REPORT ON THE SURVEY ON DEPOSIT INSURANCE SYSTEMS IN SELECTED COUNTRIES IN AFRICA

1. REPORT ON THE SURVEY ON DEPOSIT INSURANCE SYSTEMS IN SELECTED COUNTRIES IN AFRICA A PAPER PRESENTED BY R0TIMI W.OGUNLEYE NIGERIA DEPOSIT INSURANCE CORPORATION AT THE 2010 IADI AFRICA REGIONAL CONFERENCE HELD IN ARUSHA, TANZANIA DATE: 29TH-31ST JULY, 2010

2. PAPER OUTLINE • INTRODUCTION • BASIC CHARACTERISTICS OF DIS IN AFRICA • COMMON FEATURES, DIFFERENCES AND GOOD PRATCICES OF DIS IN AFRICA • CHALLENGES FACING DIS IN AFRICA • LESSONS FOR THE FUTURE

3. INTRODUCTION • Purpose of the Research Study To undertake a comparative study of DIS in selected African countries with a view to highlighting their main mandates and powers, design features, governance practices, legal frameworks, achievements as well as challenges being faced by each of the systems so as to proffer suggestions on how to address the challenges and pave way for enhancing their effectiveness. • The research report was prepared by the IADI Africa Regional Committee (ARC) Research Team. The Research Team was composed of representatives from Nigeria (chair), Kenya, Tanzania and Zimbabwe

4. BASIC CHARACTERISTICS OF DIS IN SELECTED AFRICAN COUNTRIES • In the beginning: • Kenya established a DIS in 1985 and started operations in 1986 • In 1988, the statute that created the system in Nigeria was put in place. However, it was in 1989 that the Nigeria Deposit Insurance Corporation started operations. • In Tanzania, the Deposit Insurance Board was established in 1994 whilst a similar agency was created in Sudan in 1996. • In 2003, a DIS was also established in Zimbabwe. • Earlier in 1999, the six countries of the Central Bank of West African States (BEAC) decided to jointly establish a develop insurance system. However, the scheme did not go into operation because only two member countries (Cameroon and Chad) ratified the treaty. • In Uganda, the central bank manages a deposit insurance fund but the there is no explicit DIS in place. • Countries covered in the Survey: Kenya, Nigeria, Tanzania, Sudan and Zimbabwe Kenya, Nigeria, Tanzania and Zimbabwe-members of the African Regional Committee of IADI Sudan-member of MENA Regional Committee of IADI

5. BASIC CHARACTERISTICS OF DIS IN SELECTED AFRICAN COUNTRIES (cont’d) • Governance and Structure • Kenya DPFB is a separate legal entity with an independent Board of Directors. Its day-to-day management is under a director appointed by the Central Bank of Kenya. It is a pay box system though with power to act as a receiver/liquidator • Nigeria NDIC is a separate legal entity with an independent Board of Directors. It was established as risk-minimizer with powers to offer deposit protection, supervise, participating institutions, participate in the resolution process of troubled entities and act as receiver/liquidator • Tanzania DIB is a separate legal entity with an independent Board of Directors. It functions as pay-box with power to act as a receiver/liquidator • Sudan BDSF is a separate legal entity with an independent Board of Directors. It is primarily a pay-box system • Zimbabwe DPB is a separate legal entity with an independent Board of Directors. It is primarily a pay-box system

6. BASIC CHARACTERISTICS OF DIS IN SELECTED AFRICAN COUNTRIES (cont’d) • Membership • Kenya-Compulsory for all institutions licensed to carry on business as commercial banks, mortgage finance companies, and building societies • Nigeria-Compulsory for all licensed deposit-taking financial institutions • Tanzania-Compulsory for all deposit-taking financial institutions • Sudan-Mandatory for all banks which also include foreign banks branches operating in the Sudan. • Zimbabwe-Compulsory for all deposit-taking financial institutions, finance and discount houses

7. BASIC CHARACTERISTICS OF DIS IN SELECTED AFRICAN COUNTRIES (cont’d) • Coverage In all the jurisdictions surveyed, coverage is per depositor per insured institution. • Kenya-Up to Kshs.100,000 (US$1,250) to each depositor of a member institution. The insurance covers all types of deposit accounts held by depositors. Payment is restricted to per depositor per institution • Nigeria-Covers all types of deposits except insiders, collateralized and inter-bank deposits. Maximum claims currently stands at N200,000 (US$1333.33) per depositor of deposit money banks and N100,000(US$666.7) per depositor of other institutions • Tanzania-TZS500,000 became effective 20th April, 2003(increased to TZ1.5 million in 2010) • Sudan-3000 Sudanese pound (1500 US Dollar) per depositor per bank. The maximum coverage limit with respect to investment deposits is 4000 Sudanese Pound (2000 US Dollar) per depositor per bank. • Zimbabwe-Basic deposits such as savings, time and current. Coverage limit is US$150

