1 TRUST AND POLICY RENDERING: RE- WORKING THE NIGERIAN FINANCIAL SYSTEM IN THE FACE OF GLOBAL FINANCIAL REFORM BY: U. Ibrahim, mni Ag. MD/CEO Nigeria Deposit Insurance Corporation Presented at an Executive Seminar on Trust and Policy Rendering (TPR) in the Nigerian Financial Services Industry Organised by AME&T Group and FITC Held at Eko Hotel, Lagos Nigeria on March 10, 2010.

2 Introduction The Seminar, being organised at the most apposite time, broadly aims at:  Restructuring and repositioning the banking, insurance, capital market, pension, and other non-bank sub-sectors in the financial system by Designing a framework that will enhance restoration of confidence and stability in the Nigerian financial system.  The seminar also aims at introducing TPR Nigeria Financial Trust Index.

3 Introduction Ct’d My contribution will attempt to address two main issues, namely:  How does a Deposit Insurance System (DIS) contribute to the enhancement of confidence in the financial system? and  What factors should be considered in the construction of the ‘TPR Nigeria Financial Trust Index’?

4 Definition of Deposit Insurance A Deposit Insurance Scheme (DIS) is a financial guarantee to depositors, particularly the small ones in the event of a bank failure. It has the following benefits: Protects depositors against full or partial loss of their savings Reduces bank “runs” and contributes to financial stability Can limit government fiscal and political exposure Creates a formal mechanism for addressing bank failure

 The most important macro objective of a DIS is to contribute to financial system stability by primarily engendering public confidence 5 Deposit Insurance and Public Confidence

Introduction: Components of the financial safety net 6 Strong & Robust Banking System Financial Stability Depositor Protection FINANCIAL SAFETY NET Prudential Regulation & Supervision Lender-of-last resort facility Deposit insurance system Deposit insurance enhances depositor confidence

Enhancing Public confidence 7  Confidence is achieved when a depositor believes that N100 in his bank account is as good as N100 in his pocket Protects depositors’ savings Prevents bank runs Maintains Public confidence

Enhancing Public confidence 8  DIS Maintains and reinforces public confidence through Ensuring adequate deposit coverage level. Extending DIS coverage to non-bank deposit taking financial institutions. Expanding range of deposit products covered beyond traditional bank deposit insurance products. Effective supervision where a DIS has the powers. Implementing systemic stabilization measures eg. Blanket guarantee

Enhancing Public confidence 9  DIS can also contribute to the enhancement of public confidence by:  Educating depositors in financial literacy and deposit insurance issues as: Knowledgeable depositors make informed financial decisions Financially literate depositors who know their rights could impose additional market discipline on the banking system by scrutinizing the conduct and practices of banking institutions.

10 THE NIGERIA’S EXPERIENCE  Increased deposit insurance coverage from N50,000 to N200,000 per depositor for universal banks in  Extended insurance coverage to MFBs & PMIs at N100,000 per depositor in  Already developing a framework for extending DIS coverage to non-interest bearing deposit products.  Working out strategies on how to achieve prompt depositor reimbursement.

11 THE NIGERIA’S EXPERIENCE Ctd  Supervision  Conducted examination of universal banks, MFBs & PMIs to determine their safety and soundness.  Participation of NDIC in bank examination reduced examination cycle to once in a year instead of once in 2 or 3 years that hitherto obtained.  Pursued a policy of zero tolerance for unprofessional conduct and unethical practices in the banking industry.

 Clearly defined mandate and powers  Sound Governance/operational independence  Adequate funding  Effective public awareness  Flexibility in dealing with a crisis: Comprehensive toolbox Flexibility to call upon these tools  Close cooperation with other safety net players 12 Factors that make DIS Effective in Enhancing Public Confidence

Mandate and Powers Pay BoxMinimal Role Main function: to make disbursement to depositors when banks fail Cost MinimizerSeeks least cost resolution once bank is insolvent Risk MinimizerAssesses and monitors risk on an on-going basis with wide intervention powers (NDIC is a risk minimizer) 13

Sound Governance: A Key Element of Trust Building 14 Well managed and well governed DIS Carry out all obligations effectively Build credibility in good times Build Trust

Operational Independence Ability to Meet Mandate Operational independence Will and the power to act Sufficiently free from interference from politicians, supervisors and industry Strong government funding support 15

16 THE NIGERIA’S EXPERIENCE  GOVERNANCE  NDIC has on its Board competent and experienced individuals  The Board has effective Committees  NDIC has Comprehensive business plans with explicit Key Performance Indicators (KPIs)  There is an effective enterprise risk management unit with operational framework  NDIC has put in place sound accounting and internal controls  NDIC publishes and widely circulates its Annual Report and Statement of Accounts amongst its stakeholders and members of the public.

