sectors. The banking industry operates in a fast changing environment and it requires prompt attention in order to ensure its stability. Subjecting such decisions to legislative procedures, which may not have been anticipated at the budget preparation and approval stage, could hamper decisions and create further problems which could undermine financial system stability. The recent intervention of the CBN in resolving the problems in the banking industry, through the injection of N620 billion into 8 distressed banks in 2009, corroborates this point.
6.2.7 It has been observed globally that in jurisdictions where their central banks are subjected to government control, such central banks become less transparent in their operations and ineffective in the discharge of their primary mandate. For example, the policies of the Reserve Bank of Zimbabwe (RBZ), since the independence of the country in 1980, as noted by K. Njanike, “were designed, approved and implemented with government control”. He observed that the Zimbabwean government was solely dependent on the RBZ financing as a matter of survival resulting in high inflation and contraction of real incomes. As at date, the legal tender in Zimbabwe is the US Dollar as the Zimbabwean Dollar became completely worthless. Another study by J. D. Nhavira found that the Reserve Bank of Zimbabwe is the least transparent in procedural and operational transparency compared to other central banks in Latin America, Europe and Africa.
6.2.8 Based on the importance of both functional and administrative/financial independence of central banks for the effective discharge of their mandate, the Eurozone developed some indices for measuring central banks’ independence, (A. Pisha, 2011).
In the model, a rating of Zero to One (0 to 1) was developed to assess the level of CBI, where 0 indicates strong interference and 1 indicates non-interference. For the financial and budgetary independent central bank, the summary of the study shows that a fully independent National Central Bank (NCB) should be able to avail itself autonomously of the appropriate economic means to fulfill its mandate and its budget determined by its Governing Board. A rating of 1 is given to such central bank. Most of the NCBs in the Eurozone met this criterion as they have their budgets independently determined by their respective Boards. However, where the NCB annual budget is approved by the legislature, such NCB is given a Zero (0) rating, indicating lack of independence. In fact, there is no such NCB in Eurozone.
6.2.9 In the United States of America (USA), the Federal Reserve System (Fed) is an independent entity within the government. It operates autonomously within a framework of economic and financial policy objectives established by the government. Right from the inception the Fed was given the power to generate its own income and spend it without government interference. Hence, the Fed is self-financed and therefore is not subject to the Congressional budgetary process. Nevertheless, at the end of each year, the Fed returns to the U.S. Treasury all earnings in excess of operating expenses. In his Testimony on the Federal Reserve independence to the Committee of Finance Services on July 9, 2009, Mr. Donald L. Kohn, Vice Chairman of the Federal Reserve System, observed with delight the substantial degree of independence granted to the Federal Reserve (Fed), including financial and budgetary independence, by the Congress to enable it pursue its statutory objectives of monetary policy in an efficient and effective manner. He remarked that past attempts at restricting the Fed’s formal independence by the Congress failed because of the need to ensure the system’s effectiveness and efficiency. In order to ensure accountability, the Fed is mandated to periodically report on its activities to the Congress.
6.2.10 Similarly, based on the same arguments, the central banks of several countries such as the UK, Brazil, South Africa, Ghana, Kenya, among others, determine their respective budgets without involving their parliaments in order to prevent their central banks’ independence and the effectiveness of their policies from being impaired inadvertently.
While the National Assembly is undoubtedly vested with oversight powers in respect of the use of public resources, it also, must be mindful of the effect of increased control over the independence of the CBN to determine and implement its budget without which it cannot perform its monetary policy functions efficiently and effectively. We believe that the CBN, just like the Fed in the USA, should continue to report its activities to the National Assembly through its appropriate committees.
NIGERIA DEPOSIT INSURANCE CORPORATION
MAY 28, 2012.
 In his article on Central Bank Independency: A case Study of RBZ 1998 2008 and published in the Annals of Economics of the University of Petrosani, 2010,
 In his article on An Independent Review of the Reserve Bank of Zimbabwe’s Monetary Policy Transparency, published in East Africa Social Science Research Review in 2010,
 A. Pisha, 2011, Eurozone Indices: A new Model for Measuring Central Bank Independence, Economic Research Department, Special Studies Series, 2011.