8. BASIC CHARACTERISTICS OF DIS IN SELECTED AFRICAN COUNTRIES (cont’d) • Funding • Kenya-The main source of funds for DPFB is the annual premiums from member institutions. Premiums are calculated at 0.15 per cent of the average of the institution’s total liabilities during the period of twelve months prior to the date of payment notice. However, this is subject to a minimum of Kshs.300,000 and a maximum of 0.4 per cent of the deposit liabilities. It is applied uniformly and assessments are carried out in July and premium payments are expected by August of each year. • Nigeria-Initially fixed at 94 basis points. A differential system has been introduced for deposit money banks: a floor of 50 basis points and add-ons subject to a maximum of 30 basis points depending on the risk profile of each bank For other participating institutions, the premium is still fixed at 50 basis points. • Tanzania-Flat-rate premium paid by participating institutions at 0.1 % of the average deposits for twelve months. (increased to 0.15% by 2010) • Sudan-Premiums are assessed on insured deposits at a flat rate system of two and half per thousand (0.0025); annually on average of total insured deposits. Besides the Central Bank and the Ministry of Finance each pays 10% of the total annual premium paid by the banks. According to Islamic mode of mutual support (takaful) investment depositors pay (0.0025) annually on the average of their total deposits as their deposits earn profit • Zimbabwe-Flat-rate of 74 basis points(decreased to 30basis points )

9. COMMON FEATURES, DIFFERENCES AND GOOD PRACTICES OF DIS IN AFRICA • Pubic Policy Objectives In Tanzania and Zimbabwe, the public policy objectives are formally specified in the statutes establishing the two systems In Nigeria, Kenya and Sudan, the public objectives are not enshrined in the statute. In the Nigerian case, the basic functions of the deposit insurer are codified in law • Mandates and Powers Out of the five systems reviewed, Sudan and Zimbabwe have the most limited mandate and powers; strictly pay-boxes whilst Nigeria has the broadest mandate and powers. In Nigeria, the deposit insurer performs the role of risk-minimizer. In Kenya and Tanzania the deposit insurers operate pay-box systems with extended powers of a liquidator.

10. COMMON FEATURES, DIFFERENCES AND GOOD PRACTICES OF DIS IN AFRICA(cont’d) • Governance The governance structure in all the five systems reviewed suggested varying levels of operational independence of the systems though all have independent board of directors. • In all the systems, both the central bank and the ministry of finance are well represented on the board and in fact, in Zimbabwe, Tanzania, Sudan, Kenya, the central bank governors chair the board. • In Zimbabwe, Kenya and Sudan, representatives of participating members sit on the board of directors. Nigeria and Tanzania do not have such members on their board of directors. • With respect to operational independence, the Nigerian system enjoys relatively higher level of independence when compared with the other systems given the fact it operates independently outside the purview of the central bank and it has a separate enabling legislation independent of the Banking Act. Sudan also has a separate legal statute. • For the others, they operate under the control of their central banks even though they have their own separate statutes. In addition, they depend heavily on resources of their various central banks for their operations.

11. COMMON FEATURES, DIFFERENCES AND GOOD PRACTICES OF DIS IN AFRICA(cont’d) • Relationships with other safety-net participants • In Nigeria, the deposit insurer exchange information with the central bank and both institutions ensure that there are no role conflicts or duplication of efforts while exercising their supervisory powers over insured institutions. In addition, the deposit insurer in Nigeria is a member of the Financial Services Regulation Coordinating Committee(FSRCC), a body that facilitates cooperation and collaboration amongst different regulators in the financial system. • In Zimbabwe, Kenya and Tanzania, the deposit insurers have access to information from their various central banks. • In Sudan, the Bank Deposit Security Fund has powers to access deposit information directly from member institutions and from the Central Bank.

12. COMMON FEATURES, DIFFERENCES AND GOOD PRACTICES OF DIS IN AFRICA(cont’d) • Membership and Coverage • Membership is compulsory for all deposit-taking financial institutions in all the systems reviewed In many of the systems, these institutions include deposit money banks, mortgage companies, savings banks, merchant banks amongst others. In Nigeria, membership also includes microfinance banks whilst in Zimbabwe, it includes finance and discount houses and credit societies in Tanzania. In Sudan, the deposit insurer insures the deposits of foreign banks branches operating. • All the systems examined cover the basic core deposits • In Nigeria, Kenya, Tanzania and Zimbabwe, the coverage limits cover more than 90% of all depositors operating accounts in the participating institutions.

13. COMMON FEATURES, DIFFERENCES AND GOOD PRACTICES OF DIS IN AFRICA(cont’d) • Exemptions: • In Nigeria, insiders, collateralized and inter-bank deposits are not covered. • Similarly in Sudan, insiders (define to include large shareholders and auditors and their spouses and minor children as well as spouses and minor children of directors and staff of banks) and collateralized deposits are not covered. • In Zimbabwe, negotiable CDs, BAs, foreign currency and collateralized deposits are not covered. • In Tanzania, collateralized, interbank and government deposits are not covered. • Maximum coverage limit varies from one jurisdiction to the other though the application is generally on the basis of per depositor per institution in all the systems.

