The Deposit Insurance Scheme (DIS) commenced in Nigeria with the establishment of the Nigeria Deposit Insurance Corporation (NDIC) through the promulgation of Decree No. 22 of 1988 now NDIC Act No 16 of 2006 as a vital component of the safety-nets to ensure the stability of the banking system as well as the macro economy. The measure became necessary because of the wide-spread banking distress and failures witnessed in the past which resulted in the loss of hard-earned savings by depositors.
In order to protect depositors’ interest, the Corporation was charged with the responsibility of insuring the deposit liabilities of Universal Banks and other licensed deposit-taking Institutions such as Microfinance Banks and Primary Mortgage Institutions.
It is mandatory for licensed MFBs and PMIs to insure their total deposit liabilities with the NDIC with the exception of insider deposits (i.e. deposits belonging to Board Members, Management and staff), deposits used as collaterals and such other deposits the Board of NDIC may exempt from time to time.
A depositor in an insured Microfinance Bank and Primary Mortgage Institution does not pay premium to the Corporation. The insured MFB and PMI pay through annual assessments on their deposit liabilities. The premium paid is held as Special Institutions Insurance Fund (SIIF) by the Corporation. In general, depositors’ funds in demand, time/fixed deposits, savings and other deposit account balances or products with licensed Microfinance Banks and Primary Mortgage Institutions are covered by deposit insurance.
The purpose of the Questions and Answers below, is to help you understand the nature and conditions of the Deposit Insurance Scheme for MFBs and PMIs.
Deposit Insurance is a financial guarantee instituted as a measure of safety for the financial system to protect depositors. Deposit Insurance ensures that the depositor does not lose all his money in the event of failure of an insured institution.
NDIC manages three deposit insurance funds, DIF for Universal banks, NIDIF for non interest banks and SIIF for licensed Microfinance Banks and Primary Mortgage Institutions. Universal bank deposits are covered by the Deposit Insurance Fund (DIF), Non interest bank deposits are covered by the Non Interest Deposit Insurance Fund (NIDIF) while Microfinance banks and Primary Mortgage Institutions’ deposits are covered by Special Institutions Insurance Fund (SIIF). The rules governing the insurance of the deposits of banks and other institutions insured by DIF, NIDIF and SIIF are the same. The depositors of licensed MFBs & PMIs will therefore be protected as long as the annual premiums are paid to the Corporation.
Deposit Insurance provides two important benefits to the economy:
1. It assures small depositors that their deposits are safe, and that guaranteed sum will be immediately available to them if their insured institution fails.
2. It maintains public confidence in the banking system, thus fostering economic stability and growth. Without the confidence of both the operators and the public in the banking system, banks would avoid lending money by keeping depositors’ money on hand and in cash at all times.
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.
b. 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.
c. 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.
No. The NDIC insures deposits in all deposit-taking financial institutions licensed by the Central Bank of Nigeria such as Universal Banks, Microfinance Banks, Non interest Banks and Primary Mortgage Institutions.
Each insured Microfinance Bank and Primary Mortgage Institution must meet high standard of safety and soundness in its banking practices. Adherence to these standards is determined through regular routine and special examinations by the Regulatory Authorities: the CBN and the NDIC. If despite these precautions, an insured MFB/PMI gets into financial difficulties and must be closed for purpose of liquidation. The NDIC will be on hand with cash to relieve a depositor up to the maximum of N200,000 for MFBs and N500,000 for PMIs.
No. The primary mandate of the NDIC is to protect depositors. However, the creditors and shareholders could be protected through the supervision activities of the Corporation i.e ensuring high safety, and soundness standards which ensures that the institutions continue to exist as going concerns thereby protecting all stakeholders.
MFBs and PMIs are to pay 8/16 of 1% (i.e. 50 basis points or 0.05%) of their certified deposit liabilities for the preceding year as premium for deposit insurance.
The basic insured limit for a depositor of an MFB is N200,000 while the insured limit for a depositor of a PMI is N500,000. A depositor is thus insured up to N200,000 for MFBs and N500,000 for PMIs in aggregate with respect to deposits he or she holds in the same right and capacity in each MFB and PMI including branches if any. (The terms “Right and Capacity’’ refer to the nature of ownership of deposits, such as individual, joint or trust deposits).
The scheme was designed to protect small depositors since they are more in number and less informed about the safety and soundness of depository institutions. The insured sum had recently been reviewed upwards from N100,000 to N200,000 for MFBs in response to developments in the financial services industry in particular and the economy in general.
The scheme was designed to protect small depositors since they are more in number and less informed about the safety and soundness of depository institutions.
The maximum Deposit Insurance Coverage was arrived at through a survey and research carried out on deposit structure in insured institutions. It was established that over 90% of depositors had balances of N200,000 and N500,000 and below in their accounts with each Microfinance bank and Primary Mortgage Institution respectively.
All types of deposits held in insured MFBs and PMIs are covered by NDIC insurance including:
• Savings account.
• Time / Fixed Deposits.
• Current accounts.
• Other financial products introduced purposely to mobilize deposits.
The under listed deposits are not insured.
• Collateralized deposits. (Deposits that are used to secure credit facilities).
• Insider deposits. (Deposits of Board Members, Management and Staff of the Institution)
• Funds lost by the insured institution due to robbery, theft and embezzlement.
• Donor funds i.e funds obtained by MFBs/PMIs for unlending to their customers.
• Collections i.e taxes, deposits for shares and monies collected from the public on behalf of government agencies or other organizations for services or products provided where the PMIs and MFBs serve as collection agents and the funds are remitted at agreed intervals to the CBN or a designated commercial bank.
Directors and staff deposits are not covered in order to create incentive for them to manage their institutions in a safe and sound manner and also to ensure good corporate governance practices. On the other hand, deposits of shareholders are covered since they are not involved in day to day running of their institutions.
