Written by The Nigeria Deposit institution is an independent federal agency that is in charge of protecting depositors’ funds and promoting the stability of the country’s financial system.
It is an institution responsible for protecting deposits and ensuring the safety of insured deposits.
The NDIC is responsible for providing deposit insurance coverage to all depositors of insured financial institutions, including banks, non-interest banks, and primary mortgage institutions in Nigeria.
In the event of the failure of an insured institution, the NDIC reimburses depositors up to a maximum insured amount.
History of the Nigeria Deposit Insurance Corporation
The Nigerian Deposit Insurance Corporation (NDIC) was established by the Nigerian government in 1988 through the NDIC Act, although it began operations in march 1989.
The establishment of the NDIC was in response to a series of bank failures and financial crises that occurred in the country in the 1980s.
Before the establishment of the NDIC, depositors in failed banks were often left with no recourse for recovering their savings, which led to a loss of confidence in the banking system and a lack of trust in financial institutions.
However, following the recommendations made in the reports of the committee formed in 1983 by the board of the central bank of Nigeria to examine the operations of the banking system in Nigeria, the Nigeria deposit insurance corporation was established through the promulgation of decree 22 of 15th June 1988 (now repealed and replaced with NDIC Act No. 16 of 2006).
The NDIC was created to restore public confidence in the financial system by protecting the financial system from instability caused by the loss of depositors’ funds.
Along with the Central Bank Of Nigeria, the NDIC supervise and regulate the financial institutions in the Nigerian financial system.
The NDIC also plays an important role in advising the Central Bank of Nigeria on matters relating to the liquidation of Distressed Banks.
As the chief deposits insurance agency, the NDIC is also charged with the responsibility of managing the assets of distressed banks until they are fully liquidated.
Factors that Lead to the Formation of The Nigeria Deposit Insurance Corporation
1. Bank failures: This is one of the major factors that lead to the formation of the Nigeria Deposit Insurance Corporation.
Nigeria experienced a high number of bank failures in the 1980s due to economic instability, mismanagement, and fraud.
The failure of these banks resulted in a large number of losses of depositors’ funds, threatened the stability of the financial system, and resulted in the loss of public confidence in the financial system.
Following this, the Nigeria Deposit Insurance Corporation was created in 1988 to address the issue of loss of depositors’ funds and restore the public image of the Financial system.
2. Sharp practices by Banks: As more banks entered the Nigerian banking industry, the competition for customers and deposits intensified.
This increase in competition among banks leads to sharp practices by banks.
For example, In a bid to attract more customers and retain existing customers, some banks engage in unethical and risky practices such as granting loans to uncreditworthy borrowers, mismanagement of funds, and insider abuses.
This resulted in an increase in bank failures and loss of depositor funds and highlighted the need for a deposit insurance scheme to protect depositors’ funds and regulate the activities of banking institutions.
For this reason, the Nigeria Deposit fund was established to protect Banks and other financial institution deposits.
3. Need for financial stability: The then government recognized the importance of maintaining financial stability in the banking sector, as instability in the banking sector could have a ripple effect on the wider economy.
So, a committee was set up in 1983 by the Board of the Central Bank of Nigeria to examine the operations of the Banking system In Nigeria.
The committee did its report and came up with a recommendation that a depositors protection fund should be set up.
This cumulated in the establishment of the Nigeria Deposit Insurance Corporation by the Promulgation of Decree No. 22 of 15th June 1988.
4. International Best Practices: The approach taken by several other countries at ensuring the financial stability of their banking sectors served as inspiration for the creation of the Nigeria Deposit Insurance Corporation (NDIC).
The NDIC was established in line with international best practices, as other countries had already established deposit insurance schemes to protect depositors and promote financial stability.
For instance, Czechoslovakia, the first country to institute national deposit insurance in 1924, was able to use the program to revive the nation’s banking system following the devastation of World War One.
Similarly, the United States of America established the Federal Deposit Insurance Corporation (NDIC) in 1933 in response to a banking collapse and panic.
So, to ensure that Nigeria follows international best practices at ensuring the stability of the financial system, the NDIC was established.
5. The structural Adjustment Program: Another thing that contributed to the formation of the Nigeria Deposit Insurance Corporation was the structural adjustment program (SAP), which was implemented in 1986 under the Babaginda administration.
It was envisaged that since the Structural Adjustment Program would result in the liberalization of the Bank licensing process, the number of Licensed Banks to be supervised by The CBN would significantly increase.
This highlighted the need for an explicit deposit insurance scheme with supervisory powers over insured institutions to complement the Central Bank of Nigeria’s supervision efforts.
The NDIC was, therefore, created to complement the Central Bank’s supervision efforts.
Indeed, even with the expansion in the number of banks from 40 in 1986 to 120 in 1992, which can be attributed to the Structural and Adjustment Program, the NDIC has consistently worked with the Central bank to conduct routine exams of licensed banks since it first began operating in 1989.
Functions of The Nigeria Deposit Insurance Corporation.
The functions of the Nigeria Deposit Insurance corporation can be found in Section 2 of the NDIC Act 2006.
According to this Act, The NDIC shall be responsible for:
- Insuring all deposit liabilities of licensed banks and other deposit-taking financial institutions operating in Nigeria to engender confidence in the banking system.
- Guaranteeing payments to depositors, in case of imminent or actual suspension of payments by insured financial institutions up to a maximum insured amount.
- Assisting monetary authorities in the formulation and implementation of banking policies to ensure sound banking practice and fair competition among banks operating in the country.
- Pursuing any other measures necessary to achieve NDIC functions provided such actions are not repugnant to its objectives
- Giving assistance to insured institutions in the interest of depositors, in case of imminent or actual financial difficulties of banks, particularly where suspension of payments is threatened, and avoiding damage to public confidence in the banking system.
Conclusion
To summarize, the Nigeria Deposit Insurance Corporation (NDIC) is a federal agency that protects depositors’ funds and promotes the stability of Nigeria’s financial system.
It provides deposit insurance coverage to all depositors of insured financial institutions in Nigeria and reimburses depositors up to a maximum insured amount in the event of an insured institution’s failure.
The NDIC was established in 1988 through the NDIC Act in response to a series of bank failures and financial crises in the 1980s that led to the loss of public confidence in the banking system.
The NDIC works with the Central Bank of Nigeria to supervise and regulate the financial institutions in the Nigerian financial system and manages the assets of distressed banks until they are fully liquidated.
The main factors that led to the formation of the NDIC include bank failures, sharp practices by banks, and the need for financial stability in the banking sector.
