Depositors’ Claim For Compensation For The Failure Of A Financial Institution; Revisiting The Provisions Of The NDIC ACT 2006

By Oyetola Muyiwa Atoyebi, SAN

The Nigeria Deposit Insurance Corporation (NDIC) is an agency of the Federal Government of Nigeria established pursuant to the provisions of Section 1 of the Nigeria Deposit Insurance Corporation Act 2006. The Commission is a body corporate with perpetual succession and a common seal, capable of suing and being sued, and acquiring and disposing of property in its corporate name,[1] saddled with the responsibility of, amongst others; insuring all deposit liabilities of licensed banks and such other deposit-taking financial institutions operating in Nigeria, in order to engender confidence in the Nigerian Banking system;

[2] giving 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;[3] guaranteeing payment to depositors, in case of imminent or actual suspension of payments by insured institutions up to the maximum amount provided under the law;[4] supervision of the activities of banks and other financial institutions to ensure that the business of the institution is not carried out in a manner detrimental to the continued existence and business of the institution;[5] aid banks and other financial institutions in the event of failure and ensure that such institution remains a going concern;[6] and participating in the liquidating of a failed bank where such is irredeemable,[7] etc.[8]

It is noteworthy that only the NDIC has the power of insuring deposit liabilities or guaranteeing payments to depositors of insured institutions operating in Nigeria.  The law makes provisions on the maximum amounts payable to a depositor in an insured financial institution in the event of the failure of such institution. However, whether or not these provisions are in tune with the present fiscal regime in the country’s banking sector is a question yet to be answered.

This article will be examining the provisions of the NDIC Act on insurable deposits and the insurance regime of the NDIC, what is regarded as the failure of a financial institution, and the role of the NDIC in the event of the failure of a financial institution, the concept and extent of claims settlement i.e., the depositors claim for compensation under the Act.

INSURABLE DEPOSITS AND THE INSURANCE POLICY UNDER THE NDIC ACT 2006

By Section 15 of the NDIC Act, all licensed banks and other deposit-taking financial institutions are required to insure their deposits with the Corporation and this was further made mandatory by the provisions of Section 16 of the Act, with the following exceptions:

1. Insider deposits, i.e., deposits made by the staff of the financial institution and this includes the directors.
2. Counter-claims from a person who maintains both deposit and loan accounts, the former serving as collateral for the latter,
3. Such other deposits as may be specified from time to time by the board.

The law further provides for sanctions for failure to comply with the above for both the financial institution and its principal officers.[9]

The insurance policy of the NDIC as provided by the Act requires the financial institutions to pay to the Corporation, a premium not exceeding fifteenth-sixteenth (15/16) of one per cent per annum of the total deposit liabilities of the institution standing in its books as of December of the preceding year, in the case of a licensed bank, and eighth-sixteenth (8/16) of one per cent per annum of the total deposit liabilities of the institution, in the case of other financial institutions.[10] In determining the deposit liabilities of the financial institution, it shall be as certified by the approved auditor of the institution, forwarded to the Corporation on or before the 31^st of January, of the following year and the premium shall be payable to the Corporation not later than 2 months from the date of the demand notice.

In calculating the premium payable by a financial institution, a mathematical illustration is given below.

Where the deposit liabilities of a financial institution is 5 billion Naira, the premium payable by the financial institution shall be:

15/16 of 5,000,000,000÷100 = 15/16×50,000,000 (50 million Naira being 1 per cent of 5 billion Naira)

0.9375×50,000,000 = 46,875,000

Hence the premium payable by the financial institution in the above circumstance is #46,875,000.

WHAT IS THE FAILURE OF A FINANCIAL INSTITUTION

Failure of a financial institution can be described as either a process or a situation in which a financial institution is hindered from carrying out its business as a going concern. It is considered a process where the business of the institution suffers distress or is on the verge of collapse but is yet to fail totally and as a situation, failure arises where no rescue can be carried out for the business other than liquidation. Failure also occurs when the license of the institution is revoked by the Central Bank.

The failure of a financial institution in this context, therefore, does not only relate to the liquidation of a distressed financial institution or the revocation of the license of a financial institution by the Central Bank of Nigeria, it also includes the process and the period of failing in which a rescue can still be carried out.  Financial distress may occur when the financial institution fails to meet capitalisation requirements or has a weak deposit base or is afflicted by mismanagement.[11]

POWERS OF THE NDIC IN THE EVENT OF THE FAILURE OF AN INSURED FINANCIAL INSTITUTION

In the event of the failure of a financial institution, the NDIC has the power to:

