BANK DEPOSIT INSURANCE SCHEME IN NIGERIA

By

Author

Presented To

Department of Accountancy

TABLE OF CONTENT

TITTLE PAGE

APPROVAL PAGE

DEDICATION

ACKNOWLEDGEMENT

ABSTRACT

TABLE OF CONTENT

LIST OF TABLE

LIST OF FIGURES

CHAPTER ONE

1.0 INTRODUCTION

1.1 STATEMENT OF PROBLEM

1.2 PURPOSE OF THE STUDY

1.3 SIGNIFICANCE OF THE STUDY

1.4 STATEMENT OF HYPOTHESIS

1.5 SCOPE OF THE STUDY

1.6 LIMITATIONS OF THE STUDY

1.7 DEFINITION OF TERMS

REFERENCE

CHAPTER TWO

2.0 LITERATURE REVIEW

2.1 THE ROLE OF BANS IN AN ECONOMIC SYSTEM

2.1 CAUSES OF DISTRESS BANKS

2.2 TECHNIQUES FOR IDENTIFYING DISTRESSED BANKS

2.3 BRIEF HISTORY AND BUSINESS OF SAVANNAH BANK OF NIG. PLC.

2.4 RATIONALE FOR THE ESTABLISHMENT OF NDIC

2.5 ROLE AND BENEFITS OF NDIC TO NIGERIA

2.6 EXPECTED ROLE OF NDIC TOT HE BANKING SYSTEM

2.7 OPERATIONAL ISSUES

2.8 MERCHANT BANKS' CONCERN

2.9 INTERNATIONAL DEVELOPMENT ON CONVERGE

2.10 EXCLUSION OF GOVERNMENT STOCK TREASURY BILLS AND CERTIFICATES

2.11 NDIC AND BANK DIRECTORS

2.12 THE ROLE OF FAILED BANK TRIBUNAL AND DISTRESSED BANKS

REFERENCE

CHAPTER THREE

3.0 RESEARCH DESIGN AND METHODOLOGY

3.1 SOURCES OF DATA

PRIMARY DATA

SECONDARY DATA

3.2 SAMPLE USED

3.3 METHOD OF INVESTIGATION

REFERENCE

CHAPTER FOUR

1.0 DATA PRESENTATION AND ANALYSIS

4.1 DATA ANALYSIS AND INTERPRETATION

4.2 TEST OF HYPOTHESIS

REFERENCE

CHAPTER ONE

10 INTRODUCTION

BACKGROUND OF STUDY

A bank deposit insurance scheme is widely seen as a financial guarantee to depositors, particularly the small ones, in the event of bank failure Bank deposit insurance scheme developed out of the need to protect depositors, especially the uniformed, from the risk of loss and to protect the banking system from instability occasioned by falls and loss of confidence The banking system has been singled out for this special protection because of the vital roles banks play in an economy especially in the process of economic development

The Nigeria Deposit Insurance corporation is an agent of financial government of Nigeria established by decree No 22 of 15^th June, 1988 to insure the deposit liabilities of licensed banks and other deposit - taking financial institutions operating in Nigeria The authorized capital of the corporation is N100million out of which N50million has been already called and paid up The scheme protect depositors of failed banks either by paying off depositor or arranging for their deposit to be assumed by another bank which is viable In a deposit pay-off, the decree specifies that NDIC shall make direct payment to a depositor up to a maximum amount of N50,000,000

Deposit in excess of the amount may be met in part if these are sufficient funds after the bank is liquidated

Nigeria Deposit Insurance Scheme maintain the fund system to which every licensed banks are required to pay 15/16 of one percent of the total accessible deposit liabilities standing in its books as at 31^st December of the preceding year The rate is designed to provide premium reserve fund to offset claims in the event of pay off or to support a failing bank For instance, any financial and technical support that may be required to safeguard the banking system are to be met out of the premium reserve fund A systematic failure of deposit taking institutions increases the level of distress in the financial system, results on disintermidiation, low saving and investments, poor execution of monetary policies and the disruption of the payment system

Among the action usually taken by government to restore stability are the restructuring of the distressed institution, the improvement of the existing bank supervision and examination systems and the establishment of deposit insurance schemes In particular, the creation of explicit deposit insurance schemes are intended to help restore public confidence in the banking system, provide the government with a formal mechanism for dealing with failing institutions and assure that small depositors would be protected in the event of failure

Generally, more explicit insurance schemes supervise the institutions they insured The off-sight surveillance of the scheme to develop early roaming signal against potential problems on insured institutions Also, through on-sight examination, the deposit insurer is able to monitor the soundness of insured institutions These supervisory activities in addition to various forms of assistance to insured institutions, including deposit guarantee's to depositors, engender depositor's confidence in the financial system A high level of depositors is a necessary condition for bank stability, for without such confidence even unfounded rumours of an institution's unsoundness would trigger deposit runs and precipitate instability in the financial system

