Questions, answered

Deposit-taking financial institutions differ from industrial and commercial enterprises in that they depend mainly on deposits mobilised from the public for their working capital and are highly leveraged. If a financial institution is unable to meet its obligation to depositors due to operational problems or business failure, anxious depositors may cause a run on the bank as well as other healthy institutions. The stability of the financial system and social order in general would also be at risk. Moreover, most depositors have small deposit amounts and therefore cannot cost-effectively collect and analyse information on the financial institutions they do business with.

The government has therefore established a deposit insurance mechanism, under which the NDIC is empowered to provide protection for small depositors and contribute to financial and social order.

Deposit-taking financial institutions play an important role in regulating the supply and demand of capital and promoting economic development. They accept deposits, which are a highly liquid form of debt, yet most of their assets are tied up in long-term illiquid forms. Deposit-taking financial institutions therefore have a hard time realising their assets for cash when their business runs into problems, so depositors may lose confidence, triggering a bank run.

The limited liquidity of deposit-taking financial institutions also encourages a perception among depositors that making an early withdrawal is the only way to get their money back. This fear can exacerbate a bank run and also have a chain reaction that leads to runs on other banks as well.

Hence, the Deposit Insurance System (DIS) is usually established to prevent this by providing assurance of deposit repayment to the great majority of depositors. In doing so, the system also prevents systemic risk and ensures the stability of the financial system.

The NDIC is the agency empowered to administer the DIS in Nigeria, thereby protecting depositors of deposit-taking financial institutions. The NDIC provides incentives for sound risk management in the Nigerian banking system as well as contributes to the stability of the financial system.

The NDIC manages five Insurance Funds:

• Deposit Insurance Fund (DIF) — for DMBs
• Special Insured Institutions Fund (SIIF) — for MFBs and PMBs
• Non-Interest Deposit Insurance Fund (NIDIF) — for Non-Interest Banks
• Non-Interest Special Insured Institutions Fund (NISIF)
• Payment Service Banks Insurance Fund (PSBIF)

No. Deposit insurance is different from conventional insurance in several respects:

• Purpose: Deposit insurance is a regulatory tool aimed at ensuring the safety, soundness and stability of a nation's financial system, thereby protecting the macro-economy at large. Conventional insurance is designed only to protect the micro-interest of the policyholder.
• Structure: Deposit insurance is a tripartite arrangement involving the deposit insurer, the participating institutions and the depositors. Conventional insurance is a bilateral agreement between the insurance company and the insured (policyholder).
• Premium payment: Under deposit insurance, the participating institution pays the premium while the direct beneficiary is the depositor who pays nothing. In conventional insurance, the beneficiary (the insured) pays the premium.
• Participation: Best practice dictates that participation in deposit insurance should be compulsory. Participation in conventional insurance is generally voluntary.
• Coverage: Best practice prescribes that deposit insurance coverage should be limited. Conventional insurance coverage may be full.

Insured institutions are all deposit-taking financial institutions licensed by the Central Bank of Nigeria (CBN):

• a) Deposit Money Banks (DMBs)
• b) Microfinance Banks (MFBs)
• c) Primary Mortgage Banks (PMBs)
• d) Non-Interest Banks (NIBs)
• e) Payment Service Banks (PSBs)

Membership is compulsory as provided under the NDIC Act No 33 of 2023.

It is an arrangement where the deposit insurer extends deposit insurance coverage to Pool accounts or Trust accounts domiciled in deposit-taking financial institutions and operated by Mobile Money Operators (MMOs).

Pool accounts and Trust accounts have many contributors to the funds. Rather than insure the pool account up to the maximum as provided by law, the balance of each contributor in that pool account is insured. The NDIC will provide deposit insurance coverage to subscribers of MMOs using the pass-through deposit insurance concept.

The conditions for eligibility are as follows:

• i. The relationship between the MMOs and their subscribers shall be based on a Bare Trust arrangement.
• ii. MMOs must take Fidelity Bond Insurance.
• iii. The records of the Trust (pool) account must clearly indicate that the funds belong to individual subscribers and not the agent or custodian.
• iv. The identities of the subscribers must fulfil all KYC requirements specified by the CBN.
• v. The interests of the subscribers must be disclosed properly in records maintained by the insured institutions, MMOs and Agents.

The subscribers of MMOs will be insured up to the maximum coverage level of ₦5,000,000 (Five Million Naira) per subscriber per DMB, or the applicable coverage level for depositors in line with the NDIC Act.

No. MMOs are not covered under the pass-through deposit insurance, but their corporate account in the bank is covered up to the maximum insured amount.