CHAPTER ONE INTRODUCTION 1.1     BACKGROUND OF THE STUDY

A Bank Deposit Insurance Scheme (DIS) is a financial guarantee to depositors, particularly the small ones, in the event of a bank failure. Bank deposit insurance schemes developed out of the need to protect depositors, especially the uninformed, from the risk of loss and to also protect the banking system from instability occasioned by runs and loss of confidence. The banking system has been singled out for the special protection because of the vital role banks play in an economy whether developed or developing. For a DIS to be effective in achieving the above objectives, it must be properly designed, well implemented by the agency established to execute the scheme and well understood by members of the public, [Financial Stability Forum (FSF), 2001]. A well designed DIS contributes to the stability of a country’s financial system by reducing the incentives for depositors to withdraw their insured deposits from banks following rumours about their financial conditions.

The establishment of the Nigeria Deposit Insurance Corporation (NDIC) in 1988 heralded the introduction of an explicit Deposit Insurance Scheme in Nigeria. The NDIC is responsible for insuring the deposits of all banks and other deposit- taking financial institutions licensed by the Central Bank of Nigeria (CBN). It also gives financial and technical assistance, in the interest of depositors, to banks in difficulties and in case a bank fails, it guarantees the payment of insured deposits. Finally, the Corporation assists the CBN in the formulation and implementation of banking policies with a view to ensuring sound banking practices among others.

The scheme was meant to augment the existing safety-net by protecting depositors, thereby boosting confidence of the banking public. It was also considered as an additional framework to serve as a substitute to the government support policy (implicit insurance) hitherto in place. Prior to the establishment of the Corporation, government was unwilling to let any bank fail no matter its financial condition due to fear of the potential adverse effects. Consequently, inefficient banks were given government support over the years. However, such direct supports (implicit insurance) could not be sustained under the Structural Adjustment Programme introduced in 1986 which, among others, deregulated the economy towards market orientations. With the establishment of the NDIC the pains of bank failure, inevitable in a market environment, were reduced to a minimum while moral hazard associated with direct government support was eliminated.

The decision by the Federal Government of Nigeria to establish the Nigeria Deposit Insurance Corporation in 1988 was informed by a number of factors. These included the country’s past bitter experience of bank failures, the lessons of other countries’ experiences with deposit insurance schemes, increased competition in the industry, the need for effective supervision/prudential regulation and change in government bank support policy. We shall discuss these very briefly.

The period between 1947 and 1952 witnessed a rapid growth of indigenous banks in Nigeria. This was before the establishment of the Central Bank of Nigeria in 1958 (though it commenced operations in 1959). The increase in the number of indigenous banks was followed also by a high rate of failures of such banks. By 1954, twenty-one (21) out of twenty-five (25) indigenous banks operating in Nigeria had collapsed. The failures were attributed largely to mismanagement of assets, lack of adequate capital and inexperienced personnel on the one hand and the lack of regulation on the other hand. Since the country had no Central Bank at the time to regulate the operations of the banks, market participants set their own differing standards until the enactment of the Banking Ordinance in 1952 which came into force in 1954.

Since the mid-60’s the Federal Government had ensured through direct support of banks, that the Nigerian banking public was no longer exposed to the hazards of bank failures. In this respect, the Central Bank of Nigeria had deliberately pursued certain measures to prevent bank failures. These included the requirement for every licensed bank to create and maintain a statutory non-distributable reserve fund from yearly profits before dividend payments; stipulation of minimum liquidity ratio and capital requirements as well as the rendition of statutory returns. In spite of these measures, experience showed that the capital of some licensed banks were seriously eroded by bad and doubtful debts due mainly to poor management. Since the Federal Government of Nigeria did not want Nigerians to relive those experiences, it was considered that the establishment of a Deposit Insurance Scheme was urgently needed.

