THE IMPACT OF NIGERIA DEPOSIT INSURANCE CORPORATION (NDIC) IN PROMOTING SAFE AND SOUND BANKING IN NIGERIA

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THE IMPACT OF NIGERIA DEPOSIT INSURANCE CORPORATION (NDIC) IN PROMOTING SAFE AND SOUND BANKING IN NIGERIA

(A case study of Guaranty Trust Bank Plc)

ABSTRACT

The business of banking has been exposed to several failures in the past and depositors and creditors of such banks have been the victims of circumstances. Therefore the bold steps by the government of the federal republic of Nigeria to establish a well define deposit insurance that is Nigerian Deposit Insurance corporation (NDIC).That would be responsible for the supervisions of banks is a welcome development. This research work is aimed at identifying the Impact of Nigeria Deposit Insurance Corporation in Promoting Safe and Sound Banking in Nigeria, the problems and possible conclusion and recommendations. The data for the study was obtained through primary and secondary sources in presenting and analyzing the data, the method of analysis is statistical technique using the chi-square. More emphasis was placed on the question that would help this study in drawing reasonable and authentic conclusion and recommendations that would enable the corporation achieve its aims and objectives of establishment.

CHAPTER ONE

1.1     INTRODUCTION

Deposit insurance has become an increasingly used tool by government in an effort to ensure the stability of banking system and protect bank depositors. Almost all countries of the world actually have financial safety nets in place which include explicit and implicit deposit insurance, and bank supervision as well as central bank lender of last resort facilities essentially bank deposit insurance as a financial guarantee to depositors, in the event of a bank failure. The Nigerian deposit insurance corporation is an exception to this quest. This is usually administered by government controlled and participating institutions.

The introduction of NDIC may be linked to a country’s attempt to put in place laws and mechanisms that deal with failed bank institutions. Experience suggest that the failure of depositing institutions must be handled in unique ways to deal with the tendency any of trouble banks to deteriorate rapidly ,while ministering advice effect on the overall financial system. The creation of the NDIC is linked to country’s failure resolution framework for its deposit taking banks. However, before the establishment of the corporation (NDIC), Government was playing the role of an implicit insurance. It had bail out banks like the national bank of Nigeria (NBN), African Continental Bank (ACB) etc. with the deregulation of the financial system, explicit deposit insurance became imperative.

1.2     BACKGROUND OF THE STUDY

A comprehensive and adequate legal framework is crucial for the effective implementation of the deposit insurance system. Depending on the mandate given to the deposit insurer, statute establishing the NDIC should unambiguously specify the power and authority of the deposit insurance, its source of funding, the participating deposit taking financial institutions and the conditions for their participation. The enabling legal framework for the establishment of a deposit insurance system in Nigeria was the Nigerian deposit insurance corporation (NDIC) Act no 22 of 1988 now repealed and re-enacted as the        Nigerian Deposit insurance corporation Act 16 NDIC Act of 2006.

The NDIC Act of 1988, which established the corporation, was implemented for eighteen (18) years. In those years, it has observed that the legal framework governing the operation of the NDIC had some inherent inadequacies. In 1998, legal framework was amended in an effort to clearly define the responsibilities of the corporation over failing and failed banks. In 1997, the Act was amended to empower the corporation to take proactive measure where a bank was significantly or critically under –capitalized.

The NDIC Act 2006 addressed some of the challenges encountered by the cooperation in the discharge of its mandate under the 1988 Act. The Act had to a great extend removed the challenges the corporation faced in the course of implementing the repealed 1988 NDIC Act, following the deregulation of the financial services industry which was part of the structural adjustment programmes (SAP) introduced in 1986. Government was determined to further protect depositors from ensuring competition induced by the liberation of bank licensing in the late 1980’s. It was envisaged that the establishment of an explicit system would relieve the federal government of the contingent liability of bailing out trouble banks.  NDIC was established to fores-stall loss likely to be incurred by depositors in the event of bank failure, the need enhanced bank’s competitive efficiency and creativity and to ensure fair play amongst the institutions. NDIC was introduced through degree 22 which make Nigeria the second African country to put in place a deposit insurance scheme, after Kenya. The Nigerian scheme was however, prominent permanent, partly because of the large size of Nigeria and enormity challenges faced by scheme at inception in Nigeria, particularly the level and extend of banking distress. The corporation provides deposit insurance and related service for banks with view to promoting confidence in the banking system. By section 15 and 20 of the degree, all licensed banks and other financial institution in Nigeria engaged in the business of receiving deposit are  required to insure their deposit  liabilities with NDIC with the exception of the following;

1. Insider deposit, that is deposits of staffs including directors of the insured institutions.
2. Counter claims from a person who maintains both a deposit and loan accounts, with the former serving and collateral for the bank loan and
3. Other deposits as may be specified from time to time by the board of the Nigerian deposit insurance corporation (NDIC).

1.3     STATEMENT OF THE RESEARCH PROBLEM

A nation well being rest on the financial sector and specially the banks, therefore the banking system has to be protected against failure by increasing the banking habits of the people and protecting the deposit of the depositors, particularly the small savers. It is also a necessity, to ensure fair play amongst the competing banks to check the management of assets by banks and ensure that they have adequate capital and experienced personnel. The banks also during the course of their activities would need financial and technical support and in fact the government also need assistance in it monetary policies.

