The decision of the Interim Management Committee (IMC) of the Nigeria Deposit Insurance Corporation (NDIC) to increase the Maximum Deposit Insurance Coverage, on Thursday, last week, was one of the best things to happen to the nation’s banking sector in recent times.
When the Managing Director (MD) of the corporation, Mr. Bello Hassan, entered the Conference Hall of the NDIC on that day to address a press conference, it was obvious that he was about to announce a major policy decision regarding the business of deposit insurance in the country.
That was exactly the case. Accompanied by top management staff of the organization, Mr. Bello announced the decision of the NDIC’s Interim Management Committee (IMC) to massively increase the deposit insurance coverage of all categories of licensed deposit-taking financial institutions.
Deposit insurance coverage refers to sum of customers’ deposits in banks that will be promptly reimbursed to depositors in the event of bank failure. If a bank depositor has deposits exceeding the maximum deposit insurance coverage, they can still receive balance of their funds through Liquidation Dividends paid after the sale of the failed bank’s assets and recovery of loans from debtors.
According to Mr. Hassan, the coverage for Deposit Money Banks (DMBs) was raised from N500,000 to N5 million. Primary Mortgage Banks’ coverage was raised from N500, 000 to N2 million, Payment Service Banks had theirs’ increased from N500, 000 to N2 million, while the coverage of Subscribers of Mobile Money Operators was also raised from N500, 000 to N5 million.
In addition, Microfinance Banks’ Maximum Deposit Insurance coverage was increased from N200, 000 to N2 million.
When asked how fully equipped the regulatory organization was, to be able to pay such huge sums if a bank failed, the MD explained that the NDIC has what it takes to meet its obligations, should there be a failure of any bank. According to him, there is a Deposit Insurance Fund which has accumulated an excess amount of N2 trillion from premiums paid by insured institutions over the years with which to implement the policy. The MD added that the corporation has access to contingency and other funding arrangements should the need arise.
He said that the decision to raise the coverage levels was taken by the Interim Management Committee (IMC) of the NDIC during its 18th meeting at the end of April, following a 2023 study by the organisation, to determine the adequacy of the Maximum Deposit Insurance Coverage in the country.
Mr. Hassan’s words, “NDIC’s Interim Management Committee (IMC), during its 18th meeting held on April 24th and 25th, approved an increase in the maximum deposit insurance coverage levels for all licensed deposit-taking financial institutions with immediate effect. The adjustments are as follows: Deposit Money Banks (DMBs): The increase of the maximum deposit insurance coverage from N500,000 to N5,000,000, would provide full coverage of 98.98% of the total depositors compared with the current cover of 89.20%.
“In terms of the value of deposit covered, the revised coverage would increase the value of deposits covered by deposit insurance to 25.37% compared with the current cover of 6.31% of total value of deposits.
“Microfinance Banks (MFBs): The increase of the maximum deposit insurance coverage from N200,000 to N2,000,000, which would provide full coverage of 99.27% of the total depositors compared with the current level of 98.76% and would increase the value of deposits covered by deposit insurance to 34.43% compared with 14.38% of total value of deposit, currently covered.
“Primary Mortgage Banks (PMBs): The increase of the maximum deposit insurance coverage from N500,000 to N2,000,000 would provide full coverage of 99.34% of the total depositors compared with the current 97.98% and would increase the value of deposits covered by deposit insurance to 21.04% compared with 10.77% of total value of deposit, currently covered.
“Payment Service Banks (PSBs): The increase of the maximum deposit insurance coverage from N500,000 to N2,000,000 would provide full coverage of 99.99% of the total number of depositors and would increase the value of deposits covered by deposit insurance to 43.10% of the total value deposits from the current cover of 40.60%.
“Subscribers of Mobile Money Operators: The increase of the maximum Pass-through deposit insurance coverage from N500,000 to N5,000,000 per subscriber per MMO as the applicable coverage level for depositors of DMBs.”
Periodic Research on Coverage Levels
The MD said the maximum deposit insurance coverage was determined through periodic research, to ensure its adequacy and credibility and that various factors considered in setting the coverage level were: deposit distribution, impact of inflation, per capita GDP, exchange rate and other statistical models, among others.
Global Trends in Deposit Insurance Coverage
A recent policy document of the International Association of Deposit Insurers (IADI) confirms that deposit insurers across the world fully cover a very high share of accounts/depositors, which is exactly the case with the NDIC’s decision.
