For many stakeholders, ongoing clash between the Central Bank of Nigeria (CBN) and Nigeria Deposit Insurance Corporation (NDIC) over proposed amendment of the NDIC Act 2006 is a distraction that should be stopped to safeguard the banking sector. They insist that the proposed Act, which seeks to duplicate regulatory roles, could hurt financial sector stability and dampen depositors’ confidence, writes COLLINS NWEZE.
The banking sector has been evolving in recent years, bracing up for new challenges. For instance, the Central Bank of Nigeria (CBN) and other stakeholders are promoting the cash-less banking initiative, a policy meant to move the economy away from cash. So far, the cash-less banking initiative has made banking easier and transactions faster for customers.
But getting things done differently, may sometimes spell doom for the economy especially if such move will hurt financial sector stability and subsequently, customers’ confidence in the sector.
That explains rising skepticism over the planned amendment of the Nigeria Deposit Insurance Corporation (NDIC) Act 2006, to bring about proposed NDIC Act 2014.
But the Corporation simply wants a change from the status quo. Managing Director/Chief Executive of the NDIC, Alhaji Umaru Ibrahim, insisted that the proposed amendments were based on lessons learnt from past and recent experiences of the corporation in the supervision of banks and protection of bank deposits.
As financial experts weigh the necessity or otherwise of the proposed Act, the two regulatory institutions have engaged in protracted debate.
Other stakeholders also held different views from that of the NDIC’s boss. The Director-General, West African Institute for Financial and Economic Management (WAIFEM), Professor Akpan Ekpo said the Act, if enacted, would run contrary to the established responsibilities of deposit Insurance Corporation.
He said it would also give NDIC power to license banks, suspend banks without recourse to the CBN, determine the licences of banks and appoint itself as a liquidator. This, he said, overlapped with that of the role of the CBN and out of line with the functions of the deposit insurers anywhere in the world.
He called for clear indications of mandate and collaboration from both institutions in the interest of growth and development of the economy. “There is no need amending the NDIC Act to enable it be at par with the CBN. It will amount to overkill. It has never happened anywhere in the world. It will create a loot of confusion and weaken the financial system,” he told The Nation.
A financial expert and strategist, Mr Opeyemi Agbaje, did not believe any serious changes will be made in the banking regulatory landscape, implying that the NDIC’s proposed Act 2014 may not materialise. He said now is not the time to begin radical changes in the financial services sector.
Also, Mr Bismarck Rewane, an economist, said it was not necessary for the NDIC to seek for additional powers for effective operations. “Since there has been an existing collaboration between the two institutions, they should work in the interest of the growth of the sector,’’ he said.
For the CBN Governor, Godwin Emefiele, amending the NDIC Act will spell doom for industry. “Permit me to humbly invite the Senate Committee on Banking, Insurance and Other Financial Institutions to note that the amendments being sought by the NDIC are the very ingredient for chaos and anarchy, and will threaten the fabric of our financial stability, which, ironically, the Corporation claims, it is seeking to ensure. Rather, in the interest of financial stability, we propose that this opportunity be used to review the Corporation’s enabling Act to focus it on its essence, which is deposit insurance, in line with best practices.
“We submit the above for the consideration of the Senate Committee on Banking, Insurance and Other Financial Institutions, please,” Emefiele stated while submitting the memorandum.
While it is clear that CBN is not totally opposed to change in all the sections of the NDIC’s proposed Bill, Emefiele kicked against certain aspects of the proposal at a hearing of the Senate Committee on Banking, Insurance and other Financial Institutions on the amendment. He said that if the bill was passed as recommended, it would make the NDIC and the CBN parallel regulators of the country’s banks.
“It will confer conflicting supervisory functions and powers on NDIC over banks and create overlapping regulatory responsibilities for the corporation,’’ Emefiele said.
The CBN governor, who was represented by Deputy CBN Governor (Operations), Alhaji Suleiman Barau, said that the apex bank also objected to Section 49 of the draft bill, which empowered the NDIC to appoint itself as liquidator upon the revocation of a bank’s licence by the CBN, among others.
However, analysis of the powers that the corporation sought to assume and exercise and the consequences thereof are still ongoing but tilting in favour of CBN.
Regulatory powers sought by NDIC
The Corporation seeks power to licence banks which was evidenced by the position of the NDIC that applicants for banking licences should simultaneously submit to the CBN and the NDIC, their applications for licences to enable the Corporation determine whether or not it will grant Deposit Insurance Status to the bank, if and when licensed.
CBN said this position, appears to still form the bedrock of some of its current proposals on the amendments and is the basis for some of the powers that it seeks to exercise. In this regard, it is the corporation’s position that since it is not involved in the licensing of the banks but is compelled to insure them, it should be bestowed with the power to determine their deposit insurance status with a mere notification in writing to the CBN.
