DEPOSIT INSURANCE: CONCEPT, PRACTICE AND RELEVANCE IN AFRICA

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DEPOSIT INSURANCE CONCEPT, PRACTICE AND
RELEVANCE IN AFRICA

• By Prof. Peter N. Umoh
• Executive Director, Operations
• Nigeria Deposit Insurance Corporation
• Abuja, Nigeria
• Paper Presented at the IADI Regional
  Conference on Deposit Insurance In Africa
  Issues, Challenges And prospects, at the Central
  Bank of Nigeria Auditorium.

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PAPER OUTLINE

• Introduction
• Concept of Deposit Insurance
• Practice of Deposit Insurance
• Relevance of A Deposit Insurance Scheme
• To Africa
• Conclusion

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1.0 INTRODUCTION

• Banking stability
• Safety-nets
• Deposit Insurance

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2.0 CONCEPT OF DEPOSIT INSURANCE

• Origin
• The need for Deposit Insurance
• - Financial Stability
• - Competitive Efficiency/Equality
• - Equity

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2.0 CONCEPT OF DEPOSIT INSURANCE ctd

• The objective of a DIS are usually to
• - protect depositors
• - prevent bank runs
• - sustain confidence in banks and
• - promote financial stability.
• These objectives are not mutually exclusive

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2.0 CONCEPT OF DEPOSIT INSURANCE ctd

• Conceptually and in practice, deposit
  insurance can take two forms
• - Implicit and
• - Explicit.

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2.0 CONCEPT OF DEPOSIT INSURANCE ctd

• Deposit Insurance Vs Conventional Insurance
• Premium Payment
• Protection against effects of independent acts
• Admissibility, rating and surveillance

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3.0 PRACTICE OF DEPOSIT INSURANCE

• Practice differs from one jurisdiction to
  another.
• The emergence of some best practices as guide.

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3.0 PRACTICE OF DEPOSIT INSURANCE ctd

• Ownership/administration
• Membership
• Funding
• Coverage
• Pricing and
• Failure resolution.

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3.1 Ownership and Administration

• The ownership of a DIS can take three forms
• - Public
• - Private and
• - Joint (Public/Private) Ownership.

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3.2 Membership

• Issues relating to membership include the types
  of institutions to which membership should be
  extended and
• Whether participation by eligible members should
  be voluntary or compulsory.

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3.3 Funding Arrangements and Management

• Issues to be considered are
• The initial capitalisation and
• The subsequent funding arrangements.
• Ex-Ante Vs Ex-Post
• Investment of Deposit Insurance
• Fund (DIF)

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3.4 Coverage

• The two underlying concerns
• - The insurance limit and
• - The insured deposits.

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3.4 Coverage ctd

• The insurance limit may be specified or it could
  be discretionary.
• Also, the scheme may provide unlimited or 100 per
  cent deposit coverage.
• Exclusions

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3.5 Pricing of Deposit Insurance

• Two approaches in use world-wide are
• - The flat-rate and
• - The risk-based methods.

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3.6 Risk-Minimization Vs Pay- Box Systems

• Off-Site Surveillance
• On-Site Examination

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3.7 Intervention and Failure Resolution
Powers

• Provisions relating to the conditions for
  intervention in failing and failed insured
  institutions and the mode of such intervention
  are important features of a DIS.

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3.7 Intervention and Failure Resolution
Powers ctd

• Two of the key best practices
• - The deposit insurer should have a
• system of prompt remedial actions to
• resolve failed or failing institutions
  and
• - Such powers should not be
• discretionary but should be coded in
• the legal framework establishing the
  DIS.

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4.0 RELEVANCE OF A DIS TO AFRICA

• Against the myriad of social, economic, political
  and other developmental problems facing Africa,
  the question here is whether the DIS objective of
  protecting depositors, preventing bank runs,
  sustaining confidence in banks and promoting
  financial stability is possible/relevant in the
  continent?

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4.0 RELEVANCE OF A DIS TO AFRICA ctd

• Our answer to this question is in the
  affirmative.
• A DIS is a necessary accompaniment of a sound
  financial sector in the African environment.

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4.1 Deposit Mobilization In Africa And
The DIS

• Importance of deposits
• Need for confidence in banks
• Bank runs
• Financial stability

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4.2 DIS And Depositor Free Lunch

• Insurance and Banks
• DIS and Banks
• Premium payment
• Free Lunch?

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4.3 Implicit Versus Explicit Protection

• Bank failures
• Tax-payers monies
• Nigerian experience

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4.4 Formal DIS In Africa

• Only seven (7) countries in Africa have formal
  deposit insurance schemes.
• The first scheme was in Kenya (1985), followed by
  Nigeria (1988) and the latest was Zimbabwe (2003).

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4.4 Formal DIS In Africa ctd

• Some features of the seven schemes are
• Country Year Type
  Administration
  Membership Supervision
• Kenya 1985 Deposit Guarantee System
  Public Compulsory
  No
• Nigeria 1988 Deposit Insurance
  Corporation Public
  Compulsory Yes
• Morocco 1993 Collective Deposit Guarantee
  Fund Public Compulsory
  No
• Uganda 1994 Deposit Insurance
  Public
  Compulsory No
• Tanzania 1994 Deposit Insurance Fund
  Private Compulsory
  No
• Sudan 1996 Deposit Guarantee Fund
  Joint Not
  compulsory Yes
• Zimbabwe 2003 Deposit Guarantee Fund
  Public Compulsory
  No
• Source SEDESA (2002), General Review, Seguro de
  Depositos, S. A., Argentina.
• IADI (2003) Basel, Switzerland

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4.5 Africa In The DIS International
Community

• The International Association of Deposit Insurers
  (IADI)
• Objectives
• African members
• Experience sharing

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4.6 Some Lessons Of Experience

• 15th Anniversary NDIC
• Legal framework
• Premium rate and insurance limit

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4.6 Some Lessons Of Experience ctd

• Mandatory coverage
• Adequate funding
• Cooperation with central bank
• Enlightenment

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5.0 CONCLUSION
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THANK YOU FOR YOUR ATTENTION