THE ROLE OF NIGERIA DEPOSIT INSURANCE CORPORATION IN PROMOTING PUBLIC CONFIDENCE IN THE NIGERIAN FINANCIAL SYSTEM

THE ROLE OF NIGERIA DEPOSIT INSURANCE CORPORATION IN PROMOTING PUBLIC CONFIDENCE IN THE NIGERIAN FINANCIAL SYSTEM

 BY NNAGOZIEM UDENSI

Before I continue with the general break down of theme of the subject, let me provide some definition to some terminologies used in quoting the subject.

A deposit insurance cooperation is a federal agency that insures deposits in member banks and thrifts up to $100,000. In 2008, a temporary increase was made to raise the level to $250,000, in response to the financial crisis at that time. The idea for the deposit insurance cooperation dates back to the Great Depression, a time when many individuals did not have trust that their money would be safe in the banking institutions, and the agency was founded.

Insurance, in law and economics, is a form of risk management primarily used to hedge against the risk of a contingent loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for a premium, and can be thought of as a guaranteed and known small loss to prevent a large, possibly devastating loss. An insurer is a company selling the insurance; an insured or policyholder is the person or entity buying the insurance. The insurance rate is a factor used to determine the amount to be charged for a certain amount of insurance coverage, called the premium. Risk management, the practice of appraising and controlling risk, has evolved as a discrete field of study and practice.

Financial system is the Processes and procedures used by a firm's management to exercise financial control and accountability.

Economic impact of deposit insurance scheme

When a nation state has a deposit insurance scheme, foreign investors (aka non-resident bank depositors) are more likely to passively deposit larger amounts of money in the banks of said nation state (that has a bank deposit insurance scheme).Having a bank deposit insurance scheme (for all practical purposes) guarantees that a nation state will more likely have a higher rate of passive foreign investment (within the margin of insurable amount).

Passive foreign investment in a nation state’s finance system allows for more lending to be made when global finance system conditions constrict the amount of lend able money. There has been substantial research done over the years on the impact on foreign investment of bank deposit insurance schemes.

Deposit insurance institutions are for the most part government run or established, and may or may not be a part of a country’s central bank, while some are private entities with government backing or completely private entities.

Putting all these into consideration, Nigeria deposit Insurance Corporation should insure all deposit liabilities of approved banks and such other financial institutions operating in Nigeria thereby creating confidence in the Nigerian Financial system.

The corporation like other schemes should specify a maximum insurable sum, a clearly defined funding arrangement, and a specified managerial structure. Participation in the scheme should be compulsory for all licensed deposit-taking financial institutions. The organization should also have the responsibilities for monitoring the fitness of insured institutions and providing an orderly failure resolution means.

Basically the ultimate reason for deposit insurance corporation is to guarantee insured firm against risks of loss, and reduce the risks Nigerians face daily financially. The socially beneficial purpose is to permit people share given risks not to increase the size of the aggregate risk.

Institutions experiencing problems should be handled early and efficiently.

The Corporation should dissolve any unsuccessful insured institution, supporting monetary establishments in the formulation and execution of banking policy, to guarantee sound banking performance.

The Corporation should guarantee payment to depositors in case of failure of an insured bank.

Banks should be supervised to protect depositors, to ensure stability and effective payment system.

Each bank is required to attain a minimum shareholders’ Fund to be given by the corporation (an amount that will keep the bank stable even in economic crisis) It is envisaged that with a stronger capital base, banks will be capable to sustain financial maturity as well as contend successfully both locally and internationally.

The corporation should help in assisting depositors in case of financial problems of banks, Guaranteeing payments to depositors in case of suspension of payments by insured banks or financial institutions up to the specified amount.

When people see and enjoy these quality services insured institutions offer, it encourages them and it builds their confidence in the country’s financial sytem.