Security of Customer’s Funds In Failing Banks

More than 70% percent of Nigerians have an account in a bank and this statistic keeps on increasing daily. As a result of the responsiveness of commercial banks in Nigeria, more and more Nigerians presently are comfortable with storing up their life savings and petty cash in these commercial banks. Despite this fact, a fear as to the fate of their deposits in commercial Banks, upon the failure of such banks, still lingers in the heart of many Nigerians.

One of the ways in which deposits of customers in Nigeria is secured is through Deposit Insurance. This is a measure implemented in many countries to protect bank depositors, in full or in part, from losses caused by a bank’s inability to meet its obligations to the depositors when due. It is a protection provided usually by a government agency to depositors against risk of loss arising from failure of a bank or other depository institution. Deposit Insurance ensures that the depositor does not lose all his money in the event of a bank failure. It also engenders public confidence in, and promotes the stability of, the banking system by assuring savers of the safety of their funds.

Deposit insurance is important because Banks differ from most industrial and commercial enterprises in that they depend mainly on deposits mobilized from the public for their working capita. If a bank is unable to meet its obligation to depositors due to operational problems or business failure, anxious depositors may cause a run on the bank and this would affect the stability of the financial system and social order in general would also be at risk.

Prior to 1988, deposit insurance was unknown to Nigerian Law, however as a result of the consequences from the failure of various banks on customer deposits in such bank and also the success stories of the Federal Deposit Corporation of the United States, the federal government of Nigeria by the 1988 Decree established the National Deposit Insurance Commission (NDIC) in 1988. However, this decree has been repealed by the NDIC Act of 2004 and this Act currently governs deposit insurance in Nigeria.

By the NDIC Act of 2004, the NDIC is the body charged with the responsibility of;

  1. Insuring all deposit liabilities of licensed banks and such other deposit-taking financial institutions operating in Nigeria in order to foster confidence in the Nigerian banking system;

b. Giving assistance to insured institutions in the interest of depositors, in case of imminent or actual financial difficulties of banks

c. Guaranteeing payments to depositors, in case banks and financial institutions suspends payment of deposits to customers.

Section 15 of the NDIC Act 2006 provides that all deposit-taking financial institutions licensed by the Central Bank of Nigeria (CBN) such as Universal Banks (deposit money banks); Micro-finance Banks – (MFBs); and Primary Mortgage Institutions (PMIs) must insure their deposits with the NDIC. Failure to do this is an offence and attracts a fine #500,000 for each day the offence was committed. In addition, all principal officers of such licensed banks and deposit financial institutions is liable on conviction to a term of imprisonment for three years or a fine of #5,000,000 or both. To identify banks which are members of the NDIC scheme, individuals should look out for an NDIC decal (sticker) displayed in the head offices and branches of all insured institutions.

All deposits in savings account, current accounts, or foreign currency deposits are insured with the NDIC. It is however not all deposits in banks that must be insured with the NDIC. According to the NDIC Act, deposits of staffs including directors of the licensed bank or financial institution are exempted from being insured. Therefore, where a staff of a bank has an account in his bank and makes deposit into that account, his/her money would not be insured by the bank with the NDIC.

The scheme also excludes treasury bills, bonds and other types of investment from being insured with the NDIC.

It is worthy to state that depositors whose funds are eligible to be insured includes both natural persons (individuals) as well as corporations, both citizens of Nigeria as well as foreigners who have deposits in Nigerian banks. Therefore, the NDIC insurance covers both individuals and companies. Also, a depositor in a bank which is registered with the NDIC must not apply for his /her fund to be insured with the NDIC, insurance is automatic.

The banks which are registered with the NDIC are required to pay a particular sum of money to the NDIC on a regular basis. This sum of money is called the premium. The NDIC upon receipt of this premium, invests such in government bonds,

The NDIC protects funds of depositors through Deposit Guarantee.
This is perhaps the most significant and distinct role of the Corporation. As a deposit insurer, the NDIC Act 2006 guarantees payment of deposits up to the maximum insured sum (N500,000.00 to a depositor in universal banks and N200,000 to a depositor in MFBs and PMIs) in the event of the failure of a participating financial institution. Balances in all deposit accounts held in the same right and capacity by a depositor in all branches of the closed insured institution, net of outstanding debts, are aggregated to determine the maximum insured amount. This means that where an individual has more than one account in one bank, all the accounts would be cumulated and be treated as one and such customer would only receive a maximum of #500,000 upon the failure of the bank. However, where an individual has different accounts in two different failing banks, his accounts would not be cumulated, and he would be entitled to the maximum sum separately for the two banks.

Also, where a husband and wife or two individuals operate a joint account in a bank and also operate an individual account in that same bank, these two accounts would be treated separately and would not be cumulated, rather such depositors would be entitled to the maximum amount for the two accounts.

Where an individual has more than 500,000 in a bank, he/she is entitled to a further claim higher than the #500,000 limit. This is because the NDIC has the authority to increase that maximum amount which a depositor can receive.

Upon the failure of a bank, a depositor can claim his insured sum by filing their claims through the completion of relevant forms provided by the Corporation. In addition, they have to furnish the Corporation with account documents such as unused cheque books, old cheque stubs, passbooks, fixed deposit certificates, etc. Where a depositor doesn’t have the above documents, he is to present a police report and also a sworn affidavit to this effect. Each depositor would also be required to identify him/herself with a valid identification document such as National ID Card, Driver’s Licence or International Passport. After verification of ownership of the account as well as the account balance, the depositor would be duly paid the insured sum by cheque or deposit transfer. To prove ownership of a deposit account The NDIC relies on deposit account records kept by a failed bank as well as on the proofs presented by the depositor.

It is worthy to state that the NDIC must pay the insured depositor within 90 days of the failure of such bank.

The NDIC also supervises banks to protect depositors, ensure monetary stability and effective/efficient payment system as well as to promote competition and innovation in the banking system. Banking supervision seeks to reduce the potential risk of failure and ensures that unsafe and unsound banking practices do not go unchecked. It also provides the oversight functions required to preserve the integrity of and promote public confidence in the banking system.
The Corporation is also empowered to provide financial and technical assistance to failing or distressed banks in the interest of depositors. The financial assistance can take the form of loans, guarantee for loan taken by the bank or acceptance of accommodation bills.

Written by Chinwe Alli-Udo

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