Another is the power to supervise banks without Reference to the CBN: The NDIC’s position in this respect is evidenced by its written request to the CBN that banks in the financial system be equally shared between both organizations with each party able to exercise regulatory and supervisory powers over its “share” without reference to the other.
It is in this regard that the corporation proposed to examine banks and issue reports thereon without reference to the CBN. Also, the corporation seeks to be able to remove board and management based on the report of its examinations on these banks. Furthermore, the Corporation has sought powers to carry out the consolidated supervision of banks subsidiaries, associates and affiliates without due regard for the sector regulators of such entities.
It also seeks power to determine the licences of banks: The power sought by the NDIC in this regard is evidenced by the proposed amendment to its Act which will empower it to terminate the Deposit Insurance Status of a bank with a mere notification in writing to the CBN.
Experts explain that one of the effects of such an action alongside the consequential run on the bank, will be the technical and effective revocation of the bank’s licence, as deposit insurance coverage is a mandatory requirement for a licensed bank. This power, which is subsequent upon the occurrence of some events that are listed in the proposed Act, can be exercised by the Corporation on its own with a mere notification in writing to the CBN.
It also seeks the power to appoint itself as liquidator: Subsequent to the power to determine the licence of a bank as detailed in (3) above, the Corporation also seeks the power to appoint itself as liquidator of the same institution. In other words, should its proposal receive a favorable consideration, NDIC would licence, supervise, insure and resolve a bank.
Industry analysts said 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 minimizer and that depositors of distressed banks and other deposit taking financial institutions are paid in good time to avoid delays.
Implications of the Act
While the CBN supports the desire to pay depositors of distressed institutions in good time,it says the proposal to make NDIC “the judge and juror” in cases involving banks is fraught with dangers and is a recipe for financial instability.
“It is indeed the ingredient for chaos and anarchy and is not practiced in any financial system in the world. There is also the moral hazard of the NDIC as a deposit insurer that charges premium on the basis of the riskiness of an institution which it supervises without recourse to the CBN to rate such institutions as riskier than they actually are in order to enhance the premium charged to bolster the deposit insurance fund.
“Consequently, it is essential that the NDIC must flow from its primary function, which is the basis for its establishment, that is, Deposit Insurance. Then and only then, will its role in the financial system as it relates to banks and other deposit taking financial institutions be properly defined,” CBN stated in a memorandum to the senate committee at the Public Hearing on the Proposed Amendment (House of Representatives).
To Ibrahim, the proposed amendments are aimed at incorporating provisions that would enhance the legal framework put in place for the corporation to effectively carry out liquidation activities with little or no interference from courts, among other challenges.
He, nonetheless, pledged the corporation’s readiness to work in collaboration with the CBN in a sustainable manner.
“This has been the culture, we are not in competition with the CBN; we are here to work together for the growth and development of the banking sector.
“All we are asking for is additional powers to work effectively and we are not competing with the CBN,’’ he said.
Other jurisdictions
To those in the camp of the apex bank, the above responsibilities, which should form the basis of the mandate of the corporation, do 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.
The NDIC cited two reasons for its proposal, which are: The Core Principles for Effective Deposit Insurance issued by the International Association of Deposit Insurers (IADI) issued in June 2009; and the practice in the United States of America, where the Federal Deposit Insurance Corporation (FDIC), along with the Federal Reserve and the Office of the Comptroller of Currency regulates and supervises banks to ensure the safety and soundness of financial institutions, stability in the financial markets, and fair and equitable treatment of consumers in their financial transactions.
Regarding the Corporation’s assertions with regard to (i) above, experts explained that the IADI Core Principles for Effective Deposit Insurance Systems on which the Corporation relies for its propositions acknowledges the limitation of deposit insurance in ensuring financial stability. Specifically, item 5 under the core principles and preconditions states that, a deposit insurance system is not intended to deal, by itself, with systemically significant bank failures or a “systemic crisis”.
In such cases all financial system safety-net participants must work together effectively. Furthermore, Core Principle 1, states that, “… the principal objectives for deposit insurance systems are to contribute to the stability of the financial system and protect depositors”.
This principle makes no reference to supervision and does not advocate a take-over of the supervisory function as is being canvassed by the NDIC. The IADI Core Principle 2 on mitigating moral hazard, expatiating on the role of the deposit insurer, states that, “…the deposit insurance system contains appropriate design features and through other elements of the financial system safety net”.
Also, Item 4, under the core principles and preconditions states that, “the introduction or the reform of a deposit insurance system can be more successful when a country’s banking system is healthy and its institutional environment is sound.
While a herd of analysts agree that the Federal Reserve shares supervisory and regulatory responsibilities for domestic banking institutions with the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), and the Office of Thrift Supervision (OTS) at the federal level, and with the banking departments of the various states, the primary supervisor of a domestic banking institution is generally determined by the type of institution that it is and the governmental authority that granted it permission to commence business.