11 STATEMENT OF PROBLEMS

The nation is today once again witnessing a proliferation of new banks in our system This together with the on-going deregulation of the banking system justifies the government decision to find alternative means of protecting the interest of depositors Thus, the introduction of Deposit Insurance Scheme was considered to provide a watershed between the old and the new stance of government as a veritable scheme that would serve as a vehicle to allow a change in policy

By the end of 1991, for example, eight (8) banks in

Nigeria was officially classified as distressed By December, 1992 the number rose to fifteen (15) it was up to twenty-seven (27) as at December, 193, forty-seven (47) as at December, 1994 "it" rose to fifty-seven (57) as at July, 1995 The was the more reason urgent attention, should be given to this canker-worn that has eaten deeply into the economic fabric of this great nation - Nigeria

In the year 1988, Deposit insurance Scheme was

established banks The problems encountered by the scheme are:

1 Failure to understand the regulation and purpose of the scheme

2 Inadequacy of offices to handle and monitor banks within their zone

3 Most bank directors regard certain information confidential

which is needed by the scheme to execute their supervisory function

4 Merchant banks opted for exemption because the amount of coverage of N50,00000 is exactly equal to their minimum deposit

5 Some banks refused to channel their full participation with the argument that the scheme ought to have been voluntary since some banks especially the large ones are not likely to fail

6 Some banks have argued that all deposits with licensed banks need not be insured, since a good proportion of the deposits in licensed bank is not exposed to risk

However, among the questions to be answered in the research work, include:

1 What are the rational for establishing Bank Deposit Insurance Scheme in Nigeria?

2 What is the functional relevance of the Deposit Insurance Scheme to the banking system since its' inception in Nigeria

3 Is there any relationship between NDIC and Commercial/Merchant Bank in crisis?

4 Is there any relationship between NDIC and the Central Bank of Nigeria?

5 Is the present 'Dis' adequate for the Nigeria financial system?

6 What are the achievements of NDIC since it's inception?

7 What role did NDIC play in the operation of Savannah Bank of Nigeria?

8 What is the role of the government, the CBN and Ministry of finance in the operation of NDIC?

9 What is the role of the failed bank tribunal in distressed

12 PURPOSE OF STUDY

The purpose of this research work is among other things to:

i Examine the rational for establishing Bank Deposit Insurance Scheme in Nigeria

ii To determine the functional relevance of Nigeria Deposit Insurance Scheme to the Banking system up to date

iii To ascertain the relationship between NDIC and Commercial Merchant Bank in crisis

iv To critically examine the differences and similarities of NDIC and Insurance Company

v To unveil relationship between NDIC and the Central ank of Nigeria

vi To ascertain the role of NDIC in the operation of Savannah Bank of Nigeria

vii To critically examine the role of Government, the Central bank of Nigeria and the Ministry of Finance in the operation of NDIC

viii To compare NDIC with USA, FDIC

ix To critically examine the role of the failed bank tribunal in distress banks

x To critically examine the adequacy of the present "Dis" for the financial system

xi To proffer suggestions to make the scheme more functional where necessary, in order to attain it's stated objectives

13 STATEMENT OF HYPOTHESIS

(a) Ho - There is no rational for establishing Bank Deposit Insurance Scheme in Nigeria

Hi - There is rational for establishing Bank Deposit Insurance Scheme in Nigeria

(b) Ho - There is no functional relevance of the Deposit Insurance Scheme to the Bank system since it inception in Nigeria

Hi - There is functional relevance of the Deposit Insurance Scheme to the Banking system since its inception in Nigeria

(c) Ho - There is no relationship between NDIC and Commercial/Merchant Bank in crisis

Hi - There is positive relationship between NDIC and Commercial/Merchant Banks in crisis

(d) Ho - There is no relationship between NDIC and the Central Bank of Nigeria

Hi - There is positive relationship between NDIC and the Central Bank of Nigeria

(e) Ho - There is no positive relationship between NDIC and old Savannah Bank of Nigeria

Hi - There is positive relationship between NDIC and old Savannah Bank of Nigeria

(f) Ho - The present "Dis" is not adequate for the financial system

Hi - The present "Dis" is adequate for the financial system

14 SIGNIFICANCE OF STUDY

The study will attempt to identify the causes of distress

bank especially in old Savannah Bank of Nigeria as a selected case study The significance of the study as at this point in time cannot be over - emphasized The following will benefit immensely from the work

a Researchers

b the bankers, financiers and the insurers

c the government and regulatory authorities

d students

e the general public

A RESEARCHERS

Other researchers in the field can make use of this work,

they can continue from where the work stopped bearing in mind that this is not a comprehensive research work

B BANKERS, FINANCERS AND THE INSURERS:

If the aforementioned go through this piece of work

thoroughly, they would be able to assess fully if NDIC is living up to expectation, they would be able to make useful suggestion towards correcting the issue

C GOVERNMENT AND REGULATORY AUTHORITIES:

The government of the Federal Republic of Nigeria

established NDIC in the year 1988 From this piece of research work, the government and her regulatory bodies would be able to ascertain the performance of NDIC since its inception In the course of doing this, they would be able to identify the area NDIC has covered fully and to reconcile the two by mapping out strategies to arrest the loopholes

D STUDENTS:

Students in higher institutions will surely benefit a lot

from this work They will use this for academic work as well as research assignment

E GENERAL PUBLIC:

The general public are the consumers of financial services

prior tot he establishment of NDIC in Nigeria, depositors interest in the banking industry had reduced drastically this was as a result of their not being protected in time of bank crisis or failure With the establishment of NDIC, depositors went back to the banks freely for their business In essence, after going through this work, the general public would be able to assess NDIC through its pros and cons

15 SCOPE AND LIMITATIONOF THE STUDY

This study is basically dealing on distress banks versus

NDIC Indeed, since the researcher is a student, who combined this research work with other things including academic work, because of time factor, money constraints and communication barrier one has to limit the scope of this study to Lagos Zonal office of NDIC and Old Savannah Bank of Nigeria It is strongly believe that the result, finding ad recommendations made will be applied to other NDIC Zonal offices and other distress banks in Nigeria because the chosen office have got some features that represent typical NDIC and distress banks in Nigeria

In the process of carrying out this research work, the researcher was faced with a good number of constraints and problems which contributed to the limitation of the entire research study The constraints and difficulties including the following:-

a Time constraints

b How literature rate

c Shortage of finance

d Secrecy and reluctance of respondents

e Current issue

A TIME CONTRAINTS:

The researcher consider time as one of the greatest

Problems because this study had to go along with normal lecture schedules, normal Semester exams, and normal social activities This retarded the researcher from devoting enough time to this study, hence the best is not achieved

B LOW LITERATURE RATE:

Much research work have not been done directly on the

area of this research study However, the writer could only rely heavily on the few available literatures, personal interview business journals use of seminar papers and issue of questionnaires

C SHORTAGE OF FINANCE:

Every Dick, Tom and Harry knows that finance is the

pivot on which every business retakes Business start with finance and ends with finance The researcher had problem of finance to visit NDIC office and Old Savannah Bank of Nigeria office regularly to cover much area and spread investigations hence the best result could be achieved

D SECRECY AND RELUCTANCE OF RESPONDENTS:

It was difficult for the NDIC officials and Old Savannah Bank of Nigeria officials to disclose some pieces of information which are vital to this study which they deemed as official secret

E CURRENT ISSUE:

Bank Deposit Insurance Scheme being a very current issue on which few banks and economists hence hardly passed little comments, presented another problem in terms of data collection

16 RESEARCH METHODOLOGY

The main source of data collection The research work is

primary source even though secondary sources helped in the research work Data was obtained from banks, NDIC, library research and oral interview Other materials used for this project include extracts from business firm, newspapers and textbooks, these consisted of my secondary sources of data collection

Statistical methods such as percentages and tables were used for the data analysis, where they were applicable

17 DEFINITIONOF TERMS

a Banking statute or law relating to banks and the banking system made by an authority or decree The first banking ordinance passed in Nigeria was 1952

b BAS - Banking Analysis System

c BOFID - Banks and Other Finance Institution Decree

d CBN - Central Bank of Nigeria

e DECREE - An enactment or law passed by any military government

f DEREGULATE - This terms means techniques used to stop further control or stop obeying a rule or standard

g DIS - Deposit Insurance Scheme

h DISTRESSED - Technical Insolvent

i DOMINO EFFECTS - Small flat effects

j EWS - early warning signals

k FDIC - Federal Deposit Insurance Corporation (USA) in a

position to obtain facts and information or win advantages that others cannot get for themselves

m NDIC - Nigeria deposit Insurance Corporation

n RISK-FREE INVESTMENT - Investment free from instance of possibility or chance of meeting danger, suffering loss, injury etc as used in the context, it means that investment in government securities could be regarded as the best investment that can be made by any investor

o SAB - Structural Adjustment Programme

p TSB - Transitional Supervisory Board

q OFF - SHORE BRANCHES OF BANKS - Branches Outside the Country of the bank's domicile

REFERENCES

1 Umoh, PN "The relevance and adequacy of the present deposit insurance in ensuring a healthy financial environment in Nigeria" being a paper presented by the fourth annual conference of zonal reassert units organized by the research department, Central Bank of Nigeria , held in Abuja, Nigeria on May, 23- 27 1995

2 Mgbojikwe, EN "management imperatives of a Bank in Distress", NDIC New vol 2, No 1 Jan/March, 1995

3 Deposit Insurance, "The Experience in Nigeria" Seminar for Senior Bank supervisors organized by the world Bank/Federal Reserve Board Accra, China

4 Ballama Manu, NDIC Quarterly, Nigeria Deposit Insurance Corporation vol 4, No 3, Sept 1994