After what appeared to be a major confrontation between the Central Bank of Nigeria (CBN) and the Nigeria Deposit Insurance Corporation (NDIC) over some amendments to the NDIC Act, the agencies have agreed to collaborate to ensure financial stability, reports COLLINS NWEZE.
It is not in the interest of the banking system to see two key regulators at daggers drawn. That explains the concerns over the regulatory faceoff between the Central Bank of Nigeria (CBN) and the Nigeria Deposit Insurance Corporation (NDIC) over banking supervision.
The war between the CBN and NDIC dates back to 1997 when the NDIC was accused by the CBN of taking over its regulatory roles. By 1998, however, the CBN was able to retain its regulatory position.
Currently, the NDIC wants the representatives of the CBN and the Ministry of Finance on its Board to be amended from directors to Deputy Governor and Permanent Secretary, respectively, to achieve a higher level co-ordination in banking policy formulation and implementation.
Besides, the NDIC Managing Director Alhaji Umaru Ibrahim wants to deepen the corporation’s commitment to transparency, accountability and probity. All employees and board members are required to exhibit high level of professionalism and ethical conduct. This is in line with the standards being demanded from all members of the deposit insurance system worldwide.
Issues at stake
Firstly, Nigerian banks have become conglomerates, having established a number of subsidiaries. In order to prevent such subsidiaries being used as vehicles to circumvent banking laws, rules and regulations or as avenue through which depositors’ funds are dissipated, the NDIC argued that “it is imperative that the Corporation through the auspices of the Financial Services Regulation Coordinating Committee (FSRCC) have access to the books and affairs of all the subsidiaries of insured banks to enable it assess on-going transactions between them. The proposal seeks to ensure that consolidated supervision of banking groups is carried out effectively.” This piece of proposed amendment however, does not sit pretty with the CBN.
Following the bank consolidation in Nigeria, the asset base of Deposit Money Banks (DMB) have grown so large that failure of any one of them could pose a serious threat to the Deposit Insurance Fund (DIF). Consequently, the NDIC is concerned that “there is the need for a statutory contingency plan to address open bank resolution in order to prevent failure as much as possible. There is the need to set up an Insured Institution Resolution fund that would be used to address distress on a going concern basis. We therefore propose the establishment of such a fund in a new Subsection (3) of the extant section 37,” said the NDIC boss.
Equally, the Banking and Other Financial Institutions Act (BOFIA) has a provision empowering the Corporation to assume control of certain category of failing banks but the NDIC Act has no provision stipulating the status of the Corporation in such circumstances. Based on this disparity, the NDIC wants its status to be linked to that of a conservator.
“Accordingly, a bank which the Corporation has assumed control of should be protected from attachment of its assets to assist the Corporation restructure the bank successfully. In addition, there is need to prohibit attachment on assets of the Corporation for liability of a failed bank because it is acting as conservator of such bank,” Ibrahim explained.
Speaking further, Ibrahim said that whenever the revocation of the license of a bank and the Corporation’s status as provisional liquidator is being challenged in court, several other suits are also instituted by landlords, judgment creditors, and other claimants against the failed bank and the NDIC. The suits invariably drag the corporation to defend the failed bank even when it’s status is tenuous. As a result of this, NDIC is seeking for an amendment to the existing laws “to ensure that all such suits abate pending resolution of the winding up petition.”
Ibrahim equally told the Senate that the requirement for payment of insured deposit only in the event of revocation of an Insured Institution’s operating license poses restraint on the Corporation’s ability to effectively carry out its mandate.
“Experience has shown that an insured institution may actually be insolvent and not merely illiquid and therefore suspends payment or is quite unable to meet its obligations to its depositors thereby causing hardship to those depositors even when it’s operating license has not been revoked,” he said.
This proposed amendment he said “therefore seeks to expand the crystallisation of the Corporation’s liability in the payment of insured deposit in Insured Institutions beyond revocation of license to include suspension of payment and inability to meet up with obligations to depositors as a result of insolvency in such institutions. The proposed amendment also seeks to put a time limit on the period of suspension of payments and further reduce the period within which the corporation is obliged to make reimbursement from 90 days to 30 days to its depositors, either by- cash, electronic transfer, negotiable instrument.”
The NDIC put up a strong argument that “there is the need for the corporation to have powers that would enable it pay insured depositors of failed banks even in the face litigation challenging revocation of the failed institutions operating license. This will reduce the extent to which depositors are subjected to untold hardship anytime litigants institute action the corporation to forestall liquidation of a failed bank.”
Section 40(7) does not actually prevent the filling of the application for an injunction preventing payment of insured deposits. The amendment proposed here will enable the Corporation pay insured deposit irrespective of the filing of such application in court as payment of insured deposit will be statutorily obligatory. In the event that the license of the institution is restored, the Corporation would have a right of subrogation.
