Impact Story

CHALLENGE

 

Nigeria’s financial system is large, with assets equivalent to 51 percent of GDP at the end of 2012. Banks dominate the system, with 79 percent of all assets. In 2008–09, the financial system experienced a severe banking crisis, triggered in part by the global financial crisis and in part by domestic events. Although the decisive policy responses by authorities succeeded in restoring financial stability, the recent declines in oil prices have taken their toll on the economy and public finances, putting pressure on the financial sector. With the corporate sector accounting for 80 percent of bank loans, further deterioration of the largely oil- based corporate sector could impair bank resilience.

 

The Nigeria Deposit Insurance Corporation (NDIC) administers the deposit insurance scheme and supervises banks; it is the resolution and liquidating authority. It is a wholly owned federal agency established through the original 1988 decree, which commenced operations in March 1989 and was reestablished through the 2006 NDIC Act.

 

Insured institutions are all deposit-taking entities licensed by the Central Bank of Nigeria (CBN), which include universal banks (deposit money banks), microfinance banks, and primary mortgage institutions. More than 900 institutions are members of the NDIC, with total assets of approximately N26.2 trillion (US$163 billion) as of December 2012. In the event of the failure of a participating financial institution, the NDIC is responsible for making payments up to N500,000 (US$3,100) to depositors in universal banks and N200,000 (US$1,200) to depositors in other deposit-taking entities, on a net basis.

 

Member institutions pay a fi   base rate plus a premium that reflects the member’s prudential risk profile. When necessary the NDIC can collect special contributions not exceeding 200 percent of an institution’s annual premium. There is no statutory target level for the NDIC. In 2012, assets in the fund were high by international standards but not uncommon for countries that have a high degree of concentration in the banking sector, as Nigeria does. However, an appropriate level could not be determined without reviewing the NDIC’s approach and applying international guidance on setting target fund ratios to Nigeria’s circumstances.

 

FIRST’S ASSISTANCE

 

In 2013, the NDIC requested FIRST’s assistance in establishing a framework for determining the funding level necessary to provision against contingencies in member banks and other insured deposit-taking institutions.

 

This followed previous assistance from FIRST in conducting a guided self-assessment of NDIC operations using the Core Principles for Effective Deposit Insurance set by the International  Association  of  Deposit  Insurers.  This  project identified, among other things, the absence of a target fund ratio for the NDIC (Core Principle 11). The subsequent 2013 FSAP also recommended the adoption of a target size for the fund, taking into consideration its additional mandate to provide financial assistance to facilitate bank resolution arrangements.

 

To this end, in this targeted small project focusing on a specific issue, the project team reviewed the current level of the fund, assessed the viability of certain measures to ensure the adequacy of the fund if necessary (that is, changes in the NDIC’s investment policy, a premium increase, or cost savings), and proposed a methodology for estimating the adequacy of the insurance reserves.

 

RESULTS

 

The strategic relevance and ownership of the target fund model was evident from the NDIC’s strong institutional support for the project at the highest level of its management. The technical quality of the project was also very high, as it leveraged a partnership with the United States Federal Deposit Insurance Corporation, which is among the foremost deposit insurers in the world. The participation of one of its subject matter experts, together with technical leadership from the World Bank’s deposit insurance expert, resulted in a high level of technical quality that was valued by the client. The technical review also involved the participation of three target fund experts, who affirmed the methodology’s relevance and robustness.

 

The NDIC formally decided to adopt the proposed methodology as its target fund ratio in February 2016. It also committed to maintaining and updating the model, particularly given efforts to improve the quality of fi sector data in Nigeria. To that end, the NDIC assigned a modeling team to incorporate additional data regarding how exogenous shocks—oil price declines, exchange rate volatility, the phase-out of NPL purchases by the Asset Management Corporation, and reduced liquidity from the transfer of government deposits to a single treasury account at the CBN— would affect results. This commitment of support will help ensure the sustainability and relevance of the model over time.

 

The TA also led to discussions on the broader bank resolution and crisis management framework and the authorities’ capacity to supervise and close banks. An important outcome of this work was a formal request from the governor of the CBN for additional TA to strengthen its capacity for contingency planning and crisis management, to complement efforts to enhance banking supervision. This request has been incorporated into the World Bank’s programmatic approach for financial sector development in Nigeria and will be supported with TA, following work to strengthen banking supervision.

 

Lessons learned from this activity are being applied to fund- modeling work in other countries, most recently with the Deposit Protection Corporation in Zimbabwe.