Adequate Funding Govern- ment Funding Powers to raise fund from the market Ex-Ante Premium 17 Support public Confidence

Nigeria’s Experience : Funding  Premium contribution by insured institutions is the major source of funding  The aggregation of the premium collected constitutes Deposit Insurance Fund (DIF).  The Funds are used to meet the primary obligations of the Corporation  The operations of the Corporation are financed from the proceeds of investment of the DIF. 18

Nigeria’s Experience : Funding Ctd.  The basic statistics on the Fund and insured deposits in the industry as at December 2009 are given as follows:  DIF =N240.7 billion  Total insured deposits = N1.594 trillion  Evidently, there remains a wide funding gap of about N trillion. That is one of the critical challenges facing the Corporation. 19

Effective Public Awareness Programme Information Timely and accurate information/finan cial education Strong antidote to unwarranted fear Public Understanding of Deposit insurance Functions Benefits Limitations Well informed depositors No incentive to withdraw funds Less susceptible to unsubstantiated rumours 20

Nigeria’s Experience : Public Awareness.  Has an improved web-site  Already completing work on Help Desk Facility that will facilitate response to enquiries.  Published information booklets on deposit insurance and distributed widely to all insured institutions. Work is on in translating the materials to Hausa, Igbo and Yoruba.  Organises annual Depositor Awareness Week  Organises annual Seminar for Financial Correspondents of Nigeria (FICAN) and their Editors. 21

 Access to ready and comprehensive stabilization toolbox without going through legislative process in times of crisis  Comprehensive toolbox includes powers to: Increase coverage limit (NDIC Act 2006 has granted such powers to NDIC Board) Broaden range of deposit products insured (NDIC also has the powers) Extend coverage to non-bank deposit taking financial institutions as in the case of MFBs and PMIs; and Restructure troubled insured institutions – NDIC has powers to adopt failure resolution options such as: Open Bank Assistance, depositor reimbursement, P & A and Bridge Banking. 22 Flexibility in dealing with a crisis

 Smooth cooperation and goodwill amongst safety net players essential  Information sharing, clear division of powers and responsibilities and coordination are particularly relevant  Formal arrangements essential to avoid or minimize potential conflicts  Coordinated actions most important when handling troubled banks 23 Close Cooperation With Other Safety Net Players

 NDIC collaborates actively with CBN, SEC, FMF, NAICOM, PENCOM and CAC  NDIC is an active member of Financial Services Regulation Coordinating Committee (FSRCC)  FSRCC has launched its web site to facilitate information sharing amongst its members as well as the public. 24 Close Cooperation With Other Safety Net Players: Nigeria’s Experience

25 THE NIGERIA’S EXPERIENCE: Challenges  Low-level Public Awareness of the Deposit Insurance System.  The Fiscal Responsibility Act which requires that 80% of the Corporation’s operating should be remitted to the Federation Account constrains rapid build-up of DIF  Long drawn-out litigation by erstwhile shareholders/directors of closed banks and cumbersome judicial process  Poor corporate governance of insured institutions.

Factors to consider for Constructing Trust Index  In my view, I believe that the following factors/parameters are critical in the construction of a financial Trust Index. The factors include:  Sound and Effective Legal Regime that stipulates and enforces right of contract  Strong Prudential Regulation and Supervision with appropriate institutional and policy framework 26

Factors to consider for Constructing Trust Index  Sound Accounting and Financial Reporting Regimes;  Comprehensive Disclosure Regimes that will guarantee transparency and promote market discipline;  Sound governance with all the required ingredients of Independence, integrity, transparency and accountability on the part of both the regulators and operators;  Effective risk management practices by both regulators and operators; and  Effective financial literacy. 27

Factors to consider for Constructing Trust Index  In addition to some other factors that could be found relevant, it is my view that the ‘Trust Financial Index’ could evolve when all the factors are assigned weights that reflect the peculiarities of the Nigerian environment and are calibrated. 28

29 CONCLUSION  Deposit insurance system is an integral part of an effective safety-net framework  A deposit insurance system is always designed to promote confidence and contribute to financial stability.  Effectiveness of a deposit insurance system depends on mandates and powers, capacity and flexibility to act promptly before banks are insolvent  NDIC’s case presents a remarkable experience

30 Conclusion Ct’d.  Finally, I believe that factors such as sound and effective legal regime, strong prudential regulation/supervision, effective legal regime and other factors listed above could be found useful in the construction of the proposed Financial Trust Index.  Thank you for your attention.