No. Deposit Insurance is not increased merely by dividing funds owned in the same right and capacity among the types of deposits in the same MFB or PMI. For example, current and savings accounts owned by the same depositor in the same right and capacity in the same MFB or PMI are added together and insured up to the maximum insured amount.
No. The maximum insurance cover is applicable to deposits in each licensed MFB or PMI. In the case of an MFB or PMI having one or more branches, the main office and all branch offices are considered as one institution. In summary, if a person has many accounts in one MFB or PMI, all the deposits are taken together as one account even if the deposits are in various branches of the same institution. On the contrary, however, if a depositor has accounts in more than MFB or PMI, they are insured separately up to a maximum insured amount per institution.
Section 50 of the Banks and Other Financial Institutions Act provides that where a bank is unable to meet its obligations or suspends payment, the assets of the bank shall be available to meet all deposit liabilities of the bank and such deposit liabilities shall have priority over all other liabilities of the bank..
However, after depositors are fully paid, the ranking of other creditors is as provided in the Companies and Allied Matters Act (CAMA), namely;
– Preferred Creditors.
The Corporation can render financial and or technical assistance depending on the peculiar situation of the insured institution. Financial assistance could be in form of interest-bearing loans that must be paid back on stated terms. Technical assistance could take the form of advisory services, restructuring, staff training, or take-over of management.
Section 12(2) of the NDIC Act 16 of 2006 provides that subject to stated conditions, part of the Corporation’s surplus can be applied to reduce premium payable by insured institutions. Furthermore, the Corporation would consider adopting differential premium assessment such that premium payable by MFBs and PMIs would be based on their risk profile.
Yes. Premium paid under the Deposit Insurance Scheme is an allowable expense for tax purpose. Hence, payment of premium reduces the tax burden.
a) Question: IF A HUSBAND AND WIFE OR ANY TWO OR MORE OTHER PERSONS, HAVE, IN ADDITION TO THE INDIVIDUALLY-OWNED ACCOUNTS, A VALID JOINT ACCOUNT IN THE SAME INSURED MFB OR PMI, IS EACH ACCOUNT SEPARATELY INSURED?
Answer: Yes. If each of the co-owners has personally signed a valid account signature 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 maximum insured sum.
However, the insurance protection on joint accounts is not increased by establishing more than one joint account for the same combination of owners in the same insured MFB or PMI. No joint account shall in any case be entitled to insurance coverage in excess of N200,000 for MFBs and N500,000 for PMIs.
b) Question: IF A PERSON HAS AN INTEREST IN MORE THAN ONE JOINT ACCOUNT, WHAT IS THE EXTENT OF HIS OR HER INSURANCE COVERAGE?
Answer: All Joint Accounts owned by the same combination of individuals are first added together and the total is insurable up to N200,000 for MFBs and N500,000 for PMIs. Then the person’s insurable interest in each Joint Account owned by different combination of individuals are added together and the total is insured up to the maximum insured amount.
Question: ARE ACCOUNTS HELD BY A PERSON AS EXECUTOR, ADMINISTRATOR, GUARDIAN, CUSTODIAN, OR IN SOME OTHER SIMILAR FIDUCIARY CAPACITY INSURED SEPARATELY FROM HIS OR HER INDIVIDUAL ACCOUNT?
Answer: Yes. If the records of the MFB or PMI 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 N200,000 or N500,000 maximum.
Accounts 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 N200,000 for MFBs and N500,000 for PMIs separately from any other individual accounts of the owner. If the beneficiary is other than a spouse, child or grandchild of the owner, the funds in the account are added to any other individual accounts of the owner and insured to a total of N200,000 for MFBs and N500,000 for PMIs. 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.
No. Special funds such as Donor funds or other funds that are for onward disbursement to beneficiaries are excluded from assessable deposits. The onus is on the insured institutions to ensure proper classification of such funds in their books.
a) Question: WHEN AN ACCOUNT IS HELD BY A PERSON DESIGNATED AS AGENT FOR THE TRUE OWNER OF THE FUNDS, HOW IS THE ACCOUNT INSURED?
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 of N200,000 for MFBs and N500,000 for PMIs.
b) Question: IS AN ACCOUNT HELD BY A COMPANY OR PARTNERSHIP, INSURED SEPARATELY FROM THE INDIVIDUAL ACCOUNTS OF SHAREHOLDERS OR PARTNERS?
Answer: Yes. If the company or partnership is engaged in an independent activity, its account is separately insured to a total of N200,000 for MFBs and N500,000 for PMIs. The term “Independent activity” means any activity other than one directed solely at increasing insurance coverage.
c) Question: WHAT ABOUT SOLE PROPRIETORSHIP ACCOUNTS?
Answer: Funds owned by a sole proprietorship are insured as the single ownership funds of the person who owns the business, are added to any other single ownership funds of the sole proprietor, and are insured up to N200,000 for MFBs and N500,000 for PMIs in the aggregate. Thus, even though a person who is the sole owner of an unincorporated business opens a separate account in the name of his business, the business account is not separately insured from his personal accounts in the same institution.
Yes. Depositors with claims in excess of the insured sum will share pro-rata in any proceeds from the liquidation of assets of the the MFB or PMI with other general. However depositors will be paid in full before other claimants are paid at all. Depositors have priority of payment.
Yes. But notice is always given to depositors before termination of insurance. Depositors should take precaution to verify that the MFB or PMI they are dealing with are insured and that they pay deposit insurance premium annually.
In that event, the depositors of the acquired insured MFB or PMI will continue to be insured to the maximum of N200,000 and N500,000 respectively in the aggregate with respect to deposits he or she holds in the same right and capacity.