Ever since its establishment the Nigeria Deposit Insurance Corporation (NDIC) has consistent with its mandate as provided in NDIC degree, continued to ensure and sound banking system the sanitization of the banking sector has remained the primary focus of the corporations activities through the adoption of appropriate failure resolute options and effective implement action of various laws promulgate by the government to stem the hide of distress in the system.

1.2     STATEMENT OF THE PROBLEM

The success stories of some countries especially the United States of America(USA) in addressing the problems associated with bank failure through explicit DIS also informed the establishment of the scheme in Nigeria. In fact the Federal Deposit Insurance Corporation (FDIC) has since provided the abiding lessons and model for most countries which subsequently introduced explicit deposit insurance schemes in response to anticipated changes in economic and banking conditions. Since Nigeria was at the threshold of fundamental changes in the economy and the banking sub-sector, the authorities reckoned that country might benefit from the experience of the FDIC.

Before the advent of Nigeria Deposit Insurance Corporation many banks in Nigeria has undergo distress or had to beyond owing to regulations and fraud in banking sector, they exist no organize body that is monitoring the activities of the bank hence mismanagement and fraud because the order of the body people without solid capital base come together and form bank and this leads to distress or liquidation in the event of any slight or small shake in this capital base the above and many more bring about the formation of deposit insurance corporation.

1.3     OBJECTIVES OF THE STUDY

The following objectives of this study which the researcher have designed to achieve are:

(i)      To examine the various challenges faced by Nigeria Deposit Insurance Scheme in Nigeria

(ii)     To investigate some of the achievements of the NDIC

(iii)    To find out the roles played by the NDIC in managing distress in commercial banks

1.4     SIGNIFICANCE OF THE STUDY

The study will be of significant benefits to both bankers and the public as it reveals role played by Nigeria Deposit Insurance Corporation (NDIC to the banking industry and depositors.

It will also be of significant importance to banks as it unveils how NDIC help to promote stability, safety confidence and sound banking system in Nigeria, the study will also be beneficial to students and researchers who will be researching on related topics.

1.5     RESEARCH QUESTIONS

In other to achieve the objectives of this study, the researcher tend to answer the following questions:

(i)      To examine the various challenges faced by Nigeria Deposit Insurance Scheme in Nigeria

(ii)     To investigate some of the achievements of the NDIC

(iii)    To find out the roles played by the NDIC in managing distress in commercial banks

1.6     SCOPE OF THE STUDY

The scope of the study covers evaluating the role of the Nigerian deposit insurance corporation in managing distress in commercial banks. The study will be limited to selected commercial banks in Nchia – Eleme.

1.7     LIMITATIONS OF THE STUDY

During the cause of the study, the researcher encounters some limitation which limited the scope of the study; some of these limitations are stated below

(i)      Availability of research material: The research material available to the researcher is insufficient thereby limiting the study.

(ii)     Time: The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.

(iii)    Finance: The finance available for the research work does not allow for wider coverage as resources are very limited as the researcher has other academic bills to cover

1.8     DEFINITION OF TERMS

Commercial bank: a bank that offers services to the general public and to companies.

Insurance: to arrange for compensation in the event of damage to or loss of (property), or injury to or the death of (someone), in exchange for regular payments to a company or to the state.

Deposit Insurance Scheme: Is primarily intended to promote stability of the financial system and to protect the less financially sophisticated depositor by minimizing the risk that depositors will suffer, lender of last resort, effective bank regulation and supervision and efficient payment system.

Financial Stability Form (FSF): This state that a deposit insurance system needs to be supported by strong prudential regulation and supervision, sound accounting and the enforcement of effective law.

Stable Banking System: This means that banks have the ability and capacity to meet maturing obligations as they fall due, and are making adequate profits from authorized banking business to justify their investment while at the same time keeping banking failures at a minimum within the country.

NDIC: Nigeria Deposit insurance scheme

Services adequacy: they regulates Banking and insurance industries.

Distress: Suffering and problem caused by not having enough money

Failure: lack of success or not successful in doing something

SAP: structural Adjustment programmed

Regulation: it will bring about a depositors confidence

Legislation: the process of making and passing Law