Globally, the deposit insurance scheme avails the government a regulatory framework in order to intervene and mitigate the potential disruptive effects that a failure of deposit-taking institutions may inflict on the stability of the financial system.
It is common knowledge that banks’ intermediation role is very strategic, where long-term assets are, in most cases, financed with short-term deposits, which is a practice that could precipitate bank distress and failure. The need to mitigate this ugly scenario informed the design and implementation of deposit insurance as a financial safety net in Nigeria.
Therefore, it was not surprising the positive appraisals that greeted the announcement last week by the Nigeria Deposit Insurance Corporation (NDIC) that it had reviewed upward the maximum deposit insurance coverage for depositors of all licenced deposit-taking financial institutions in the event of bank failure.
The move was also consistent with the recent assessment of Nigeria’s financial landscape, which saw the International Monetary Fund (IMF) call for Nigeria to methodically raise the deposit insurance level managed by NDIC to better mirror the current economic realities of inflation and currency devaluation.
The Managing Director (MD) of NDIC, Mr Bello Hassan, told newsmen in Abuja that the deposit insurance coverage level for Deposit Money Banks (DMBs) was reviewed from N500,000 to N5m.
Bello said the insurance coverage for Microfinance Banks (MFBs) had been increased from N200,000 to N2m, which would provide 99.27 per cent coverage of total depositors.
He further said that for Primary Mortgage Banks (PMBs) it was increased from N500,000 to N2m with full coverage of 99.34 per cent compared with the current 97.98 per cent.
For subscribers of Mobile Money Operators (MMOs), he said that the deposit insurance coverage had increased from N500,000 to N5m per subscriber, per MMO.
Bello also said that the Payment Service Banks (PSBs) insurance coverage had also increased from N500,000 to N2m.
He explained that the factors considered in the upward review of the coverage level were deposit distribution, impact of inflation, per capita Gross Domestic Product (GDP), exchange rate and other statistical models.
New coverage covers 98% of depositors
According to data by NDIC, the total number of customers in DBMs (commercial banks) as at end of June, 2023, stood at 206,166,014
The total number of customers in DMBs with N5m and below fully covered by the current deposit insurance coverage level stood at 204,063,294
The only number of customers not fully covered by the current deposit insurance coverage level stood at 2,102,720, representing 1.02 per cent of the entire customers of the DMBs.
Similarly, the total number of customers in PMBs with N2m and below fully covered by the current deposit insurance coverage level stood at 204,469
The only number of customers not fully covered by the current deposit insurance coverage level stood at 1,341, representing 0.66 per cent of the entire customers of PMBs.
Also, the total number of customers in MFBs as at end of June, 2023, stood at 16,889,804
The total number of customers in MFBs with N2m and below fully covered by the current deposit insurance coverage level stood at 16,765,773
The only number of customers not fully covered by the current deposit insurance coverage level stood at 124,031, representing 0.73 per cent of the entire customers of the MFBs.
The total number of customers in Payment Service Banks (PSBs) as at the end of June, 2023, stood at 24,005,438. The total number of customers in PSBs with N2m and below fully covered by the current deposit insurance coverage level stood at 24,005,395
The only number of customers not fully covered by the current deposit insurance coverage level stood at 43, representing 0.0002 per cent of the entire customers of PSBs.
How recent global lessons strengthen consideration for review
According to the International Association of Deposit Insurers (IADI), the 2023 bank failures in the United States (US) and Switzerland have fueled discussions on the appropriate coverage of deposits by deposit insurance schemes.
Especially in the US-based failed banks, IADI noted that shares of uncovered deposits were very high and those uncovered deposits were concentrated among a small number of depositors.
For instance, over 94 per cent of deposits at Silicon Valley Bank were not insured at year end 2022 due to exceeding the Federal Deposit Insurance Corporation limit of $250,000.
Upon news of their bank’s rapid deterioration, uninsured depositors withdrew their funds at an unprecedented speed and at significantly higher rates than insured depositors, which ultimately was a major contributor to the failure of the banks.
The major lesson was that high levels of uninsured deposits within a given member institution of a deposit insurer may increase the likelihood of failure and of systemic implications in the event of such failure.
IADI said discussions on potential follow-ups to these events included suggestions to increase deposit insurance coverage levels and differentiation of coverage across depositor classes (e.g. retail or certain types of business accounts).
According to IADI, this may contribute to lowering the ratio of uninsured deposits and to slowing down or preventing liquidity runs as (some of) the previously unprotected depositors would now benefit from deposit insurance.
Assessing the likelihood of a run in this context is largely dependent on the insured depositors’ willingness to leave their funds within the under-stress institution, knowing that they will not incur any losses with an active deposit insurance system in play.
NDIC sounds warning as expert commends move
Sounding a warning to reckless depositors, Bello said, “We call our depositors to be cautious, not to be carried away by mouthwatering interest rates that are offered by unlicensed agents. Patronise licenced deposit institutions; those are the ones that are ensured such that if there is any failure, deposit insurer will come in and pay; if you are aggrieved, you can also petition NDIC so that the matter can be looked into. When you patronise unlicenced institutions, you are doing it at your orders.”
Speaking on the new coverage, Professor of Finance and Capital Market, Nasarawa State University, Keffi, Uchenna Uwaleke, said, “The increase in the maximum deposit insurance coverage level from N500,000 to N5m for DMBs and from N200,000 to N2m for MFBs is a welcome development against the backdrop of elevated inflation and naira depreciation.
“This would no doubt boost confidence in the nation’s banking sector, as well as financial inclusion.”
