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TRUST AND POLICY RENDERING: RE-WORKING THE NIGERIAN FINANCIAL SYSTEM IN THE FACE OF GLOBAL FINANCIAL REFORM

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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 ... – PowerPoint PPT presentation

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Title: TRUST AND POLICY RENDERING: RE-WORKING THE NIGERIAN FINANCIAL SYSTEM IN THE FACE OF GLOBAL FINANCIAL REFORM


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 AMET 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 Ctd
  • 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

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

6
Introduction Components of the financial safety
net
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
7
Enhancing Public confidence
  • 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
8
Enhancing Public confidence
  • 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

9
Enhancing Public confidence
  • 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 NIGERIAS EXPERIENCE
  • Increased deposit insurance coverage from N50,000
    to N200,000 per depositor for universal banks in
    2006.
  • Extended insurance coverage to MFBs PMIs at
    N100,000 per depositor in 2006.
  • 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 NIGERIAS 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.

12
Factors that make DIS Effective in Enhancing
Public Confidence
  • 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

13
Mandate and Powers
Pay Box Minimal Role Main function to make disbursement to depositors when banks fail
Cost Minimizer Seeks least cost resolution once bank is insolvent
Risk Minimizer Assesses and monitors risk on an on-going basis with wide intervention powers (NDIC is a risk minimizer)
14
Sound Governance A Key Element of Trust Building
Carry out all obligations effectively
Build credibility in good times
Well managed and well governed DIS
Build Trust
15
Operational Independence
16
THE NIGERIAS 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.

17
Adequate Funding
Support public Confidence
18
Nigerias 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.

19
Nigerias 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 N1.353.3 trillion. That is one of the
    critical challenges facing the Corporation.

20
Effective Public Awareness Programme
21
Nigerias 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.

22
Flexibility in dealing with a crisis
  • 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.

23
Close Cooperation With Other Safety Net Players
  • 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

24
Close Cooperation With Other Safety Net Players
Nigerias Experience
  • 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.

25
THE NIGERIAS EXPERIENCE Challenges
  • Low-level Public Awareness of the Deposit
    Insurance System.
  • The Fiscal Responsibility Act which requires that
    80 of the Corporations 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.

26
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

27
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.

28
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.

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
  • NDICs case presents a remarkable experience

30
Conclusion Ctd.
  • 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.
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