Emphasis on innovation and human resource development has been the hallmark of the two and half decades of the founding of the Nigeria Deposit Insurance Corporation (NDIC).
Also, remarkably, the diversity of NDIC’s organisational structure has faithfully reflected the federal character. It has worked in harmonious partnership with Central Bank of Nigeria (CBN) and Ministry of Finance since its establishment, a partnership that has become more consolidated in recent years.
The NDIC was established on March 17, 1989. It has weathered the many financial storms that beset not only the country but indeed the world in the last 25 years largely due to the trained and highly motivated staff and innovative services, founded on sound policies and effective leadership in the last decade.
Looking back to March 1989 when the NDIC commenced its operations, many of the 100-odd banks or so in the country had gone through one form of distress or the other – indeed, many had gone out of business! The Structural Adjustment Programme (SAP) introduced in the country in 1986 opened a floodgate of new banks.
But it soon became clear that the phenomenal increase in the number of banks from 40 in 1986 to 120 within the span of six years was clearly unsustainable as the nation neither had adequate manpower to serve those growing banks nor requisite knowledge of risk management to ensure strict good governance regimes within the banking industry. That was the first challenge of a fledgling corporation.
Luckily, NDIC had other country experiences to learn from. Czechoslovakia, for example, which was the first country to establish a nation-wide deposit scheme in 1924, used the scheme to revitalise the country’s banking system after ravages of the First World War. Similarly, the United States of America (USA), which established the Federal Deposit Insurance Corporation (FDIC) in 1933, did so in response to a banking collapse and panic.
And, as was the case with these countries, the deposit insurance option came to the rescue in Nigeria, with the establishment of NDIC, as a risk minimiser with the broad mandate of deposit guarantee, bank supervision, as well as mechanism for orderly resolution of failure, including bank liquidation.
Its history in the past quarter of a century has been to realise this mandate in the most professional manner. From its humble beginning, today, the corporation operates from 10 branches across the country with a staff strength of 1,141.
Some of the measures taken by NDIC back in the 1990s to save many collapsing banks include moral suasion; continuous interaction with bank managers/owners; imposition of Holding Actions on distressed banks to restrict operations and encourage self-restructuring; and rendering of Financial Assistance to banks. In 1989 alone, for example, NDIC in collaboration with the CBN granted facilities to the tune of N2.3 billion to 10 banks with serious liquidity problems.
Takeover of management and control was another set of measures adopted by NDIC. Between 1991 and 1996, 24 distressed banks were taken over by NDIC. By the turn of the century, acquisition and restructuring saw seven distressed banks handed over to new investors in 1999 and 2000.
These different measures adopted were the manifestation of the innovative grounding of the NDIC. And the most innovative period is the last five years, when its current management team came on board, led by Umaru Ibrahim, managing director/CEO.
Most of the measures taken from 2009 to date were quite novel measures in banking failure resolution, including bailouts; bridge banking; establishment of asset Management Corporation of Nigeria (AMCON); assisted merger and acquisition and introduction of financial stability fund (FSF).
The bailout measures were not arbitrary, but rather were preceded by special audit of the DMBs to ascertain the extent to which they were affected by the financial crisis that engulfed the world in 2008.
The special audit report revealed that banks were afflicted by large volumes of non-performing loans (heavily exposed to oil & gas, margin lending), capital erosion, poor risk management, illiquidity and poor corporate governance practices, amongst others.
It further revealed that 10 out of the 24 DMBs needed close supervisory monitoring out of which eight eight were in precarious financial conditions which required serious supervisory intervention. The audit result showed the market shares of the 8 banks in precarious financial condition in terms of total assets, deposits, credits and branch network were 30.08%, 30.72%, 52.70% and 40.32%, respectively. The supervisory authorities therefore intervened in eight of the banks with precarious financial condition by sacking their managements and appointing new ones.
To complete the resolution of the situation of the eight most affected banks, the CBN, injected N620 billion into them as loan capital and liquidity support. The apex bank, working with the NDIC, also gave guarantees for all the affected banks’ interbank takings and foreign credit obligations. In the end, the eight banks were bailed out and their depositors and shareholders were saved from the deadly depression that such loss causes.
When it became clear that the three banks (Afribank plc, Spring Bank plc and Bank PHB plc) out of the 10 found to be in grave financial condition in 2009 could not recapitalise, merge nor find an acquirer before a deadline, the bridge bank option had to be adopted by NDIC to address their problems as provided for in Section 39(1) of NDIC Act, 2006. The NDIC adopted the bridge bank option because the three affected banks had attractive franchise, and deterioration in their assets would hamper their sale.
Depositors were protected, thus promoting confidence in the system by ensuring continuity of banking services. Outright liquidation would have had dire consequences on depositors and other stakeholders.
The adoption of innovative option helped to preserve and sustain daily operations in all the 577 branches of the three failing banks; Safeguarded 6,667 jobs in the affected banks; and depositors had immediate access to a total deposits of N809.4bn (U$5.58bn) as against N130.57bn (U$842.39m) insured deposits guaranteed by NDIC. The three bridge banks established and which were acquired, through share subscription, by AMCON were Keystone Bank, Mainstreet Bank and Enterprise Bank.
Yet another original idea seen for the first time in Nigeria’s banking history was the establishment of Asset Management Corporation of Nigeria (AMCON) in 2010 by an Act for the purpose of efficiently resolving the non-performing loans assets of banks in Nigeria and to recapitalise the technically insolvent ones and enhance the availability of credit to the critical sectors of the economy.
Consequently, AMCON acquired the three bridge banks from NDIC and injected the sum of N1.012 trillion (U$6.98bn) into them as capital injection. AMCON also injected the sum of N1.379trn into five of the intervened banks (Intercontinental, Oceanic, Finbank, ETB, Union) with a view to facilitating their merger and/or acquisition.
The amount injected (invested) by AMCON had another positive impact. It shored up the affected banks shareholders’ funds that were negative and made investment in the banks attractive to investors. Access Bank acquired Intercontinental; Ecobank acquired Oceanic Bank; FCMB acquired Finbank; and Sterlling Bank acquired Equitorial Trust Bank.
As part of the efforts to meet the resolution cost of restoring financial stability, the FSF was set up by CBN in collaboration with the banks in 2010. The Fund was to ensure that future bailouts of banks could be achieved with minimum delays and with little demand, if at all, from tax payers’ money.
The CBN was to contribute N50bn annually to the Fund for 10 years while each bank was to contribute 0.4% of its total assets annually for 10 years. The Fund had an initial target of N1.5trn (about U$ 10 billion), which had since been increased.
The innovative approaches of NDIC are lessons the world has been eager to learn. Last year, Umaru Ibrahim, the NDIC managing director, went to Switzerland to showcase these novel approaches that steered the Nigerian banks away from the precipice of systemic collapse to buoyancy.
No doubt, many of the participants at the International Association of Deposit Insurance (IADI) forum would have found these Nigerian experience at banking failure resolution far enriching and at home.
It is therefore difficult to resist the temptation to salute the courage of its leadership for sticking to the path of innovation. It has been 25 years of modernisation, improvement and originality.
Bashir Ibrahim Hassan