It said, “In almost half of jurisdictions, deposit insurance coverage levels are set at around twice the GDP/capita value (±1 point). Coverage levels are markedly higher (lower) in upper middle income (low income) jurisdictions.
“Globally, slightly more than half the value of eligible deposits are not insured by deposit insurance. The same goes for slightly over 60% of total deposits.”
The increase in levels of coverage as announced by Mr. Hassan, showed that for DMBs, the N5 million deposit insurance coverage provides full cover for 98.98 percent of depositors. That means that only about 1.2 percent depositors have more than N5 million in their accounts.
Similarly, among account holders of Primary Mortgage Banks, the N2 million coverage gives full protection to 99.34 percent; the N2 million cover in account holders of Microfinance Banks also providers full cover for 99.27 percent of customers.
Coverage Adequacy
The analysis above shows that the bulk of banks’ customers have been fully protected under the new coverage levels, which is a demonstration of NDIC’s commitment to enhancing depositors’ protection, public confidence, financial inclusion, and stability of the financial system.
As the MD put it at the press conference, the small percent of banks’ customers who have more than N5 million are high net worth customers who have the capacity to undertake risk analysis of banks or who have the resources to engage experts to advise them on the standing of each bank.
For instance, as at the end of June 2023, the total number of DMB’s customers stood at 206.166 million. Out of that number, those with N5million and below in their accounts were 204.06 million, which showed that only 2.102 million or 1.02 percent out of 206.166 million account holders had more than N5 million in their accounts.
Similarly, among the 205, 810 accounts holders of PMBs as at end June 2023, 204,469 customers had N2 million and below, leaving only 1,341 (0.66 percent) who had more than N2 million in their accounts.
At the level of Microfinance Banks, there were 16.889 million customers as at June last year. Out of that number, 16.765 million had N2 million and below, leaving only 124, 031 depositors with more than the coverage level of N2 million. Those with more than N2 million constituted about 0.72 percent.
The increase of the deposit insurance coverage, notwithstanding, all bank customers have a responsibility to ensure that the banks they patronize play according to the rules of the game. Particularly, every member of the society has a responsibility to bank with only deposit-taking institutions that are licensed by the Central Bank of Nigeria (CBN) and indeed covered by the NDIC.
The NDIC boss has repeatedly advised members of the public to avoid unlicensed deposit-taking institutions, as such organisations had no insurance and that such deposits could be in danger.
Unlicensed deposit-taking organisations usually often make mouth-watering offers in order to attract gullible members of the society who discover, much later, that they are dealing with fraudsters.
All licensed deposit-taking financial institutions are listed on the websites of the NDIC and Central Bank of Nigeria and can be easily verified to avoid becoming victims of fraudsters, the NDIC MD stressed.
No Increase in Premium
Despite the increase in coverage, concerns may arise regarding whether banks will have to pay higher premiums. However, the Managing Director has clarified that the heightened coverage levels will not lead to an increase in the premium paid by banks. This assurance comes as a relief for the banking sector. Moreover, the expanded coverage is expected to enhance depositor confidence, attracting more individuals to save their earnings in banks.
It’s essential for each bank to adhere to prudential guidelines, ensuring that while they pursue profitability, they do not jeopardize depositors’ funds. This responsibility is particularly crucial now, the enhanced coverage does not impose additional premium obligations on banks.
Historical Perspective
The maximum deposit insurance coverage for depositors of DMBs was set at N50,000 at the inception of the Corporation in 1989 through a research survey.
The amount was set in such a way that up to 85% of the total depositors in the nation’s insured banks would be 100% covered. Subsequently, 96% of all depositors were protected when the coverage ceiling was raised from N50,000 to N200,000 in 2006.
The coverage limit of N100,000 was also set, for the first time, for MFB and PMB depositors in the same year. In the year 2011, the coverage limits for DMBs increased from N200,000 to N500,000 and from N100,000 to N200,000 for depositors of MFBs and PMBs.
The coverage level was further adjusted to N500,000 in 2016 for PMB depositors, as well as, subscribers of licensed Mobile Money Operators (MMOs). Coverage of N500,000 was equally extended to depositors of Payment Service Banks (PSBs) in 2020. Meanwhile the coverage for DMBs remained at N500,000, its adjustment, last week.