14. COMMON FEATURES, DIFFERENCES AND GOOD PRACTICES OF DIS IN AFRICA(cont’d) • Funding • Initial Capital -provided by government in all the countries surveyed • Subsequent Funding • Ex-ante premium contributions from participating institutions In all other jurisdictions, the flat rate method is in use; only Nigeria has recently introduced a differential premium assessment system that is applicable to deposit money banks • A variation of the flat rate method is in use in Kenya: the premium chargeable ranges from 0.15% to 0.4% of the average of total deposit liabilities but subject to a minimum of Kshs.300,000 • In Kenya and Tanzania, the assessment base for premium collection is the average of each institution’s total deposit liabilities during the period of twelve months prior to the date of payment notice while in Sudan it is the average of total insured deposit liabilities for 12 months. In Nigeria and Zimbabwe, the base is total deposit liabilities as at the end of preceding year.

15. COMMON FEATURES, DIFFERENCES AND GOOD PRACTICES OF DIS IN AFRICA(cont’d) • Additional Sources of Funding: • In Sudan, an additional source of capitalization is the once-and-for all payment of membership fee by participating institutions • In all systems except Sudan, the deposit insurers are allowed to borrow from the central bank and other approved sources. • In Kenya and Tanzania, the deposit insurers are allowed to receive grants, subventions and other donations. • In Nigeria, the deposit insurer is allowed to levy additional premium on the participating institutions if available fund cannot meet its obligations. • In Sudan, the central bank and the Ministry of Finance each pays 10% of the total annual premium paid by banks. In addition, investment depositors pay (0.0025) annually on the average of their total deposits as their deposits earn profit according to Islamic mode of mutual support (takaful) • Investment income in Nigeria, Kenya, Tanzania and Zimbabwe

16. COMMON FEATURES, DIFFERENCES AND GOOD PRACTICES OF DIS IN AFRICA(cont’d) • Public Awareness Only in Nigeria and Zimbabwe are deliberate efforts made to embark on some levels of public awareness. • In Nigeria, the deposit insurer educates the public through advertisements in the media and distribution of pamphlets, reports, books and other publications on deposit insurance. In addition, it organizes annual depositor-protection awareness week as well as annual workshops to educate and update the knowledge of finance correspondents and editors of different media. • In Zimbabwe, the deposit insurer engages in distribution of pamphlets and other reports to the public. • In Kenya, public education comes through placing public advertisements in the print and electronic media for depositors of failed institutions to come forward for their monies.

17. COMMON FEATURES, DIFFERENCES AND GOOD PRACTICES OF DIS IN AFRICA(cont’d) • Failure Resolution • The DIS in Nigeria has adequate failure resolution framework and this encompasses trigger mechanisms for prompt corrective action and effective resolution processes including authority to establish bridge bank • In all other jurisdictions, the deposit insurers are mainly involved in the reimbursement of depositors of failed institutions but sometimes act as liquidators and receivers of the failed institution if so appointed by their various central banks. • In Sudan and Zimbabwe, the deposit insurer cannot act as the liquidator and receiver of any failed financial institution.

18. CHALLENGES • Issue of autonomy of the deposit insurer Apart from Nigeria, all other deposit insurance system reviewed are operationally dependent on their various central banks to achieve their set objectives. In all the jurisdictions except in Nigeria, the central banks’ governors are chairmen of the board of directors with additional members from the central banks still on the board In Zimbabwe, Kenya and Sudan, representatives of participating members sit on the board of directors. Nigeria and Tanzania do not have such members on their board of directors • Mandate With the exception of Nigeria, all other systems examined were basically pay-boxes. Sudan and Zimbabwe operate as core pay-boxes whilst the systems in Kenya and Tanzania have additional role of liquidator. • Problem of debt recovery. The challenges in this respect include the following: • Poor loan documentation to support court cases. • Poor credit administration thereby making recovery of outstanding loans very difficult • Difficulty in realization of securities • Slow response by depositors of failed institutions to file claims for their protected deposits • Macroeconomic problems e.g. Hyperinflation

19. LESSONS FOR THE FUTURE • Independence of the Deposit Insurer Operational independence of deposit insurer grants speedy decision–making and actions whatever the mandate is and such helps in building the trust of all stakeholders in the system; a necessary ingredient that determines the success or failure of any DIS. • Powers of the Deposit Insurer Deposit insurer needs to be given wider powers in order to fulfill the basic public policy objectives of depositors’ protection and contributing to financial system stability. • Asset Management The difficulties of managing the assets of failed institutions by the deposit insurer during liquidation process calls for speedy improvement in the adjudication process with respect to enforcement of contracts, debt recovery and realization of assets during liquidation of a failed institution

20. LESSONS FOR THE FUTURE(cont’d) • Public Awareness There is the need to put in place policies and programmes that would enhance the stakeholders understanding of the system’s benefits and limitations. Such programmes should be measurable and should be improved upon from time to time • Failure Resolution Options It is imperative that standard operational guidelines and procedures be put in place to ensure that best practices are followed • Reimbursement of depositors of failed institutions With respect to pay-out, the mechanism should be such that the period is made to be as short as possible. That would serve as an element of confidence for the depositors as they become aware that they can get their monies within that short period following the closure of a failed institution

21. THE END • THANK YOU FOR ATTENTION