The proposed amendments also seeks to incorporate provisions aimed at enhancing the legal framework for the Corporation to effectively carry out liquidation activities or non interference from the courts and other challenges. The powers expected, “include acting as liquidator upon the revocation of license of a failed bank, ensuring payment of deposits to depositors but it’s license has not been revoked, prohibition on the attachment of the assets of the corporation when acting as liquidator in respect of liability of a failed bank and enhanced debt recovery provisions to enable the Corporation recover debts owed to failed banks promptly.”
However the NDIC got a bashing when it asked for “provisions limiting the powers of courts whose effect is to prevent or frustrate the Corporation in performing its statutory obligation and carrying out its mandate.” To this request, lawyers to on the side of the CBN and a Senator who is a lawyer of over 30 years standing in the bar argued against any laws limiting the powers of the courts in any way manner or form.
To the NDIC, “it is most important to note that the above powers proposed were adopted from the laws governing the operations of the Federal Deposit Insurance Corporation in the United States of America along which lines the Nigeria Deposit Insurance Corporation was fashioned. The Corporation is therefore not re-inventing the wheel but is merely adopting best practices that have proved successful over time.”
CBN speaks
CBN Deputy Governor Operations Alhaji Suleiman Barau argued that following the decision of the NDIC to amend its 2006 Act, the CBN held various meetings to review the proposals to ensure consistency with the goals of financial system stability.
He drew the attention of the NDIC to several objectionable clauses in the proposed Act, which at the least sought to confer coordinate functions and powers on the NDIC. Specifically, the attention of the Corporation was drawn to the implications of the enactment of the Act as proposed as it would make the NDIC a parallel/coordinate regulator for banks as CBN; confer conflicting supervisory functions and powers on NDIC over banks; and create overlapping regulatory responsibilities for the NDIC.”
Barau and the CBN argued that the powers that the Corporation sought to assume and exercise and the consequences include: Power to Licence Banks: Power to Supervise Banks without Reference to the CBN: Power to Determine the Licences of Banks and Power to appoint itself as Liquidator.
Barau argued that “all the above powers, which the NDIC seeks to assume and exercise, are ostensibly to ensure that it carries out its function as a risk minimiser and that depositors of distressed banks and other deposit taking financial institutions are paid in good time to avoid delays. While the CBN supports the desire to pay depositors of distressed institutions in good time, the proposal to make NDIC “the judge and juror” in cases involving banks is fraught with dangers and is a recipe for financial instability.”
NDIC roles
Then and only then, the CBN insisted “will its (NDIC) role in the financial system as it relates to banks and other deposit taking financial institutions be properly defined. The founding fathers of the NDIC, he noted, must have had this in mind in setting up the Corporation, as its responsibilities were aptly couched under Section 2 (1) of its enabling Act as follows: “the Corporation shall have responsibility for- insuring all deposits liabilities of licensed banks and such other deposit taking financial institutions (hereinafter referred to as “insured institutions”) operating in Nigeria within the meaning of sections 16 and 20 of this Act so as to engender confidence in the Nigerian banking system.
The NDIC is also expected to give assistance to insured institutions in the interest of depositors, in case of imminent or actual financial difficulties particularly where suspension of payments is threatened to avoid damage to public confidence in the banking system among other roles.
The above responsibilities, the CBN argued, should form the basis of the mandate of the Corporation, because it does not differ from those in other jurisdictions including Canada, Malaysia, and Japan. “Consequently, the new powers that the Corporation seeks to assume and exercise are not only difficult to subsume under its responsibilities as detailed above, but are alien to deposit insurance practices in those jurisdictions.
Other jurisdictions
The CBN Deputy Governor emphasized that “the USA banking system can hardly be used as an example of best practice as the dual federal-state banking system evolved partly out of the complexity of the U.S. Financial system, with its many kinds of depository institutions and numerous chartering authorities. It has also resulted from a wide variety of federal and state laws and regulations designed to remedy problems that the US commercial banking system has faced over its history.
The US financial system is therefore unique and not replicated anywhere in the world; hence our concern at the constant reference to the system as “best practice” by the NDIC. Certainly, a country from where the global financial crisis started cannot be cited as an example for the rest of the world to follow.”
Other stakeholders speak
At the end of both sides’ arguments, Managing Director, Financial Derivatives Company Limited, Bismark Rewane cautioned both parties to bear in mind that delays in settling depositors claims on time means that the amount involved for every individual would have lost its value as well as being eroded by inflation. He opted for a speedy payment of the claims of depositors of failed banks and financial institutions so the innocent public does not suffer unnecessarily.
The Chairman, Senate Committee on Banking, Insurance and Other Financial Institutions, Senator Bassey Edet Otu says that the position of the CBN as the prime regulator in Nigeria’s financial system cannot be disputed. According to him, the committee was committed to ensuring the safety of financial deposits of Nigerians and as such would not support a Bill capable of compromising the powers of both the CBN and the NDIC.