The rationale behind establishing Nigeria deposit insurance co-operation (N D I C) was in order to reduce the cases of distress and failure in the banking sector by assisting in the supervision of banks which have hitherto been carried out solely by central banks of Nigeria (C B N). This  research is therefore concerned about the

1. Impact and role the N D I C has to play in Nigerian banking sector.
2. Why its establishment?
3. How well has it (N D I C) fared?
4. Why the need for banks to be insured?
5. How far has it carried on its obligation?
6. What are its prospect and challenges?

1.4     OBJECTIVE OF THE STUDY   

The objectives of this study is to examine how Nigerian deposit insurance corporation (N D I C) as supervisory body in the banks and also an attempt to access the impact of the corporation in promoting a safe and sound banking in the economy and appraise the effectiveness of the NDIC in pursuance of its main objectives.

The general aim of this research work is to determine the impact of the supervisory function of the NDIC on the activities of Nigerian banks. The, objectives are as follows:

1. To examine thoroughly how supervisory functions of the NDIC impact on Nigerian banks
2. To determine the efficiency and effectiveness of NDIC in Nigerian banks as a means of boosting depositors confidence in the system.
3. To know nature and extent of NDIC’s involvement in distress free banking in Nigeria.
4. To examine the legal framework and methods use in the supervision.
5. Finally, to propose a comprehensive and effective policy package that will ensure a comprehensive resolution of liquidity problems in Nigerian banking institutions.

1.5     STATEMENT OF RESEARCH QUESTIONS

Since the promulgation of decree No 22 of 1988, the effectiveness of the operations of NDIC has been a source of controversy and comment by key monitors in the banking industry. The general controversy among bankers and the general public form integral part of the research questions, thus the following;

1. Has NDIC done enough to stop banks failures or collapse?
2. What is the performance rating the supervisory authorities in preventing financial distress.
3. Is GTB Plc survival as a result of effective supervision of NDIC.

1.6     STATEMENT OF HYPOTHESIS

In this study, we shall make use of the descriptive type of hypothesis. The nature of the study is such that descriptive rather than analytical or quantitative approach is better favoured.

For the purpose of this study, the following hypothesis will be tested.

H_O:    The operation of NDIC has not ensured distress free banking in Nigeria.

H_I:    The operation of NDIC has ensured distress free banking in Nigeria.

Information and data’s obtained from the respondent bank will be from the basis for either accepting or rejecting the null hypothesis (HO) and this lead to the conclusion on effectiveness and efficient of the impact of the NDIC in promoting safe and sound banking in Nigeria.

1.7     SIGNIFICANCE OF THE STUDY

The research is being carried out to unveil the role Nigeria deposit insurance co-operation (NDIC) plays in the banking sector. It is aimed at finding loopholes and given recommendation where necessary. It will therefore be of use to those involved directly or indirectly with the bank and they include the deposition, owners of bank, operator of the deposit insurance scheme (DIS), the government, student and intellectuals. Also a study of this nature will be helpful to the various bank management to be aware and alert of the demand of NDIC and depositors of expectation on the others hand.

The study will contribute immensely to the NDIC in the supervision of bank in Nigeria this is because the study provides enough literature review on the function of NDIC the challenging facing the insurance etc.

The study will help assisting bank policy formulates especially the risk management and loan syndication debts. This is done to avoid bad debt which will leads to eventual distress in the banks.

1.8     SCOPE OF THE STUDY

The scope of study will focus on the impact of Nigeria deposit insurance corporation (NDIC) in promoting safe and sound banking in Nigeria with particular reference to guaranty trust bank PLC

It will focus on issues such as historical background of the bank in question, the insurance activities and management of deposit insurance funds (DIF), functions and feature of NDIC etc. the study will be carry out by collecting primary data and secondary data the data will be through the use of questionnaire and publication from NDIC headquarter and bank report since the study is in the impact of NDIC in promoting safe and sound bank in Nigeria of the insure banks.

A sample of bank is to select one out of the existing banks, the sample will be carried out to know the distress and in distressed bank reference to guarantee trust bank PLC. The data will consist of both NDIC quarterly report and journals relevant literature, text book and previous research work will therefore be applied for data analysis.

1.9     LIMITATIONS OF THE STUDY

The limitation of the study is due to the lack of adequate information (materials) because this information was considered to be strictly confidential by the management of the organization. Also lack of information from text book, only few text book papers presentation were used to develop a well-constructed literature review. Another major constraint to the study are in term of time and usual finance constraints despite the  limitation, a lot has been done to make this research work meaningful and will be something to contribute to the knowledge.

1.10   DEFINITION OF TERMS

The definitions of terms relevant to this study are:

Deposit: this is the required amount of money that is expected to be with the Nigeria deposit insurance corporation (NDIC) for the purpose of compensating customers in case of bank failure.

Insurance: this is a devices by societies aimed at providing a financial compensation to the victims of the many social misfortune that befall them

Banking: A Financial activities that enable customer enjoy certain services like loan, overdraft, depositing cash and safe keeping security/valuables etc. from the banks

Insurance Scheme: this is the scheme that ensures that affected depositors will be compensated in the event of bank failure.

Banking System: This include all financial agents whose operation and transaction determine the financial flow of the economy as well as engage in receiving deposit transaction.

Capital: the term capital is multifaceted and dynamic one it is made up of debt and equity capital liquid and illiquid asset

Bank Distress: this refers to a situation in which a bank is unable to meet its maturing obligation (as at when due) from its normal operation activities when it happens to a number of banks within the same period

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