Deposit insurance system and depositor protection
The Deposit insurance system (DIS) plays a major role in strengthening depositor confidence in the financial system. This is because of its pivotal role as a financial safety net component that guarantees protection to depositors, particularly small and uninformed savers up to the maximum insured limit. The DIS ensures that depositors do not lose all their money in the ‘unlikely’ event of a bank failure.
The DIS also guarantees depositor protection by providing compensation in time of need. The interplay of these factors coupled with effective banking supervision and distress resolution mandate of DIS goes a long way in discouraging apathy and anxiety that tend to exclude the unbanked from the formal financial system, thereby promoting financial inclusion.
In financial circles today, the strong relationship existing between Financial Inclusion, Financial Literacy and Consumer Protection has been recognized and given prominence in the quest to achieve Financial System Stability. It is also generally agreed that while inclusive growth is extremely necessary to financial stability, it is also largely driven by financial inclusion.
Let us look at these three concepts. Financial inclusion and financial literacy are key features in a deposit insurance system. We all agree that availability and access to financial products are indeed important, but it is the knowledge of the products i.e. financial literacy that creates demand for these financial products and services.
Financial literacy
Financial Literacy can simply be defined as the acquisition of knowledge and skills by individuals to manage financial resources effectively to enhance their economic well-being. The Organisation of Economic Co-operation and Development (OECD) defines financial literacy as “the combination of consumers’ or investors’ understanding of financial products & concepts and their ability and confidence to appreciate financial risks and opportunities, to make informed choices, to know where to go for help, and to take other effective actions to improve their financial wellbeing”.
An NDIC study on financial literacy in Nigeria showed gaps in financial literacry among Nigerians. Five domains of financial literacy were identified in the study and they included:
Money Management- Responses showed only about 46.8% of respondents tracked their expenses and 38.6% reconciled their accounts books. Majority of the respondents would fall on their savings while 26.7% would have to borrow if they run out of money.
Financial Behaviour- 47.4% shopped around before buying financial products and marketability of a product was the major feature considered by the respondents when making such purchases
Financial Planning- 69% engaged in budgeting for their expenditures whilst only about 55.4% engaged in long-term financial plan.
Financial Knowledge- 85.7% of the respondents considered financial knowledge as being important in their day-to-day activities. Except for 4.6% of the respondents who admitted to having poor knowledge, all claimed to have varying degree of knowledge.
Financial Experience- Evidence showed that most of the respondents operated bank accounts with savings representing the largest of these accounts whilst mortgage accounts were the least. With respect to investments, 68.2% had undiversified investment portfolio while 32.2% had investments in the stock market.
Financial inclusion
On the other hand, financial inclusion can be achieved when adults have easy access to a broad range of formal financial services that meet their needs and are provided at affordable cost. Financial inclusion is based on ease of access to financial products and services such as payments, savings, credit, insurance and pension products. The Financial products must be within easy reach for all groups of people and should avoid onerous requirements. It is therefore important for all institutions involved in delivery of financial products and services to contribute to a well articulated financial literacy agenda.
The National Financial Inclusion Strategy (NFIS) was launched in October,
2012 with the overall target of reducing the number of adults excluded from financial services from 46.3% in 2010 to 20% in 2020.
Consumer protection
The issue of consumer protection would lead us to now understand and appreciate the all-important role of deposit insurance system to the mix the need for ‘customer’ or as is in this case, ‘depositor protection’.
The Nigeria Deposit Insurance Corporation (NDIC) administers the DIS with the mission statement: “To protect depositors and contribute to the stability of the financial system through effective supervision of insured institutions, provision of financial/technical assistance to eligible insured institutions, prompt payment of guaranteed sums and orderly resolution of failed insured financial institutions”.
Protecting depositors and contributing to financial system stability explains the unique roles which underscore the place of deposit insurance scheme as a forerunner to financial inclusion.
It is unassailable to say that it is only where there is a strong depositor protection mechanism that people can be encouraged and be easily influenced to embrace the mainstream formal financial system. Against this backdrop, the NDIC has continued to take steps that boost confidence in the system.
In 2010, the Corporation increased maximum coverage limits of deposit money banks (DMBs) from N200,000 to N500,000 per depositor per bank and that of microfinance banks (MFBs) from N100,000 to N200,000 per depositor per bank. Similarly, coverage level for depositors of primary mortgage banks (PMBs) was reviewed upward from N200,000 to N500,000 in 2016. The limits were set to cover over 95 per cent of total bank depositors in line with International Association of Deposit Insurers (IADI) core principle for effective deposit insurance which stipulates that coverage should cover large majority of depositors.
Other initiatives adopted by the Corporation to enhance depositor protection and financial inclusion included introduction of Non Interest Deposit Insurance coverage up to N500,000 per depositor to cater for depositors of Non Interest Banks (NIBs) as well as deposit insurance coverage up to maximum limit of N500,000 per subscriber of mobile money operators. The Corporation also organizes annual workshop for Business editors and Financial Correspondents (FICAN), road shows and participation in various international trade fairs and sensitization seminars for key stakeholders to enhance public awareness on its mandate.
In large measure, the NDIC as one of the three components of financial safety-net has contributed immensely toward engendering depositors’ confidence, soundness and stability of the financial system while consolidating on the gains achieved in the drive towards financial literacy and consumer protection in promoting financial inclusion.