1. Render financial assistance to the institution. Where a financial institution has difficulty in meeting its obligations to its depositors and other creditors,[12] or persistently suffers liquidity deficiency,[13] or has accumulated losses which have nearly or completely eroded the shareholders’ fund,[14] the Corporation may grant loans to the institution, give guarantee for loans taken by an insured institution, or accept an accommodation bill with interest for a period not exceeding 90 days maturity exclusive of days of grace and subject to renewal for not more than seven times. [15]
2. Propose a scheme of management and restructuring for the institution. The Corporation may in consultation with the Central Bank of Nigeria, take over the management of a failing institution until the financial position of the institution improves substantially, or direct that specific changes be made in the management of the institution within a given time frame, or propose a scheme of merger and acquisition or a purchase and assumption arrangement with another insured institution on such terms as prescribed by law or the Corporation, or acquire manage or dispose of the properties of a failing institution either by itself or in consonance with the Asset Management Company, or take such other expedient measures for the restructuring of a financial institution. [16]
3. Establish bridge banks to enter a purchase and assumption arrangement with the distressed institution. The Corporation has the power under the law to, in consultation with the Central Bank, incorporate one or more banks to act as insured financial institutions in taking over the deposit liabilities of failing insured institutions. The Corporation has power in this regard to determine the composition of the bank and also apply for waivers and exemptions for compliance with the requirements of the law regarding its functioning as a company but such a bank is to have its license revoked within 2 years upon either a successful merger with another insured institution not being a bridge bank, or the sale of the majority of the equity of the bank to any other person (natural or juristic) or such other arrangements as provided by law.[17]
4. Liquidation of a failed bank. The NDIC is empowered by law to act as a liquidator for a failed financial institution. Where the license of an institution is revoked by the Central Bank, the Corporation has the power to act as a liquidator for such institution and it shall be deemed as duly appointed by the Federal High Court and shall have and exercise all the powers of a liquidator in respect of the institution, its assets and all its liabilities. [18]

DEPOSITORS CLAIM FOR COMPENSATION AND THE EXTENT UNDER THE ACT

Otherwise known as claims settlement, it involves the payment of money entitled to by the depositors of a failed or closed financial institution. It is noteworthy, that depositors of an insured institution are only entitled to payment where the financial institution is closed and not otherwise. Hence, where an insured financial institution is in distress, any of the measures discussed above may be taken by the Corporation to rescue the business of the institution and thereby secure the deposit of its customers.

Section 20 of the NDIC Act provides to the effect that a depositor shall receive from the Corporation a maximum amount of #200,000 from the Deposit Insurance Funds of licensed banks or #100,000 from the Deposit Insurance Fund of other deposit-taking licensed financial institutions in the event of the revocation of operating license of that bank or other deposit-taking financial institution. The Corporation may, however, with the approval of its Board, vary upwards such maximum amounts to be received by depositors in respect of failed deposits of an institution.

This provision, however, seem not reflect the goal of the insurance scheme for which the NDIC exists which is to engender confidence in the Nigerian Banking system. The maximum amount payable in a settlement claim seems to be out of touch with the present economic realities, and as such, cannot be said to be to stimulate public confidence in the Nigerian Banking system.

CONCLUSION

The Nigeria Deposit Insurance Corporation has as its mandate the protection of the deposits of customers of financial institutions in a manner that enhances the confidence of the public in the banking sector of the nation. The enabling statute ought, therefore, to contain adequate provisions to reflect the commitment of the Corporation on the protection of depositors. A review of the Act will therefore be much appreciated in the Nigerian banking system.

SNIPPET

The aim of the insurance policy of the NDIC is to engender confidence in the Nigerian Banking System thereby boosting the economic sphere of the Nation.

Keywords: financial institution, Nigeria Deposit Insurance Corporation, claims settlement, purchase and assumption.

AUTHOR: Oyetola Muyiwa Atoyebi, SAN

Mr Oyetola Muyiwa Atoyebi, SAN is the Managing Partner of O. M. Atoyebi, S.A.N & Partners (OMAPLEX Law Firm).

Mr. Atoyebi has expertise in and vast knowledge of Banking Law Practice and this has seen him advise and represent his vast clientele in a myriad of high-level transactions.  He holds the honour of being the youngest lawyer in Nigeria’s history to be conferred with the rank of Senior Advocate of Nigeria.

He can be reached at atoyebi@omaplex.com.ng

CONTRIBUTOR: BIBIANA ADENIJI

Bibiana is a member of the Dispute Resolution Team at OMAPLEX Law Firm. She also holds commendable legal expertise in Banking Law Practice

She can be reached at linda.amaefule@omaplex.com.ng

[1] Section 1 Nigeria Deposit Insurance Corporation Act 2006.

[2] Section2 (a) of the NDIC Act.

[3] Section 2 (b) of the NDIC Act.

[4] Section 2 (c) of the NDIC Act.

[5] See Sections 27-32 of the NDIC Act.

[6] See Sections 37-39 of the NDIC Act

[7] See Sections 40-44 of the NDIC Act

[8] See generally section 2 of the NDIC Act 2006 for the duties of the Corporation.

[9] See Section 15 (a) and (b) of the Act.

[10] Section 17 (1) of the Act.

[11] Babalola Adeyemi Bank failure in Nigeria: a consequence of capital inadequacy, lack of transparency and non-performing loans? Banks and Bank Systems, 6(1) 2011.

[12] Section 37 (1) (a) of the Act.

[13] Section 37 (1) (b) of the Act.

[14] Section 37 1 c

[15] See section

[16] Section 38 of the Act.

[17] See section 39 of the Act.

[18] See section 40 of the Act.